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In a previous article, we provided info on the Backdoor IRA, which is a technique to help higher earners contribute to Roth IRA’s. In this article, we referenced a way to get around the one limitation with Backdoor IRA’s…..
Backdoor IRA’s open up Roth contributions to higher earners by allowing contributions in a roundabout way. However, as mentioned in our previous article on this, the presence of existing Traditional IRA’s can significantly limit the benefit of a Backdoor IRA.
Enter the Reverse Rollover
Since Roth conversions with pre-existing Traditional IRA accounts in place activates the “Pro Rata” clause, you can exercise a Reverse Rollover to avoid this Pro Rata clause from crushing your Roth IRA dreams!
You’re likely familiar with a Direct IRA Rollover which is common for folks leaving a job. It occurs when you rollover your 401k funds into a Traditional IRA. No tax implications are incurred and you now gain more control over the funds. On the other hand, a Reverse Rollover involves moving funds from a Traditional IRA account into a 401k.
This opens up the Backdoor IRA since you would no longer have pre-tax funds in your IRA upon conversion.
Other Benefits of Reverse Rollovers
Remember, if you’re going to execute a Reverse Rollover, be sure it is done with a direct rollover, so your IRA administrator doesn’t cut you a check for the transfer, which then carries a tax withholding requirement.
As you can see, the Reverse Rollover may be a vital strategy to your financial plan.
Contact us if you have any questions on how this technique can be used for you!