Rocket Dollar Knowledge Base

How do I execute a Roth conversion at Rocket Dollar?

To save you money with account opening fees, it is wise to convert an old traditional IRA to a Roth IRA off-platform and then roll the new Roth dollars into a Rocket Dollar Self-Directed Roth IRA.

Can I do a Roth Conversion at Rocket Dollar?

Because a Roth conversion needs a traditional IRA and a Roth IRA, you would have to open two accounts, resulting in two account fees. As a result, it is often better to convert a traditional IRA to a Roth IRA before rolling it over to a Rocket Dollar Account if you only wish to maintain one account. 

I can't do a transfer from my traditional IRA to a Rocket Dollar Roth IRA?

It's important to provide solid records of your Roth conversion for tax purposes and the 5 Year Roth Rule. Currently, Rocket Dollar cannot support that tax reporting.

Roth Conversion 2

What is a Roth Conversion?

A Roth conversion, also known as a "backdoor" Roth, is converting a Traditional IRA to a Roth IRA. Traditional dollars are pre-tax and have never been touched by taxes, and Roths are post-tax, which means this process is a taxable event. You do not pay an early distribution 10% penalty for being younger than 59 & 1/2 but must pay for the taxes on that money as income for that tax year.

Regardless of the taxable event, this is a popular strategy for a few reasons.

  1. Roth IRAs have restrictive income limits which bar many high-income Americans from participating.
  2. Roth dollars are highly desirable in some financial planning strategies for their post-tax status, ability to take them out after 5 years, which allows you to keep your income artificially lower and protected from future tax rates
  3. Tax rate, especially after the Tax Cuts and Jobs Act (TCJA) of 2017 are at historic lows. 

Is this a legal process?

Yes! It's a process that is supported by retirement law as long as you are reporting the moves correctly on your taxes and keeping proper records of your IRA. 

What is the Five Year Roth Rule?

How do I keep track of the Five Year Roth rule?

If you are doing this process very regularly, it might make sense to have multiple Roth IRAs, or inside a Rocket Dollar account, two bank accounts numbers tied to the same IRA LLC or two Roth Trusts and Trust bank accounts for a Rocket Dollar Solo 401(k). If you are commingling Roth conversions in the same account, the 5-year rule still applies to each conversion. This can get very messy to track the growth of each conversion! Save yourself the trouble of tax reporting by keeping the conversions separate. 

 

The above is not meant to be tax advice. Weigh all decisions and consult a tax professional or financial advisor before making a financial decision.