WealthRabbit Support

Does having a SIMPLE IRA affect a Backdoor Roth?

Yes. Having a SIMPLE IRA can affect your ability to use a Backdoor Roth strategy. SIMPLE IRAs are included in the IRS pro-rata rule, which means the balance in your SIMPLE IRA is counted when determining how much of your Roth conversion is taxable. This can significantly increase the taxable portion of the conversion if your SIMPLE IRA contains pre-tax funds.

In addition, SIMPLE IRAs are subject to a two-year participation rule. This rule generally restricts rollovers and conversions during the first two years after you first participate in the SIMPLE IRA. Attempting to move funds earlier than allowed can trigger additional penalties and taxes.

If you participate in a WealthRabbit SIMPLE IRA through your employer, it is important to understand these rules before using a Backdoor Roth strategy. In some cases, it may make sense to wait until the two-year period has passed or to review whether there are alternative strategies more suitable for your situation.