Many P&G employees eventually reach a point where their income exceeds the limits to
contribute directly to a Roth IRA.
Fortunately, there is still a strategy that allows you to continue funding a Roth IRA each year: the
Backdoor Roth contribution.
However, there is an important rule that many employees overlook.
The Pro-Rata Rule Problem
If you have money in a
Traditional IRA, the IRS requires that any Roth conversion be calculated across
all of your IRA balances.
This is known as the
pro-rata rule.
In simple terms, if you have a Traditional IRA balance, part of your Roth conversion may become taxable.
For example:
- You contribute
$7,500 to a Traditional IRA and convert it to a Roth.
- But if you also have
$50,000 or pre tax dollars sitting in a Traditional IRA, most of the conversion will be treated as taxable.
To keep the Backdoor Roth strategy clean, the goal is to have
$0 in Traditional IRA balances (what matters is the year end balance).
Two Ways P&G Employees Can Solve This
There are two common ways to remove a Traditional IRA from the equation.
Roll the IRA into the P&G Savings Plan
You can roll your Traditional IRA into the P&G Savings Plan.
Once the funds are inside the 401(k), they are
no longer counted in the pro-rata calculation, allowing you to continue making Backdoor Roth contributions each year.
For employees planning to stay at P&G for a while, this is usually the
simplest option.
Open a Solo 401(k)
You can then roll the Traditional IRA into that plan, which accomplishes the same goal of removing the IRA balance from the pro-rata calculation. This option is a little more complex, and could require additional tax filing if your Solo balance is above certain threshold. It is worth consulting with your advisor prior to choosing this option for full alignment.
Why This Matters
For many P&G employees, the Roth IRA becomes one of the most valuable retirement accounts over time because:
- Growth is
tax-free
- Withdrawals in retirement are
tax-free
- There are
no required minimum distributions
Keeping the Backdoor Roth strategy available can allow you to
continue building tax-free assets for decades, even after your income exceeds the Roth contribution limits.
The Bottom Line
If your income is approaching the Roth limits and you have a Traditional IRA balance, it may make sense to:
- Roll the IRA into the
P&G Savings Plan, or
- Move it into a
Solo 401(k).
Either step can keep the
Backdoor Roth strategy available going forward.
Reach out with any questions, and we would be happy to help you navigate.
