How to backdoor Roth for stay-home wife?

[a.trainer]

My mother in law does not work and my father in law makes too much money to qualify for a Roth. I found information suggesting my mother in law is able to contribute to a backdoor Roth and it is my hope people here can explain it to me a bit further. My father in law has a SEP IRA and my in laws are in a high tax bracket so it appears he should not be the one moving his money into a backdoor Roth. My mother in law has about $20-30k in a traditional IRA and no other retirement in her name. They file jointly and she is 60+ years old.

Is it smart for my mother in law to open a Roth? Is it smart for my father in law to not open a Roth? And would anyone please explain the steps for my mother in law to open this backdoor Roth please? Thank you.

[Petunia 100]

My mother in law does not work and my father in law makes too much money to qualify for a Roth. I found information suggesting my mother in law is able to contribute to a backdoor Roth and it is my hope people here can explain it to me a bit further. My father in law has a SEP IRA and my in laws are in a high tax bracket so it appears he should not be the one moving his money into a backdoor Roth. My mother in law has about $20-30k in a traditional IRA and no other retirement in her name. They file jointly and she is 60+ years old.

Is it smart for my mother in law to open a Roth? Is it smart for my father in law to not open a Roth? And would anyone please explain the steps for my mother in law to open this backdoor Roth please? Thank you.

You just make a traditional IRA contribution, then immediately instruct your custodian to convert the traditional IRA to a Roth IRA. Here is the gotcha: if you have made deductible contributions to traditional IRAs, SEP IRAs, or Simple IRAs, you must convert a pro-rata share of deductible and non-deductible monies.

In short, it sounds like a taxable event for your in-laws.

[autoxer]

Having traditional ira assets makes the backdoor roth less attractive, because of the way the conversion is taxed. This may not be a good strategy for them.

[Like2Plan]

My mother in law does not work and my father in law makes too much money to qualify for a Roth. I found information suggesting my mother in law is able to contribute to a backdoor Roth and it is my hope people here can explain it to me a bit further. My father in law has a SEP IRA and my in laws are in a high tax bracket so it appears he should not be the one moving his money into a backdoor Roth. My mother in law has about $20-30k in a traditional IRA and no other retirement in her name. They file jointly and she is 60+ years old.

Is it smart for my mother in law to open a Roth? Is it smart for my father in law to not open a Roth? And would anyone please explain the steps for my mother in law to open this backdoor Roth please? Thank you.

I agree with what the others. Both will get snagged by the pro rata rule, but since you asked I tell you the steps involved.

1. Make sure you don't have any other pretax IRA or SEP IRA. (If your MIL had a 401k to which she could roll over her pretax IRA funds--she could go ahead with the rest of the steps.)

2. Make a contribution to a traditional IRA

3. Convert tIRA to a Roth IRA.

4. Report on taxes. This is where it gets tricky. Some folks forget to report the contribution which is where the basis comes from on the form 8606. The account custodian will send a 1099-R. This information also gets put on the 8606. Any gains (from the contribution to conversion time frame) are taxed.

Note: Your in-laws have to have a Roth account open for at least 5 tax years no (matter what age they are) in order to be considered "qualified". If they already have met that requirement--they are cool. But, if this the first time they have opened a Roth, they will have to meet that requirement.

Here is a link that goes into much more detail on the mechanics of filling out the 8606:

https://thefinancebuff.com/the-backdoor-roth-ira-a-complete-how-to.html

IRS Pub 590

https://www.irs.gov/publications/p590b#idm140097546590032

One thing your in-laws might look at for your MIL is a conversion of the entire t-IRA to see how that would impact their tax situation in the long term (like at age 70.5 when required minimum distributions kick in). But, you have to look at this from the stand point of whether they will be in the same tax bracket or a lower one after your FIL quits work and/or RMDs kick in.
There are some more potholes as folks get closer to medicare age, though. There is an IRMAA tax on part B medicare premiums (with a 2 year look back) which could make conversions more expensive than just looking at the tax rates.

https://www.medicare.gov/your-medicare-costs/part-b-costs/part-b-costs.html

https://www.ssa.gov/pubs/EN-05-10536.pdf