By Dr. Jim Dahle, WCI FounderEvery March and April I am absolutely inundated with Backdoor Roth IRA questions. This year was no different and I found my prior post on 17 Ways to Screw Up a Backdoor Roth IRA to be inadequate. Not only are you guys incredibly good at finding new ways to screw Backdoor Roths up, but that post focused too much on the errors and not enough on the solutions once the errors have been made. I haven't given up on prevention, but I am now focusing more on treatment.
For a process that seems so incredibly simple to me, it can be amazing all the different ways to screw it up. In 2019, I noticed a couple of trends in the questions I was getting that probably deserve some time on the blog. Before we get into them, let me explain the VERY SIMPLE way to do a Backdoor Roth IRA. There are essentially six steps. I'll go over them and then go over how to fix errors that occur with each step.
6 Steps to Successfully Contribute to a Backdoor Roth IRA
- Step #1: Contribute to traditional IRA ($6K, $7K if 50+ for 2019).
- Step #2: Invest the money in a money market fund.
- Step #3: Move money from traditional IRA to Roth IRA (i.e. a Roth conversion).
- Step #4: Invest in your preferred investment (typically a stock, bond, or balanced index mutual fund).
- Step #5: Ensure you have no money in a traditional IRA, SEP-IRA, or SIMPLE IRA on December 31st of the year you do the CONVERSION step.
- Step #6: Report the transactions correctly on your taxes by filling out Form 8606.
Seriously. That's it. If you can do a cholecystectomy, you can do this. If you can work up a pulmonary embolus appropriately, you can do this. If you can manage hypertension well, you can do this. If you can fill a cavity, you can do this. Super easy.
However, people still manage to screw up on EACH of those six steps. Let's go through the mistakes people make, step by step.
How to FIX Backdoor Roth IRA Mistakes
Step #1 Error: Contributing Directly to a Roth IRA
An error that commonly occurs with a first Backdoor Roth IRA is that people simply don't realize that their income is too high to do a direct Roth IRA contribution. So instead of doing it indirectly (i.e. going through the Backdoor), which is no big deal even if you're under the limit, they contribute directly to a Roth IRA. Then they realize their Modified Adjusted Gross Income (MAGI) is over $137,000 ($193,000 Married Filing Jointly) for 2019. Now what?
Enter the Recharacterization
Well, now you have to recharacterize the Roth IRA contribution to a traditional IRA contribution. This basically makes it as though you never contributed to a Roth IRA but contributed to a traditional IRA instead. You usually have to call your IRA provider to get this done, but it's no big deal.
You have until the due date of your tax return to do this (including extensions). So if you did an IRA contribution in January of 2018 for the 2018 tax year, you have until October 15, 2019 to do a recharacterization. There's no penalty or anything to do it. You can do the opposite as well if you contributed to a traditional IRA but meant to contribute directly to a Roth IRA.
Bear in mind that starting in 2018, you can no longer do recharacterizations of Roth CONVERSIONS (not contributions). This eliminated the “Roth IRA Conversion Horserace” technique for tax reduction.
Until recently, I had thought there was a waiting period after a recharacterization to then reconvert the money to a Roth IRA. However, that rule was only for recharacterizations of conversions, not contributions. There has never been a waiting period for a recharacterization.
Any gains that occur before the final conversion are, of course, fully taxable at your ordinary income tax rate in the year of the final conversion.
Step #2 Error: Not Investing in a Money Market Fund in the Traditional IRA
I ran into a new issue this year from a couple of people. What happens if you LOSE money in between the contribution and conversion step? This problem is easily avoided by using an investment like a money market fund that does not go down in value for that time period, but some people fail to do so and end up losing money. When they work their way through their IRS Form 8606, they discover they have basis left over that they can then carry forward indefinitely for years! No big deal, it just makes your paperwork more complicated. Perhaps at some point in the future you'll do a Roth conversion of tax-deferred money and this carry forward basis will reduce the tax on that event.
What if you MADE money in the account between contribution and conversion? This actually happens most of the time, so I wrote an entire post on it called Pennies and the Backdoor Roth IRA. Technically, any money earned between the contribution and conversion step is fully taxable at ordinary income tax rates in the year of the conversion. If it is less than 50 cents, you just ignore it. More, you report it on your 8606 and pay taxes on it.
If it is still in the traditional IRA, either do another tiny Roth conversion or leave it there until you do next year's Backdoor Roth IRA process, either is fine. If you were smart and just used a money market fund and did the conversion as soon as your IRA provider allowed it (usually less than a week and sometimes as early as the next day), this won't be much money and there won't be much tax due.
Step #3 Error: Forgetting to Do the Conversion
If you were dumb and forgot to do the conversion step for eight months afterward, it could be a huge gain you're paying taxes unnecessarily on. No way to fix this one, just pay your stupid tax and move on.
Step #4 Error: Forgetting to Invest the Roth IRA Money
Even worse than paying taxes on a huge gain, is not getting the gain in the first place because you left the money sitting in cash for months. No way to fix this one either. Your “stupid tax” this time comes in the form of opportunity cost. Just get the money invested ASAP to stop the cash drag. Maybe you even got lucky and the market went down in between contribution and investment so now you get to buy low.
Step #5 Error: The Pro-Rata Rule
Some of the most common questions I get are from people who make a late contribution to a Backdoor Roth IRA. What do I mean by late? Well, you are allowed to make an IRA contribution AFTER the calendar year ends. In fact, you have until tax day, usually April 15th unless you get an extension of up to six months. While it is to your advantage to contribute to retirement accounts as quickly as possible so that money can start compounding in a tax-protected way, I understand that we all have lots of good things to do with our money and sometimes this gets pushed back into the next calendar year. All it really does is complicate your paperwork a bit.
For example, if you made your 2018 IRA contribution in April 2019, instead of reporting both the contribution and the conversion on your 2018 taxes, you would report only the contribution there. The conversion would be reported on the taxes for the year you did the conversion, i.e. your 2019 tax return due in April 2020. Your 2018 IRS Form 8606 becomes a little simpler and your 2019 IRS Form 8606 becomes a little more complicated. Not a big deal if you can follow the simple instructions.
What confuses people, however, is the pro-rata rule. This is the rule that says you need to empty out your traditional IRA by December 31st of the year you do the conversion. Since these folks have never filled out a Form 8606 (or apparently read the instructions) they assume that for a 2018 contribution they need to have a balance of $0 at the end of 2018, even if they didn't do the conversion step until 2019. That's simply not the case. The pro-rata rule isn't applied until the year of the conversion, i.e. December 31st, 2019.
Emptying the IRAs
So how do you empty out those IRAs? You usually have two choices.
- Do a Roth conversion of the whole thing. This is what I generally recommend for small IRAs where the tax bill on the conversion would not be too onerous. It is quick, easy, and increases the amount of tax-free assets you have.
- Roll the money into a 401(k) or 403(b), either that of your current employer, that of a past employer, or to your own individual 401(k) if you are self-employed. This is usually a better option if you have a large IRA where you would rather deal with the hassle than pay the tax bill during your peak earnings years.
So how large is large and how small is small? Well, it's going to vary by the person and how much disposable cash they have. Most would consider an IRA under $10K to be small and an IRA over $100K to be large. In between, it's a personal decision as to which would be better for you.
What If You Didn't Empty the IRA?
So what if you screwed this one up? Well, your Backdoor Roth IRA conversion step just got pro-rata'd. There is a tax bill associated with that because most of your conversion was of tax-deferred money rather than post-tax money like it was supposed to be.
The fix for this is going to vary by the individual, but the easiest fix is to simply convert the entire IRA to a Roth IRA now, so you end up getting all your post-tax money into that Roth IRA. Another possible fix is to figure out a way to separate your basis in that IRA, roll the tax-deferred money into a 401(k), and then convert the basis left behind in the IRA.
Do yourself a favor and just empty the darn IRA by December 31st. Keep in mind that this is usually not an instantaneous process, so don't put it off until you're on holiday break at the end of the year.
Step #6 Error: Screwing Up the Tax Forms
Both individual taxpayers and professional tax preparers screw up IRS Form 8606 all the time. In fact, some of them haven't even heard of a Backdoor Roth IRA. (Incidentally, this is one of the best questions to ask while interviewing a potential tax professional—”How many backdoor Roth IRAs did you help last year?”)
The usual fix to this error is to file a 1040X (Amended Tax Return) and a new Form 8606. You can do this for the last three years if necessary. If you didn't file Form 8606 at all, you'll definitely want to do this. The key is to check lines 15c and 18 on Form 8606. They should both be a number very close to zero if the form is being completed correctly.
The tax preparer should NOT be filing Form 5439. If you did steps 1-5 right, this form probably doesn't belong in your tax return.
A lot of people wonder about the 1099-R sent to them by their IRA provider and worry that it was done wrong and that it will cause them to pay tax they shouldn't have to pay. Sometimes the form was filled out wrong, but mostly this is just a lot of anxiety. What gets people anxious is finding something on Line 2a “Taxable amount”. As long as the box on Line 2b is also checked “Taxable amount not determined”, you're golden. Don't worry about it. If it is not, have the IRA provider send you a new, correct form, either with $0 in 2a or the box in 2b checked (usually the latter). Here's what mine looks like every year from Vanguard:
Note that Box 2b is checked, even though they are reporting a taxable amount of $5,500.07 to the IRS.
Again, if you're not sure how to enter this into Turbotax, check out Harry Sit's excellent tutorial. I still occasionally refer to it myself.
Still Confused About the Backdoor Roth?
I wish Congress would just lift the rule against direct Roth IRA contributions for high earners and save us all this hassle, but who knows if that will ever happen.
- Need more help with a Backdoor Roth IRA? Here is my Backdoor Roth IRA Tutorial (along with 1800 comments on it).
- If you did your contribution after the end of the year, check out Late Contributions to the Backdoor Roth IRA.
- The Physician on FIRE walks you through a step by step Backdoor Roth IRA at Vanguard.
- Harry Sit walks you through reporting the Backdoor Roth IRA in Turbotax.
- Here is my prior post on 17 Ways to Screw up Your Backdoor Roth IRA.
- You can hire a professional to help you, either a good financial advisor or a good tax strategist can assist.
- You can also ask your peers for help on the WCI Forum, the Private WCI FaceBook Group, and the WCI Subreddit.
What do you think? Which Backdoor Roth IRA mistakes have you made? How did you fix them? What errors do you see others making? Comment below!
Well I went from first commenter here, to finding a new way to screw it up potentially 🙂
Made 2021 ira contributions and conversion to roth in January 2021. I left my employed job to open up a solo practice (1 employee). I didnt realize that the best retirement plan option for my new practice would be a SEP-IRA. I also will need to discontinue my solo 401k as I have non family employee and would violate control group . So here is my plan and I would appreciate any feedback.
Close solo 401k on 1/1/2022, transfer pretax 401k to traditional IRA
transfer roth 401k to roth ira
Open Sep IRA and make 2021 contributions , do not perform backdoor roth for 2022 and on for some time
Any help appreciated
Thanks
Yes, you could do that. You could also probably leave that solo 401k open if you want. You just can’t contribute more money into it. Perhaps you could roll your SEP-IRA in there every year too. Better get a professional opinion on that last part though.
I have to say I mess up my back door Roth conversation and can not fix it. I opened my TIRA in fidelity and funded $6000 this Dec, at the same time I have an SIMPLE IRA pretax about 35k from my ex-employer I left 3 years ago and another pretax 401a account 25k from my previous employer many years ago, they were both in my fidelity account but under stock plan category not retirement plan as my TIRA, so I thought they won’t be pro rated since I didn’t roll over them to IRA….Even more stupid, I heard this year is the last year for back door conversion, has to do it in 2021. So I submit the conversion on 12/31, seems the fund immediately got transferred,. Then later in the day a friend told me the SIMPLE IRA definitely pro rata though not sure about the 401a one. But it’s already too late, since I click the button on 12/31, no way to fix it by rolling these to my current 401k or simply convert all to Roth.
Now with this 1 click, I will pay another $1800 tax dollar (fed+state) on my after tax money 🙁
I’m sorry to hear that. Yes, you will be pro-rated. You needed to do something with that SIMPLE IRA, but not necessarily that 401a. You could have moved that SIMPLE into your 401k. The best move might be just converting the entire SIMPLE to a Roth IRA this month.
Royal screw up, now hopeless after a lot of research for a fix and doesn’t seem to be a way out.
I’m an avid white coat investor follower for many years now and should know better. I can only describe my mistake as someone playing with a loaded gun, knowing is loaded but still accidentally shooting yourself in the foot.
I been doing my wife’s back door Roth IRA successfully for a few years now. I correctly converted her old SEP account into a solo 401k in the first year I did her first back door Roth conversion for her.
However, for the first time in December 2021 something got to me and I rushed through a back door Roth conversion for myself for 7k (I’m 51 years old)
I opened a Fidelity Traditional IRA and a Roth IRA. I transferred 7k into the traditional and then immediately rolled the 7k into the Roth completing my back door Roth conversion before the end of 2021.
Funny as it seems I was on a long drive on the first day of 2022 listening to a white coat investor pod cast
And the pro rata rule came up on one of the listeners questions. It was right then that it pop up that I have
An old employer 401k that was converted to a traditional IRA with vanguard – 10 years ago and I never contributed anything to it since then. There is just about 300k in it.
Trust me I know it seems hard to believe it but because when I did my wife’s back door rollover I only dealt with a SEP account it somehow never pop in my mind that I had the vanguard traditional IRA sitting there.
Is there ANYTHING that can be done to at least minimize the ROYAL screw up?
Thank you for all your help and sorry for the disappointment I know I should known better and taken my time doing the conversion instead of rushing through it.
Your conversion will be pro-rated for 2021. You can either carry forward basis in that IRA indefinitely or you can try to isolate the basis at some point by rolling the tax-deferred dollars in the IRA into a 401(k) and then converting the basis left in there.
https://www.whitecoatinvestor.com/how-to-get-your-tax-exempt-tsp-money-in-to-a-roth-ira/
https://www.whitecoatinvestor.com/fix-backdoor-roth-ira-screw-ups/
But will I have to pay taxes on the full 300k amount including the basis or just taxes on the gain?
Thank you for all the help!
You’ll have to pay taxes on the portion of the conversion that represents pre-tax money. That’s what pro-rata means. That’s going to be almost the entire conversion in your case. So just under $7K but not $300K. Unless you convert the entire $300K, which most would not.
If I am reading this correctly, You will owe taxes on the $7000 moved to the Roth based on the total that was in your IRA (The 300K). No way around that.
If you move the whole $300K to a Roth this year you will owe taxes on that (At your income rate) minus the basis (if you have proof of the basis) No way around that.
Your 2 options are to continue with the way it is or
Move the 300K IRA into a 401K (there by having ZERO in a traditional IRA). Once it is the 401K, pull out the Basis part (the money you put in and paid taxes on before it went in part) and put into a Roth IRA.
A long answer to a short question.
In summary move it to the 401K and you should not have to pay taxes now ( but will later, RMD at 72). If you move the whole thing now to a Roth this year, you will owe taxes when you file (for tax year 2022). But not on the basis, just the earnings (if you have proof, form 8606 etc)
I am not a tax person , just another reader. Pretty much what WCI said. Good Luck
Yes, I was calculating I would have to pay taxes on the whole 300k even though I only moved the 7k into Roth.
That would have been a huge tax bill and kept waking me up at night the past few days 😂
If I’m only paying on the 7k isn’t ideal and I rather not but I’ll look at it as what it is – a tax bill for stupidity – will bite the bullet and learn the lesson no rushing on important matters.
I truly appreciate you taking the time and effort to reply to my question. You helped me sleep tonight 😂 (hopefully)
Best wishes and happy 2022
Even paying that tax isn’t all bad. Remember that $7K will never be taxed again. A Roth conversion of pre-tax dollars isn’t a bad thing. It just isn’t what you were trying to do.
The 401K likely won’t accept the post tax dollars. That’s a good thing though. They’ll be left behind in the IRA and you can just convert them to a Roth IRA.
Your website is very helpful. I have about $75k USD I rolled over from a 401k to a Traditional IRA many years ago. I recently learned of the pro rata rule, which doesn’t allow me to do a backdoor Roth.
It’s now Jan 2022 and I’m hoping, per your recommendation, to just convert the whole $75k Traditional IRA to a Roth IRA (and pay the taxes) sometime in the next week, so I can start doing a backdoor. My question is will I be able to do a backdoor contribution for 2021 and 2022? Am I out of luck on a $6k 2021 contribution since we’re past Dec 31, 2021? Am I out of luck on a $6k 2022 contribution since I’m converting from a Trad IRA to a Roth IRA?
Yes.
No. That contribution can be made until tax day 2022.
No, the conversion has nothing to do with the annual IRA contribution limit.
Thanks for the responses. Following up here as I’m doing my 2021 taxes.
Quick Summary:
-In Jan 2022, I converted the whole $75k in my traditional to my Roth IRA
-In Feb 2022, I did a backdoor Roth contribution of $6k intended for the year 2021.
Was I allowed to contribute the entire $6k for 2021 given I had money in my Traditional IRA for all of 2021?
Yes. The only time your IRA balance matters is on 12/31 of the year you did the conversion step.
Hello ! This is my first time doing a Backdoor Roth and I already made a mistake …
For the year of 2020, I was still a resident (pharmacy)/finishing up residency, so I was able to contribute to my ROTH directly without exceeding the income limit. In January of 2021, I made another direct contribution of $6000, to my ROTH, forgetting that I would actually exceed the income limit this year!! I contacted Vanguard and was able to recharacterize this contribution to a traditional IRA. Then I converted it to the ROTH.
I’m wondering for reporting my taxes this year (using TurboTax), do I need to do anything separately/in addition? I’ve read your step by step guide on how to report a backdoor roth.
Not really. It’ll be treated as though you contributed to a traditional IRA originally.
Thank you so much for your reply! Sorry I had one last question. I was reading the comments earlier and someone (who also had to do a recharacterization) said that because of this, they would not be able to file their taxes electronically this year. Is this true (because I have to write a statement/notice of why I had to recharacterize my contribution) ?
Thank you so much for your speedy reply! Sorry I had one last question. I was reading earlier and one of the commenters said that because they had to do a recharacterization of their contribution, they would not be able to file their taxes electronically this year. Is this true ? (because I have to send a notice to the IRS explaining why I had to recharacterize?)
I’ve never heard that before; I don’t think it’s true. You can certainly send statements electronically. But even if it were true it’s not that huge of a deal. It wouldn’t keep me from recharacterizing.
Thanks Jim for all the education your provide.
In 2020 we had a rollover IRA. Rolled into a. 403 in Dec 2020. ( didn’t realize there was a small balance after the rollover).
In 2021 we did a BD Roth for 2020 and 2021.
Jan 2022. Did the BD Roth for 2022
Jan 2022 got a ira contribution form 5498 from our previous rollover ira brokerage acct. we have $607 in cash that did not get rolled over.
I think my options are
1. Rollover the $607 to my 403
2. Pay tax on the 607 and convert to my Roth.
Does this fall under the pro-rata?
Yes, you got pro-rated. Best way to fix it is # 2.
Ok. Thanks
I assume we will only have to pay tax on the 607. Not the amount that we rolled over to the 403b in 2020. We would pay tax and report on our taxes for 2022.
Is Step 2 basically a Roth conversion.
It’ll be less than $607. Some of that is now after-tax money you won’t have to pay tax on (it was pro-rated). Yes, step 2 is a Roth conversion. But part of it will be tax-free.
Did I mess up?
I have already done my backdoor Roth for 2022 – $6000 IRA contribution and transferred it to my Roth IRA.
I then realized I had not contributed to my IRA in 2021 and therefore had not done the backdoor Roth conversion for 2021.
Since then I have made a $6000 contribution to my IRA for 2021. Can I now do the backdoor Roth conversion for 2021, even though I have already done a backdoor Roth conversion this year?
You can still do a 2021 up until tax day, even if you have already done a 2022 one.
Phew….thank you, I am glad to hear that. It just looked a bit odd on the Fidelity website…..didn’t give an option for which year I was trying to convert it for and since I had already done 2022 it looked like I didn’t have an option to covert another $6,000.
I made the mistake of not converting in time; trying to figure out from past posts if I’m still ok.
1. In 2021, I had to roll over a past-employer 401k into a Rollover IRA, amount ~$200,000
2. I intended to CONVERT that amount to a Roth IRA, but did not do so yet (missed Dec 31st 2021)
3. I’d like to convert it now, before the April 18, 2022 tax deadline for 2021
4. Anticipated income loss for 2021 would offset any tax implications for the conversion if I can claim the conversion in 2021 tax year.
Can I make the conversion from Rollover IRA to Roth IRA before April 28, 2022 and claim it on 2021 taxes?
3. Nope. That’s not how conversions are taxed. Sorry. Conversions are taxed in the year they are made. A conversion done in 2022 is paid for with your 2022 tax bill and reported on your 2022 tax return.
But you’re not talking about a Backdoor Roth IRA here anyway. You’re just talking about a Roth conversion. You can do that any time. There’s no 12/31 or 4/15 deadline or anything.
Hi, I have two Roth IRA conversions that I made improperly for the 2021 tax year. I have not yet file]ed my taxes and would like some advice on how to correct the mistaken additions before I file. The first is I inadvertently made a deposit to my Roth IRA Vanguard account that was a mistaken $2000 conversion. The second is I when I made two additional conversions for $1000 each. Taxes were paid on the IRA withdrawals that i converted. They were legal conversions except that I wrongly coded them as rollovers and not conversions. Can you help with some advise on what to do? Vanguard told me to consult a tax professional, and I cannot get through the IRS. Thank you!
It’s not clear to me exactly what you did. Can you please detail all IRA contributions, conversions, and recharacterizations with their dates and amounts that were done in 2021 and 2022 so far?
I did my 2022 backdoor Roth contribution and conversion in jan 2022 at vanguard. My traditional vanguard IRA acct has a zero balance.
I did a rollover IRA from fidelity into a seperate Vanguard rollover IRA acct (about $450K) in March 2022. I think I have made a mistake by doing this. Am I supposed to have zero dollars in all IRA accounts except the Roth IRA?
P.S. the $450k was in a former employer 401k at Schwab before rolling over to fidelity IRA. I believe I have an option to roll the money back to my new employer fidelity 403b plan. Should I do this?
Yes, by December 31st. I’d just roll it into the 403b.
I made the following traditional IRA contributions in 2/2022:
2021- 6,000 contributed
2022- 6,000 contributed
My basis is now 10,600 as I didn’t contribute to a money market fund. I want to convert to ROTH.
Do you have any paperwork examples for money lost between the contribution and conversion for my 2022 tax return?
I did a rollover of my SEP to my 403 b in 3/2022, and I do not have a SIMPLE IRA.
I guess I’ll have to do one there are so many people making this error. But basically, you have to carry the basis forward for years until you use it. Personally, if it was me in your situation, I’d let it sit there until it grows back to $12K and then convert it just to ease the paperwork hassle!
Let’s work through the form with your numbers. This would be a 2022 8606 (which no one has filled out yet of course.) We’ll assume you convert right now.
1. 6000 (this is your 2022 contribution)
2. 6000 (this is your 2021 contribution)
3. 12000
4. 0
5. 12000
6. 0
7. 0
8. 10600
9. 10600
10. 1
11. 10600
12. 0
13. 10600
14. 1400 (this is your basis, i.e. line 2 on your 2023 8606)
15a, b 0
15c 0
16 10600
17 10600
18 0
So no tax due and you get to carry 1400 forward so eventually, you’ll be able to have 1400 in gains tax free maybe somewhere down the line.
Your response is so helpful. Thank you. I like the suggestion and will wait until it gets closer to 12K.
Help!
I just realized that in 2021 I contributed directly to Roth-IRA. Vanguard just did recharacterization and transferred it to tIRA, I am going to convert to Roth IRA after a few days. My question is do I need to fill out 8606 this year (I filed for tax extension)? or it needs to wait until 2022 to add it along my 2022 contribution.
Help!
I just realized that in 2021 I contributed directly to Roth-IRA. Vanguard just did recharacterization and transferred it to tIRA, I am going to convert to Roth IRA after a few days. My question is do I need to fill out 8606 this year (I filed for tax extension)? or it needs to wait until 2022 to add it along my 2022 contribution.
You made a non-deductible IRA contribution for 2021 via a recharacterization done in 2022? Yup, you need a 2021 8606 documenting that contribution.
hi Team,
We have 2 issues.
1.)For TY 2019, we did backdoor roth IRA and wasnt aware we should file 8606. To fix this should we just send 8606 or Form 1040X and 8606?
2.)For TY 2020, we did backdoor roth IRA and incorrectly reported as recharacterization. There were no entry in 4a and no taxes on 4b. In this case should we just send 8606 or Form 1040X and 8606?
1) Not clear so I’d do the latter. Certainly that’s not wrong to do so.
2) I’d definitely do the 1040X for that.
For point 1, we did back for ira and didn’t file it. So to file now, do we need to send just 8606 or both 1040x and 8606. Hope it’s clear now.
I understood the question. I’m saying the answer isn’t clear. So I’d send both an 8606 and a 1040X. Don’t worry, the 1040X is easy.
I have a question regarding Form 8606. In 2021, someone helped me with filing my taxes, and I insisted I needed a form 8606 since I did a backdoor roth conversion (tax preparer was confused about this form). I directly contributed $6k to ROTH in 2020 since I was under MAGI, but in 2021, since I was >MAGI, needed to do backdoor.
I’m reviewing the form again, (many months later, I know) and I don’t know if he did it right. This is what it looks like:
1. 5996
2. 0
3. 5996
4. 0
5. 5996
6. 0
7. 0
8. 0
9. 0
10 . x
11. 0
12. 0
13. 5996
14. 0
15abc. 0
16. 5996
17. 5996
18. 0
But I was looking at your sample above, and since I already had 6k in my roth (from 2020) shouldn’t Line 2 be 6,000 instead and then Line 3 would be 11,996? (carrying basis forward, even though I didn’t have to go backdoor in 2020)?
If the form is incorrect, how do I fix this? Will I just need to resubmit a form 8606? Or do I need to do both 8606 and 1040x ?
It’s hard to say if it was done right if you don’t tell us exactly what happened and when. Certainly as illustrated you don’t owe any taxes so it’s probably right.
If the form is incorrect, I recommend both an 8606 and a 1040X.
I’m so sorry! I should’ve been more clear
2020: Directly contributed to ROTH $6k since I was making below the MAGI
2021: Backdoor ROTH since I was now above the MAGI
Would my form 8606 still be incorrect in this case?
Right, but when did you do the contribution and how much. When did you do the conversion and how much.
I think I’m getting pro-rata’d. I contributed $6k each (wife and I) early in 2022 through the backdoor into a Roth IRA. Now our employer has changed and we have ~$1M in our 401k being rolled over. Our new employer has a high management fee, so I was going to roll over into an IRA and self-manage. I know I’ll owe taxes on nearly all of that conversion amount, but how bad is the situation going to be for the remaining money in the IRA? As in, is the math/tax work going to be so complicated that I should just consider using the new employer’s 401k to simplify my situation?
It may not be worth paying higher fees on $1 million in order to do a Backdoor Roth IRA each year. Getting pro-rated isn’t illegal or anything. It just causes a little messier paperwork on your taxes and eliminates the main benefit you were looking for with the BD Roth IRA.
Hi, I think I have a combination of issues #1 and #2 and was hoping for some guidance. My spouse contributed directly to a Roth IRA and invested it in an S&P index fund at the start of the 2022. We then got married in late 2022, and our combined income put us above the income limit for a direct Roth IRA contribution (Issue #1). To fix this I followed the advice to have it recharacterized, and then converted it back to a Roth in December of 2022. The problem is since it had been sitting in an S&P index fund since January, it had lost around $1,000 at the time of the conversion (Issue #2). If I am understanding this all correctly, we will have a negative basis for around $1,000 on our 2022 taxes that will carryover indefinitely.
Now for 2023, she has made her contribution correctly to a traditional account and it is currently sitting in cash. I’d like to try to fix the negative basis to reduce future tax paperwork, so my thinking is to intentionally keep the money in the traditional account and invest it in hopes that it grows to chip away at the $1,000 carryover loss basis. We would then convert it when it either gains $1,000, or by December 2023 regardless of value, whichever comes first. If there is still a negative basis, repeat the following year until the gains outweigh the negative basis. The risk is that the account loses value again sitting in the S&P, but at the point that we still have a negative basis anyways I don’t think it makes much of a difference. Does this make sense, or is there a better way to do this?
Thank you for the help!
Seems like a good plan to me except no need to do it by December if she hasn’t done a Roth conversion in 2023 there is no need to do it by then. Can’t be pro-rated until a conversion is done.
I’m concerned I screwed up somewhere along the way here: In 2021, I contributed $4K directly to a Roth IRA but found out I overcontributed by $1640 while I was doing 2022 taxes. I recharacterized $1640 to a traditional IRA account and contributed an additional $2000 for the 2021 $6K max. I contributed $6K for 2022 max—all was converted to Roth IRA in 2022. I reported the recharacterization and traditional IRA contributions on form 8606 for 2021 tax return. I am filling out my 2022 tax return and received 1099-R for the Traditional IRA ($9644 filled in both Gross Distribution and Taxable Amount boxes). Both “Taxable Amount not determined” and “Total Distribution” are checked. The 1099-R I received for the Roth has $1686 in box 1 (recharacterized amount plus gains). I put in all the numbers in my tax prep and my refund fell by over $1K. I made sure tIRA was zero before end of 2022. I called Fidelity and they state all the forms that they sent to me are in good order. Any ideas what I missed?
“Refund fell by $1K”. Is it right or not? Do you owe taxes on your 8606 or not? Sounds like you shouldn’t from your description.
I don’t think I owe any taxes on the 8606, but I am using the tax prep software FreeTaxUSA and it tracks your tax refund as you enter in income, etc and I noticed the refund marker fell after I entered in my 1099-R info (I always get a small refund with each year’s tax return). I thought contributions I made to a traditional IRA are non deductible so not sure why there would be any taxation. I tried doing the same return in another tax prep program and it says I over-contributed by $3640 for 2022, so now I’m thoroughly confused.
What I do when that happens is dive in deeper and figure out what’s going on. Many tax software programs nave a “forms” mode where you can see what is actually changing.
Dr. Dahle, my wife and I have been contributing to back door roth for a few years. Not this year yet for 2023. We Just found out from her parents that she has a sep ira from when she was 16 yrs old with 170 dollars open at northwest from a job she had in her name. So we’re afraid we’ve been violating the pro rata rule this whole time. What do we do?
1) ask fidelity to move the sep to our traditional ira and then convert to her roth that has all the backdoor roth money in it ?
Can she still do backdoor roth for 2023?
2) any addendum for previous taxes? How?
Thank you
Well, you can refile taxes for the last 3 years and reflect the pro-ration in the new taxes. Alternatively, you can ignore it all and hope nobody notices/cares.
1) Moving forward, I would convert that SEP right now into her Roth IRA. It doesn’t need to stop in a traditional IRA first. Then go ahead and proceed as usual with your Backdoor Roth IRAs.
2) If you choose to amend past returns, that is done on Form 1040X. So you’d send in a new 8606 and a 1040X and pay a little bit of tax for each of the last 3 years. But you still have the years before that if they were wrong too that you’ll just be leaving as “wrong.”
https://www.whitecoatinvestor.com/household-employees-and-the-1040x-kids-corner/
OK thank you and if I convert the sep into her roth directly would I have to show this somewhere on next year’s taxes?
It shows up on line 4b of Form 1040. It’s taxable income.
My wife had a Roth that she transferred to a different brokerage firm to have better options but somehow ghey classified it as a 401k! Now that we need to but a house we are getting hit with taxes twice. The broker swears it has always been a 401k. How do we prove otherwise? Very little paper trail from 10 years ago.
You don’t have to convince the broker, only the IRS. You can adjust your taxes as appropriate and include a letter of explanation as to why your tax return does not match the 1099-R the broker issues for the withdrawal.
My wife had a Roth that she transferred to a different brokerage firm to have better options but somehow they classified it as a 401k! Now that we need to buy a house we are getting hit with taxes twice. The broker swears it has always been a 401k. How do we prove otherwise? Very little paper trail from 10 years ago.
This may be a new way screw up the BackoorRoth…
I rolled my TIRA into my Roth in 2019, but apparently didn’t close that account and $0.05 were added in 2022 as an adjustment by E-TRADE for “Fair market value – 12/31/21”. Has anyone else seen this? Can I just close the account or do I need to roll the 5-cents into ROTH and then close it?
I already made my 2023 backdoor conversions so I’m hoping the 5-cents in an unknown account is not a deal-breaker….
I’d just close it. You round to the nearest dollar on your taxes anyway.
Hi,
Both my wife and I contribute to backdoor roth IRA every year. We have a new accountant who filled out the Form 8606 differently than in this article and on the 1040 put $12,000 in line 4a and 0 in line 4b. On the 8606 form he filled it out as follows:
1. 6000
2. 6000
3. 12000
5. 12000
13. 6000
14. 6000
16. 6000
17. 6000
24. 18000
When I asked him why the form was filled out differently then instructed in the WCI and elsewhere , he said thats how the computer program that he uses is set up and that “form 8606 is just an information form so it doesnt effect taxes at all”. Is this true? Since he is not reporting any taxable distributions does it matter how form 8606 is filled out? He also filled out distributions on form 1040 from IRA. How ill this affect me in the future? What exactly is the issue that the IRS will have with me down the road from now if I leave it as is?
Looks weird but I can’t tell you how to fill yours out because you haven’t told me what you actually did. Yours assumes you’re carrying basis into 2023, is that the case?
I’ve had different opinions from different accountants. I’m a 1099. For the last 6 years, my LLC has been maxing out my SEP IRA via business funds. The accountant that I have been with for the last 6 has OK’d maxing out and doing backdoor roth conversion as well. My new accountant says no, citing the pro rata rule.
Have I made 6 years worth of mistakes? If so, what should I do?
Thanks
Yes, you’ve been messing up. Your accountant was wrong. Have your new accountant help you clean it up. You’ll probably end up refiling taxes for the last 3 years and adjusting your basis somewhat. Then hopefully you can roll the SEP-IRA into a 401(k) so you can be okay moving forward.
I’m really glad I found your website, I just wish I would have found it earlier….
I was not aware of the pro-rata rule for investors with traditional/simple IRA’s. I personally have a 401(k) through work and last year started the backdoor roth conversions for both 2021 and 2022. I got lucky because I opened both the traditional and roth IRAs up as new accounts so when I did the conversion there was $0 in the traditional IRA at the end of 2022. This year I did the same thing for 2023, but for whatever reason, the settlement fund paid interest of around $4 in the matter of just a couple days the money was in the fund, prior to the conversion. I supposed I’ll have to convert that money and pay the taxes next year. Now onto the real issue…
I decided that this seemed to work so well for me last year, that I would do the same thing for my wife. Unfortunately, she has a large sum of money in a traditional IRA that was rolled over from a previous simple IRA after her employer switched brokerage firms from Janney to the Vanguard. She is also currently enrolled in a simple IRA with Vanguard through her employer. I already contributed and converted $6000 into a roth IRA last month to max out 2022 contributions. I assume my only option with that money is to just accept that money will be a nice pro-rata tax bill next year. To further compound my stupidity, I started the process of a $6500 contribution into her traditional IRA for the 2023 tax year, with the intensions of doing a backdoor roth conversion. That money has yet to actually hit the settlement fund, but it’s far enough along in the electronic transfer process that Vanguard will not let me cancel it. Do you have any suggestions as to how I should handle that money? I assume that I can’t just transfer it back into my checking account without incurring an early distribution penalty, right? Some other thoughts I had were to just leave the money in the traditional IRA and try to figure out how to add it to the basis since it’s after-tax money. Or can I roll it over into my wife’s simple IRA as a 2023 contribution that I can deduct, as long as I don’t exceed the 2023 simple IRA contribution limits? Thanks for your help, sir.
A Backdoor Roth IRA probably isn’t a great ongoing option for your wife. But yea, that conversion you just did is going to be pro-rated. That’s not the end of the world. I mean, some of that money will now come out in retirement tax-free. It’s not a penalty or something. You’re just not getting exactly what you were hoping to get. Nothing illegal about getting pro-rated.
Thanks for the reply. What do you think the best option is for the money that I just contributed into her traditional IRA with the intention of converting it? It will be non-deductible obviously. It seems like just leaving it in there and adding to the IRAs basis as already taxed money is the best option, right?