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!
Thanks so much for the wonderful article. I am kinda in a mess but I am not sure if its an easy fix? I normally do Backdoor ROTH IRA every year and keep little short from the limit. In 2022 I did contribute $5990 ($10 less than the actual limit) to my traditional IRA and converted to ROTH IRA. I just found out that I got dividend in traditional IRA after I converted to ROTH IRA. Now I am sitting with $2.90 in my traditional IRA?
So my question is, should I convert that $2.90 to ROTH for year 2022 (The basic question is can we do multiple Roth rollover in the same year) ? Or should I wait for year 2023 and convert for year 2023? Or Should I withdraw $2.90 from traditional IRA and pay the 10%penalty?
Appreciate your help and what you do! Thanks.
I realize this has probably been covered ad nauseam (sorry in advance) but I just want to make sure I understand exactly what to do in this particular situation:
I’ve been doing the back door Roth for a number of years now. It’s like clockwork. Every year I do 2 transactions, the contribution to traditional and then the Roth conversion when the money settles. No brainer. This year I did the same and as of February, the $6,500 was converted from Roth to traditional leaving $0 in the traditional as usual.
Only thing is I logged into my account recently and discovered Fidelity had paid $3 and change back into the traditional (post conversion) as an interest payment on the $6500 for the 6 or 7 days it sat in the traditional…weird because it wasn’t invested but rather in the same low-yield money market bucket as always. But alas, it did make that money.
So now I’m wondering, do I just withdraw that $3.42 to zero out the account. Would that create a bug in my tax reporting somehow? Obviously the amount is a non-issue but I’m just trying to determine the least invasive way to remove this pebble from the road so my 2023 tax reporting follows the same easy routine as usual.
Thank you!
That low yield money market fund is paying more this year than in prior years. Just convert the $3.42 into the Roth IRA as discussed here:
https://www.whitecoatinvestor.com/pennies-and-the-backdoor-roth-ira/
Embarrassed to admit this, but for years I’ve done a backdoor Roth for myself and my spouse but only recently did I learn she had a traditional IRA which now has approximately $25,000 in it, which she funded before we met in 2008. I think I’ve literally done the conversion for 13 years now and I have no idea how to correct this mistake. I’ve always done taxes on my own. Do I have to now backfile 13 years of taxes? It seems hiring an accountant may be required in this situation, but even then, I think we’d be hard pressed to get all the statements going back over a decade to calculate the pro-rata rule appropriately. Any suggestions on how to handle this would be much appreciated. Thanks for all you do.
Oops.
Well, you can only go back and file for the last three years so you can’t “fix” this completely. So you’ll have to do the best you can. I think what I’d do is fix the ongoing situation ASAP by rolling that IRA into a 401(k) or converting it. If you can get that done before the end of the year, maybe I wouldn’t bother doing anything else and I’d just claim ignorance if I were asked questions about why no pro-rating of conversions the last few years. It’s not like you’re cheating the government out of tax dollars here. You’re just changing when/how the taxes are paid.
I’m not an accountant (and I’m certainly not your accountant). It’s probably worth asking this question to one. There are three that hang out on the WCI forum. You might try asking there.
Inadvertently withheld 28% for 2022 non-ded IRA-to-Roth (backdoor) conversion, so I recently realized I only got $5040 into the Roth (I’m >50yo).
I did file a 2022 extension…so have until Oct 15 I guess.
TDA guy told me I already contributed max to non-deductible IRA, though, so can’t contribute that last $1960 to max the backdoor Roth.
Is there a (reasonably simple) way?
Thanks!
Good question.
I don’t think so, sorry. Maybe you can beg TDA to reverse that transaction/witholding and do it again right but I doubt they will. Don’t make that mistake next time.
This article was a godsend. No matter how much you google your screwup, no-one explains it better (and berates better) than the WCI. I find myself screwed up thanks to a Fidelity rep blithely letting me rollover a 401K ($57k) into an empty rollover IRA in 2022 (making my combined IRA’s “nonzero”), and on doing the $6500 backdoor Roth as usual, completely pro-rata-messing up my backdoor Roth strategy I’ve been doing for years. Ie, I now have “tainted pre-tax funds in my Rollover IRA. I had to pay tax on a percentage of that money (I still can’t figure the math but it ended up being around $1200 or something).
My question: can I fix this per your “empty the IRA” suggestion? I happen to be self-employed. Can I…
1. Create a solo 401k in the dying days of 2023
2. Surgically separate the pre-tax amount currently in the rollover IRA and roll it into that solo 401k (how do I figure that out?)
3. Then move that post-tax amount into the Roth? (again, how do I figure that out?)
This is like some kind of cruel joke… Fidelity of course smugly sniff “you were instructed to consult your tax advisor” – when they could so easily have pointed out such a move would impact the strategy which is why you would “speak to your tax advisor.” I’m inclined to withdraw everything out of Fidelity and move it all to rolling Treasuries until I die…
Yes.
You’ll need a business to justify opening a solo 401(k). But you roll the entire IRA balance minus the basis into the solo 401(k) and then convert what was left behind.
How do you open a solo 401(k)? Well, you go to a solo 401(k) provider (such as Vanguard) and fill out the paperwork and then you have one. The harder part is starting the business that allows you to do the solo 401(k).
More info here: https://www.whitecoatinvestor.com/solo-individual-401k/
How do you do a Roth conversion? You simply transfer the money from the traditional IRA to the Roth IRA.
More info here: https://www.whitecoatinvestor.com/roth-conversions/
If you can’t figure either out, you can just call up the provider (like Vanguard) and have them walk you through it.
You might consider just converting the entire $57K. Yea, it’ll cost you $20K or so in taxes this year, but if you can afford that it’s a really simple solution PLUS you then have a nice large Roth account. You’re really just pre-paying taxes that you’ll eventually have to pay anyway (although potentially at a lower rate in the future).
Have been doing backdoor Roth with growing confidence thanks to WIC threads.
UNTIL UH OH!!
Turns out a 403b from a former employer had been “automatically” rolled over into a traditional IRA without me realizing it.
So my form 8606 in 2022 and 2023 was incorrect, because I indicated the value of all my traditional IRAs on December 31 was zero.
Seems like I need to resubmit revised 8606s for those years ya? The form will spit out some number that I owe, and I’ll pay it.
1. Good to go?
In terms of emptying the problematic account. It holds $960. I want simplicity. I could transfer to solo 401K versus conversion to ROTH IRA (via first transferring to the traditional IRA [the one I knew I had] at Vanguard…where my ROTH is).
2. Which is simplest and avoids lagging weird balances on form 8606?
Heartfelt Thanks
1. Yes, you’ll need to redo 8606s. The best way to clean this up is to just convert that entire IRA this year with your usual conversion step of the Backdoor Roth IRA process.
So we did the screw up of being a resident then graduating then being over the MAGI. We had made a 2k contribution straight to roth in july before we realized we may be over the limit by the end of the year. So that 2k had been invested in FXAIX. I have recharacterized but it is now in FXAIX in my trad IRA. Is that ok? Do I just need to put the other 4k into the trad IRA and hold it in the core position then convert all of it to Roth?
Well, you’re certainly making your 8606 interesting. Yes, make the rest of the contribution and convert it back to the Roth ASAP to minimize the amount of gain or loss that occurs before conversion.
If I found out my MAGI was too high in 2024, when filling out my 2023 taxes, am I correct in moving the excess contribution to a brokerage from the ROTH IRA and then moving from the brokerage into a Traditional IRA where I can convert into the ROTH IRA once more? I expect my MAGI to only get higher (is higher for 2024) so I can’t just roll the excess for 2024 taxes. Essentially I contributed the full $6500 for 2023, but I should have only contributed $5000; $1500 needs to come out and I was hoping to back door it by taking a distribution and then moving to Traditional IRA, finally into the ROTH once more. Is that possible?
No. You just recharacterize your Roth IRA contribution from a Roth contribution to a tax-deferred one. Then reconvert it, paying tax on the earnings in between contribution and conversion.
https://www.whitecoatinvestor.com/ira-recharacterizations/
Thanks for the reply!
Oh no, I already took a distribution from my ROTH because Turbo Tax calculated my MAGI and said I was over. Does you previous reply still apply or have I made things worse?
Not sure you can reverse that. You can call them up and see.
I see – you’re saying I never should have executed a distribution, but instead went straight to the recharacterization. Whelp, add it to your list of how to screw things up.
That’s right.
I filed my wife and I’s taxes yesterday through TurboTax, feeling a bit hopeless. I have been successfully doing a backdoor Roth IRA for the last few years through a CPA, but went software route this year and I think messed up the paperwork (step 6). So I did a backdoor Roth IRA conversion last year March 2023 for $6000 total. My wife did the same but hers was for $5790 (I can’t remember why but I believe it has something to do with having ~$300 in her Traditional IRA leftover).
Anyways, I submitted this into the software but on the 8606 it states my taxable amount is $6000 and hers says $5790, which I’m reading should actually be zero $ or close to it. Basis states $0 for us both. Looking at my 1099-R it reads: box 1 $6000. Box 2a taxable amount $6000. Box 2B is checked. Box 4 $0. Box 7 is 2. And the IRA/Sep/Simple is checked. Box 14 is $0. The same applies for my wife’s 1099-R with instead $5790. We did this through American Funds. So my question is did I make an error in our 8606’s? If so, what’s the best path to rectify this error? filed yesterday, so should I wait until I get my tax refund before I try to amend? If you could help me with some reassurance…did I miss out on thousands in tax refunds…
Yes, you better get that fixed or that money will be taxed twice. You’ll need to refile your taxes and fix the 8606 to show that the IRA contribution was not deductible and thus the conversion is not taxable. This post may help:
https://www.whitecoatinvestor.com/how-to-report-a-backdoor-roth-ira-on-turbotax/
Great, thanks for the reply. How long do I have to refile? Should I wait for my initial tax refund?
And I’m assuming when you say ‘refile’ you mean file an amendment.
Three years.
No. I’d do it today probably.
Yes, an amended tax return with a 1040X and a correct 8606.
My Situation…
Did a late contribution
We submitted 2022 tax returns in March 2023 but then decided to do a late contribution in April.
We funded each of our Traditional IRA with a non-deductible contribution of 6000 early April since we had till April 15th of 2023 to fund for 2022 Tax year Then Converted it to a Roth IRA that same week.
It Gained $3.54 in interest while sitting in the traditional IRA while waiting for funds to clear..
Later in 2023, we added the 6500 for each of our accounts since that was the limit contribution for the 2023 Tax year. Once it cleared, We Converted the 6500 plus the $3.54 in interest that was earned on the first contribution earlier in the year.
for a total conversion of 12503.54 in my IRA during 2023 as stated on my form 5498
During second contribution, It gained $3.26. in interest while sitting in traditional IRA while waiting for funds to clear.
I completely forgot to zero our traditional IRA’s before Dec 31st of the year 2023
So now my ending balance for my traditional IRA 2023 it shows $3.26
so Far I understand I have to amend my 2022 tax return and file 2022 form 8606 to show basis of 6000 for that year.
while filling out form 8606 for the year 2023
this is what each line is
line 1 is 6500
line 2 is 6000
line 3 is 12500
line 4 is 0
line 5 is 12500
Im stuck on form 8606 Lines 6-18.
Because I have 3.26 sitting as my end of year balance for 2023.
and need help filling it out.
Im trying to see what’s the amount I owe taxes on and what my basis will be for next year if any.
I was really hoping to get that magical 0 in tax owed. but I know my first year doing this was going to cause some hiccups along the way.
I would greatly appreciate it if you could help me understand and solve this situation with me!
So you filed your tax return, then did some things that need to be reported on your tax return. So yes, that means you then have to amend that tax return. Line 6 on your 2023 8606 is $3. Does that help sort 7-18 for you? Your conversion (line 8) should be $12,504 and your line 14 should end up with $3 on it.
Help please.
I contributed $7500 in 2023 (age 58) to my nondeductible contributory IRA. When I recharacterized my IRA to my Roth (backdoor), they transferred $7503.60 as it generated $3.60 in interest, This generated at 1099 R for $7503.60. When I use Turbo Tax, they are reporting this as excess in contribution and I need to remove excess and pay $450 penalty. When I contact my retirement plan to remove the $3.60 excess, they state there is no excess in contribution as the initial contribution of $7500 is correct.
What am I doing wrong? Thank you in advance for your guidance. Thank you for your amazing blog.
dyschan
You mean converted or recharacterized? Because they’re two very different things. Which did you do? If conversion, all is well and you owe tax on $4. I bet you’re just inputting it wrong in Turbotax. See if this post helps:
https://www.whitecoatinvestor.com/how-to-report-a-backdoor-roth-ira-on-turbotax/
Hello,
Thank you for the great tutorial. I think I misunderstand how this affects what I will owe in taxes for 2024. Here’s what I did:
1. Contirbuted $7,000 to a Traditional IRA in April 2024;
2. Converted this to a Roth IRA in April 2024;
3. I did not withold taxes (Fidelity said this may cause me to owe taxes later on).
Am I right to assume that since I funded this with after-tax dollars, that I won’t owe any extra taxes at the end of the year? Or should I expect to pay the tax man some extra money at the end of the year due to this conversion? (For instance, if this $7,000 might be taxed as income? I’m unsure if this is the case).
Thank you!
If your traditional IRA contribution was not deductible, there will be no tax cost to the conversion despite seeing Fidelity’s generic warning they pop up every time someone does a conversion.
Hi James,
This article was very helpful. My situation is better described in Step #2. I left my to-be-converted-to-Roth in my Traditional IRA for 2-4 business days and because of the 4+% interest in the Money Market Fund, the account earned $0.95. So now I have $0.95 in my Traditional IRA balance (while it should have been $0).
You mention two ways to correct this discrepancy:
1) “If it is still in the traditional IRA, either do another tiny Roth conversion” or
2) “Leave it there until you do next year’s Backdoor Roth IRA process.”
Should there one solution be preferred over the other? And if so, I was wondering why.
And if Solution 2 is preferred over 1 and for next year the Roth contribution limit is still $7000, do I convert 6999 + 1 (in other words, I transfer $6,999 from my bank account plus the dollar that would still be in my Traditional IRA) or I convert $7001?
Thanks in advance for any help!
Best,
George
I prefer 1.
Don’t forget the only limit is on contributions, there is no limit on conversions. So you can contribute $7000 for 2024 and then convert $7,001.
Hi!
I have used Betterment for my roth IRA before my income increased and when it did, I started doing conversions from traditional IRA via backdoor.
Despite me converting the same day that the investment is placed in, the amount that is converted is slightly smaller than the initial placed on the traditional IRA.
For example:
Mar 8, 2023 Retirement – Traditional IRA 2022 Tax Year Contribution: $6,000.00
Mar 8, 2023 Retirement – Traditional IRAConversion to Roth IRA: $5,974.19
(despite choosing all amount, on the same day)
Dec 20, 2023 Retirement – Traditional IRA 2023 Tax Year Contribution: $6,500.00
Dec 20, 2023 Retirement – Traditional IRA Conversion to Roth IRA: $6,493.35
(despite choosing all amount, on the same day)
So, when receiving the 2023 Form 1099-R for Traditional IRA
Box 2a is: $12,467.54
Resulting in: Form 8606: Box 13: 12,468 and Box 14: 32, when filling via TurboTax Online.
Issue is that: I have none left over on the traditional IRA accounts, yet that $32 is there.
This makes me not want to do the Backdoor with Betterment again, unless this number is not significant and does not show up in future tax forms.
Should I be worried about this number?
Thanks for all your advice, me and my wife follow you consistently.
What did you invest the money in between contribution and conversion? Not cash I assume. Or were there fees?
At any rate, you’ll have basis now going forward.
Hello! Thank you so much for providing all this detailed information!
I have a question in regards to emptying traditional IRA accounts in order to do the backdoor Roth to avoid getting pro-rata’d.
I know you mentioned two ways to do it, one is to just convert it all to a Roth account and then pay the taxes that year, the other is to roll it over to my employee 401k.
I have made contributions to my traditional IRA since 2019. There are both deductible and nondeductible amounts (depending on the year). If I decide to just convert the entire amount to Roth, is there anything I need to be aware of (or need to do extra) as far as what amount was contributed as deductible and what amount was nondeductible?
You mentioned that the second option is to roll over the amount to my 401k. Would this mean that I can avoid paying taxes during the year that I rolled over? Or if not, what’s the benefit of this option over just converting the traditional IRA amount to a Roth account? I originally thought that the benefit was that I wouldn’t need to pay taxes by rolling it over to my 401k (until I finally start to withdraw from the 401k when I retire right?) but my Merill Edge rep for my 401k is saying otherwise. Can you please clarify?
Thank you so much!!
You’re supposed to have been filing 8606s every year so you should know how much of that IRA is non deductible. I’m guessing by the fact that you’re asking this question that you didn’t. So better go back through your records, figure out the basis, and go back 3 years and file 8606s with an explanation.
If your 401(k) only accepts pre-tax money like most, you can separate the basis this way, leaving it behind in the IRA to be converted tax-free to a Roth. But you still have to figure out the basis and keep documentation of it. The best documentation, of course, an 8606 filed each year.
I don’t know what your problem with your “Merrill rep” but I don’t have a very high opinion of the typical knowledge base of either “Merrill” or “reps”. It’s possible your plan doesn’t allow rollovers but that would be a pretty odd plan. Maybe you and your rep are talking past each other due to not using the right terminology or understanding exactly what’s going on.
Background:
My Roth conversion for 2024 includes BOTH
1. the allowable $7000 traditional IRA contribution for 2024
2. $952.18 that has been in a tax-deferred IRA (unknown to me, converted by former employer’s 403b, and complicating my 8606 situation). I’m choosing just to pay the tax on it and fix my old 8606s.
Question:
Does $952.18 belong anywhere on my 2024 8606? I was tempted to put it on line 7 because it is like a distribution and I owe taxes on it. But line 7 instructions say “do not include conversion to ROTH.” So I suppose that means don’t include ROTH conversion EVEN IF the conversion was pretax money. And I’ll get a 1099R for that which will document I owe tax on that money.
Basically form 8606 doesn’t care about the $952.18 and it gets dealt with elsewhere? Is that right? If not how does 8606 deal with the 952.18?
I’m grateful to have a place to ask this.
You can’t file a 2024 8606 until 2025 so I assume you mean a 2023 8606.
If you did the conversion in 2023, I’d report it on line 8. If you didn’t, I’d report it on line 6. But it shouldn’t go on 7 in either case.
I’m filling out my 2024 form for submission in 2025 while I’ve got the conversion in my recent memory.
The 952.18 value (though slightly different at that time) did go on line 6 of my 2023 8606…because I hadn’t yet converted it. The conversion was in 2024. I think that means line 6 is zero for the 2024 form (to be submitted in 2025).
So I think I can apply what you said to mean I should be adding my 7000 post-tax classic backdoor contribution and the $952.18 tax-deferred conversion and putting that number on line 8. Does that seem right?
7952.18?
Not sure how I did so well in school and can’t seem to nail this confidently. Thanks for the support!
You’re right. If you did the conversion in 2024, then it shows up on line 8 with the rest of your 2024 conversions on your 2024 8606.
Hi Dr. Daley, thank you so much for all the information you provide and diligently helping people even if same questions have been asked.
I may have unknowingly screwed up my backdoor since I didn’t get to read your guide prior. After I started as an attending in July 2022, I stopped contributing completely to my Roth IRA since I know I no longer can given the change in tax bracket. I opened up a Traditional IRA and Backdoor IRA accounts in Feb 2023 in preparation for doing a backdoor. However I realized that I still had $2000 I can put in for my 2022 Roth IRA (since my residency money was not enough to complete it that year). What I did is – I placed that $2000 in my Traditional IRA account (contribution for year 2022), and converted it to Roth in my Backdoor IRA account. This is now reflecting as a Roth Conversion when I’m reviewing my 2023 Backdoor IRA account activities (showing as conversion for prior year – which is 2022). I still did my $6500 Backdoor Conversion for 2023 and now I’m just about to file my Form 8606.
Additionally, I kept my Traditional IRA account empty by pulling out the capital gains (pennies showing up in the Traditional IRA after conversion) and transferring them to a brokerage account (thinking if its just $1-2, getting taxed + penalized 10% is alright instead of untaxed gains getting mixed in for succeeding conversions). Will follow your guide on pennies moving forward.
Question:
– Do I need to file for a Form 8606 for year 2022 since the $2000 backdoor conversion was done for that year?
– Or do I just consider this as a Backdoor Roth Late Contribution and just follow that guide?
Thank you so much!
No. You need to do it because you contributed $2,000 in non-deductible contributions for that year, right? The conversion gets reported on your 2023 8606.
I see, so I’ll have to file for 2 Form 8606, one for 2022 and one for 2023. Thank you so much!
Your resources have been so helpful, thank you!
I started this year by contributing $4,000 to a Roth IRA (prior year contribution), invested the money, and then realized that with my husband’s income I make too much to contribute to a Roth. So then, I converted it to a Trad IRA and left it there. Since then, I have put about $3,000 more into the Trad IRA that I immediately transferred to my Roth for a backdoor Roth.
I have been worried about that original $4,000 that I originally put in the Roth and then moved to the Trad – it is invested and has increased about 300$ since I put the money in. Is it too complicated to now do a backdoor transfer, or can I roll it over to my employer Traditional 401k? I know that I’ll need to pay taxes on the gains if I do a backdoor, but I’m wondering if I’ve just made this more complicated than it needs to be. Any advice is appreciated!
my first year (2021) doing this I messed up… Now I received a “Notice of Deficiency” from the IRS, adjusting our reported income to include the IRA contribution (for me and my husband), of $12000, and they want us to pay taxes on that. I’m not savvy enough to understand how to “word” it for the IRS to understand the mistake, so that I don’t get taxed on this post-tax money. Do I just explain to them that this was a “Backdoor conversion on post tax money contributed, therefore tax was already paid on this money” or is there a better explanation for them to understand the mistake
First, make sure your deduction was not deductible.
Second, make sure your tax paperwork was filled out correctly.
Third, explain carefully to the IRS what happened. Don’t use the words “backdoor roth IRA” or “backdoor conversion.” Simply state what you did. You made a non-deductible IRA contribution. Then you did a Roth conversion of that money.
That should take care of it, but be aware this will go back and forth over many months.
I am wanting to start making Backdoor Roth IRA distributions, but have 2 hurdles to get over. One is an annuity in a SEP-IRA from my first job (I should have known better, but I didn’t back then). I have figured out that I can cash it out penalty free now and then am planning to roll it into my employer-sponsored 401K. The second is my wife’s rollover IRA (approx $22K). I was planning to just convert it to a Roth IRA. If I do that do I pay my usual federal tax rate (35%) on the 22K? Also, is that all I can contribute this year or can I still put in an additional 7K? Thank you for any advice!
1. Sounds like a good solution.
2. Yes. You can put in an additional $7K.
Hi, I contributed $4,000 to my Roth IRA back at the beginning of the year, not knowing I was going to make over the income limit. With growth, it has become $4,500. I am going to recharacterize and convert.
Since I contributed $4,000 and the limit is $7,000. Can I still contribute $3,000 to traditional IRA and convert it to Roth IRA (backdoor)? Or can I only contribute $2,500 because with growth, it looks like I contributed $4,500?
I am thinking you can put in the additional $3000, If the market went down you could not put in more funds. You can contribute $7,000 and convert any amount. It is the government (IRS) so no telling.
Yes, you can contribute $3K more. You’re going to owe taxes on $500 when this is all said and done of course.
Just goofed and make mistake #1 by contributing $7k directly to my Roth IRA. I hopped on Fidelity chat and they suggested a “Return of excess IRA contribution” (then restart the backdoor process) while the guide here suggests a re-characterization to Traditional (then conversation back to Roth).
I’m happy to do either method, but was wondering which will be simpler from a tax reporting POV. Ideally I would be following your “How to Report a Backdoor Roth IRA on Turbotax” guide on the backend. Thanks.
I think the recharacterization is the better way to do it. I’d worry that you would have an issue doing another contribution after removing an excess one. But maybe either way is fine. I know the recharacterization works well. I’m not sure the other way does. Maybe bounce it off an accountant.
Thank you for such informative info regarding Intuit’s TurboTax!
I contributed my own money to a traditional IRA (not associated with an employer) – $7000 for 2025 year, but forgot to say no tax witholding when I submitted to the direct conversion to my roth IRA. As a result, they did a automatic deduction of $700 and only deposited $6300 to my roth IRA. When I asked the bank they said the money had already been sent to the IRA. Is there anyway to correct this so the full amount can end up in my roth IRA?
Well that’s kind of a new screwup. Don’t do that again. I don’t think there’s much you can do about it. In fact, I wouldn’t be surprised if you get penalized on that $700 as an early withdrawal. But I don’t think there’s anything you can do to reverse it.
https://www.urs.org/mango/pdf/urs/miscellaneous/iraConversion.pdf
Things to Know
• Tax Withholding on Conversions
Unless you choose otherwise, the IRS requires 10% of the
conversion amount be withheld by URS for federal income
tax purposes. You may elect to have no taxes withheld or
elect to have more than 10% withheld. (Note: Any taxes
withheld at the time of the conversion are considered a distribution and may be subject to a 10% early withdrawal penalty
tax.) No Utah state income taxes will be withheld unless
you provide a Substitute W-4P tax withholding form.
I contributed and converted $7,000 to Roth IRA beginning of 2024 (Jan). However, I recently changed jobs and decided to transfer my 401k to IRA (~85k). I realize this is problematic now that I’m doing my taxes. Can I leave the $85K in my IRA if I’m not planning on doing back door Roth IRA in the future? Should I convert all of the 85k into my roth IRA? I have a 401k with my new employer so can I transfer all of the IRA to my 401k even if its passed 12/31/24 for the pro rata rule? Appreciate any input.
Yes, you can. Probably shouldn’t though. Probably should transfer it into the new employee 401(k). Please tell me the 401k to IRA transfer happened in 2025. Otherwise, that 2024 Roth conversion is pro-rated and makes this way more complicated.