By Dr. Jim Dahle, WCI FounderMany doctors make a direct Roth IRA contribution, then later in the year realize their income is going to be higher than they thought and that direct contribution isn't going to be allowed. Here's an example from my email box:
Q. I am currently closing out my chief resident year and starting my Cardiology fellowship in July. I am doing my financial plan for next year. Last year I was fortunate to have the opportunity to moonlight and brought in an additional $60,000. Moreover, my wife received a raise and a bonus. Given this, we will be over the $206,000 Roth IRA contribution limit for 2020. I have been making the maximal contribution to our Roth IRAs for the past several years. I have not contributed to her Roth IRA for 2020 but have made the maximal contribution to my Roth IRA earlier this year before I realized that I would bring in this much extra money from moonlighting. I will be utilizing a Back Door Roth for her account so I can continue contributing there but I was curious if there is anything I can do retroactively for my account so I am not hit with any tax penalty.
It is really unfortunate since these doctors are trying to do the right thing. They are using a Roth IRA. They are funding it early in the year so there is more time for it to compound. They are busting their butt to get their income up. But then the IRS rules come down on them like a hammer. In fact, this circumstance is really common for people in the first year they do Backdoor Roth IRAs. A lot of people don't realize that anybody CAN do a Backdoor Roth IRA. It's just that high earners (along with people filing Married Filing Separately) HAVE to do a Backdoor Roth IRA. So if there is any doubt at all, do your Roth IRA through the Back Door, i.e indirectly. In fact, in 2010, the first year that the Backdoor Roth IRA was allowed, I did a Backdoor Roth IRA. I didn't have to, though; my income turned out to be lower than I expected that year.
More information here:
The Income Limit
The first thing to determine is whether this post even applies to you. If your income is below a certain amount, you can just contribute directly to a Roth IRA. That amount depends on several things. First, it is a MODIFIED Adjusted Gross Income (MAGI). That number is very similar to your Adjusted Gross Income (AGI). Remember how tax form 1040 works.
The first income line you come to is line 7b, your “Total Income”. When people think about income, this is generally what they think of. The third income line on the form is line 11b. This is your “Taxable Income”. This is what your tax bill is actually calculated from. It is basically your total income minus all of your deductions. In between those two, on line 8b, is another income, your “Adjusted Gross Income”. This is “the line” that people are talking about when they use the phrases “above the line deduction” and “below the line deduction.” If it comes out before your AGI is calculated, it is an above the line deduction. These are deductions such as self-employment tax, self-employed retirement plans, self-employed health insurance premiums, HSA contributions, student loan interest, alimony, tuition, and any IRA deductions. If it comes out after your AGI is calculated, it is a below the line deduction. These are EITHER your standard deduction OR your itemized deductions, like mortgage interest, state/local/property taxes, and charitable contributions. A MAGI is just a slight tweak to your AGI.
Here are the MAGI limits for 2020 for direct Roth IRA contributions. If your MAGI is below the first number, you can just contribute to a Roth IRA directly. If your MAGI is over the second number, you cannot contribute at all. If your MAGI is between the two numbers, you can make a partial direct contribution (most shouldn't bother with this, just do it all through the Back Door).
- Married Filing Jointly: $196,000-$206,000
- Married Filing Separately (and lived with spouse for at least part of year): 0-$10,000
- Single or Head of Household: $124,000-$139,000
If you think you'll be anywhere close to that first number, do yourself a favor and just do your Roth IRA contribution indirectly, i.e. through the Back Door (contribute to a traditional IRA and then convert that contribution to a Roth IRA). Since 2010, there has been no income limit on Roth conversions and there has never been an income limit on traditional IRA contributions, just your ability to deduct them.
So how does a MAGI differ from an AGI? It's a very slight difference. Bear in mind that there are other MAGIs out there. We're only talking about the one that affects Roth IRA contributions here. But to get your MAGI, you simply take your AGI, you subtract some income from it and you add back in some other income to it. The worksheet showing you how to do this is Worksheet 2-1 in Publication 590.
Basically, you subtract income from a Roth conversion and you add income from IRA deductions (not sure why you'd have this), student loan interest (if you are using this worksheet, you probably don't have this), tuition deduction (you probably don't have this), a couple of rare deductions for foreign income/deductions (you probably don't have these), some savings bond interest you probably don't have much of, and some employer-provided adoption benefits. As you can see, for most people your MAGI = your AGI since all of these deductions are pretty rare for the folks worried about this limit for direct Roth IRA contributions. So focus on your AGI. That means if you contributed directly to a Roth IRA but late in the year realized you probably should not have, one easy fix is to get your AGI below that limit by contributing to an HSA or a self-employed retirement plan like an individual 401(k) or SEP-IRA. Note that giving a bunch of money to charity is NOT a solution to this problem because that is a below-the-line deduction.
How to Do an IRA Recharacterization
If you can't get your MAGI low enough, you will have to do an IRA Recharacterization. With a recharacterization, as far as the IRS is concerned it is as though you never made the Roth IRA contribution at all, but made a traditional IRA contribution instead. You don't report a recharacterization separately, you just report a traditional IRA contribution. Keep in mind as you read on the internet about recharacterizations that there used to be two types of them—a recharacterization of a Roth IRA CONTRIBUTION and a recharacterization of a Roth IRA CONVERSION. The second type was outlawed in 2018, but the first one, the one we're talking about today, is still perfectly legal. If you decide you want to undo a Roth conversion these days, you're simply out of luck. Here is how you do a recharacterization of a Roth IRA contribution:
You tell Vanguard (or wherever your IRAs are) to recharacterize the Roth IRA contribution to a Traditional IRA contribution.
Yup. That's it. They take care of the rest. I mean, you can read all about all of the rules in Publication 590 Chapter 1 if you want, but that's basically what they say. Don't believe me? Fine. Here's the IRS instructions:
How Do You Recharacterize a Contribution?
To recharacterize a contribution, you must notify both the trustee of the first IRA (the one to which the contribution was actually made) and the trustee of the second IRA (the one to which the contribution is being moved) that you have elected to treat the contribution as having been made to the second IRA rather than the first. You must make the notifications by the date of the transfer. Only one notification is required if both IRAs are maintained by the same trustee. The notification(s) must include all of the following information:
- The type and amount of the contribution to the first IRA that is to be recharacterized.
- The date on which the contribution was made to the first IRA and the year for which it was made.
- A direction to the trustee of the first IRA to transfer in a trustee-to-trustee transfer the amount of the contribution and any net income (or loss) allocable to the contribution to the trustee of the second IRA.
- The name of the trustee of the first IRA and the name of the trustee of the second IRA.
- Any additional information needed to make the transfer.
In most cases, the net income you must transfer is determined by your IRA trustee or custodian.
See what I mean? It's just a phone call. Any earnings that the account had in between the contribution and the recharacterization just go over with the contribution. No big deal.
You have until your tax filing date to do this. Most of the time, that's April 15th of the next year. However, the IRS is even more lenient than that. You actually can do this for an extra six months after your tax filing date, but you will have to refile your return.
Where Do You Report a Recharacterization?
If you hire somebody else to prepare your taxes, you can skip this section. If you do it yourself, you'll need to make sure you report this correctly. According to Pub 590, you report it on our old friend Form 8606.
Pub 590 says this:
Actually, that's really misleading. If you read Form 8606, you will see that the only time it ever mentions a recharacterization is to tell you NOT to put it on the form.
So what is Pub 590 talking about? They're talking about this section in the 8606 instructions:
Reporting recharacterizations.
Treat any recharacterized IRA contribution as though the amount of the contribution was originally contributed to the second IRA, not the first IRA. For the recharacterization, you must transfer the amount of the original contribution plus any related earnings or less any related loss. In most cases, your IRA trustee or custodian figures the amount of the related earnings you must transfer. If you need to figure the related earnings, see How Do You Recharacterize a Contribution? in chapter 1 of Pub. 590-A. Treat any earnings or loss that occurred in the first IRA as having occurred in the second IRA. You can’t deduct any loss that occurred while the funds were in the first IRA….Report the nondeductible traditional IRA portion of the recharacterized contribution, if any, on Form 8606, Part I. Don’t report the Roth IRA contribution (whether or not you recharacterized all or part of it) on Form 8606. Attach a statement to your return explaining the recharacterization. If the recharacterization occurred in 2019, include the amount transferred from the Roth IRA on Form 1040 or 1040-SR, line 4a; or Form 1040-NR, line 16a. If the recharacterization occurred in 2020, report the amount transferred only in the attached statement, and not on your 2019 or 2020 tax return.
The bottom line is that you just report this recharacterized contribution on Form 8606 as if it were the regular old non-deductible traditional IRA contribution that you should have made in the first place. You also need to include a statement. What should your statement look like? I would write something like this:
To whom it may concern:
I made a 2020 Roth IRA contribution of $6,000 on March 13th, 2020, because I didn't know about the whole MAGI limit thing when I made the contribution. After becoming smarter, I recharacterized $6,137.14 (original contribution plus earnings) to a traditional IRA on November 4th, 2020, Thank you for helping our country fund its government. You're the best.
Hugs and kisses from your favorite taxpayer,
James Dahle
Seriously. It doesn't say what has to be on the statement, just that there is one “explaining the recharacterization”. You don't even have to tell them why you did the recharacterization. If you had a loss in the account between contribution and recharacterization, no big deal. It's still as though you made a $6,000 contribution to a traditional IRA and THEN it lost money. If you were able to deduct the contribution (you probably can't) you would get a $6,000 deduction. The IRA provider may also send you a Form 5498 (which has the recharacterized amount on line 4), but you don't actually do anything with it when you file your taxes. It's just an informational return.
Reconverting the IRA
Now here is where it gets interesting. You've now fixed your mistake in the eyes of the IRS, going from an illegal Roth IRA contribution to a legal traditional IRA contribution (that is probably not deductible for you). But you really aren't done with what you meant to do, which is put money into a Roth IRA. You now need to do a Roth conversion. You do it just like you normally would as if you had contributed originally to the traditional IRA. You can do it the very next day if you like. You can probably even do it the same day, just make sure there is a paper trail showing the money was actually in the traditional IRA at some point. There used to be a waiting period after a recharacterization before you could do a Roth conversion on that money, but that waiting period only ever applied to the recharacterization of a Roth CONVERSION (which is no longer allowed starting in 2018) NOT the recharacterization of a Roth CONTRIBUTION. So there is no waiting period. Just reconvert convert it and go on your merry way.
I hope this information helps you fix your mistake. Just do your Roth IRA contributions through the Back Door going forward and you won't have this problem again.
More information here:
How to Fix Backdoor Roth IRA Screw-ups
What do you think? Have you had to do a recharacterization of a Roth contribution? What happened?
Hello – when are IRA recharacterizations reported?
This is my first time doing a backdoor Roth. I contributed $6000 to my 2022 Roth IRA and found out that my income exceeded the limit. I then performed a recharacterization into Trad IRA, and then converted this back to Roth (backdoor). This all happened in April 2023.
Do I need to report the recharacterization when filing my 2022 taxes? If so, then I will just submit Form 8606 Part 1 ($6000 to lines 1, 3, and 14) like the recharacterization never happened, and then include a statement? If this is the case then what is the best way to send this statement if my CPA is filing on my behalf electronically?
Also a bit confused on what this means, “If you hire somebody else to prepare your taxes, you can skip this section.” I am hiring a CPA to file my taxes – does this make a difference?
They’re not reported. As far as the IRS is concerned it is as though the money was originally contributed to the traditional IRA. So your 2022 8606 will report a contribution but not a conversion and certainly not a recharacterization. You have it exactly right. The CPA can put a statement in electronically.
Your CPA should take care of all this for you.
Hello,
Thanks for your response. Can you please provide some help on how to fill out Form 8606? My CPA is unfamiliar with reporting the backdoor Roth to the IRS so I sent over your screenshot of Form 8606 (https://www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/#late) in the “Late Contributions to the Backdoor Roth IRA” section. ($6000 in lines 1, 3, and 14). I contributed to my 2022 IRA in April 2023 (this month) and completed the backdoor this month as well.
However my CPA says that when filling out $6000 in line 14, this becomes taxable and my tax refund becomes smaller. Do you know why this is the case?
I’m curious if the CPA is going to share some of the fee you’re paying him with me. J/K
You definitely put the $6,000 on line 14 in your situation and have to deal with whatever consequences that may bring.
But why that would raise your tax bill THIS year I have no idea. A couple of things to check on:
# 1 Your accountant may be wrong. I mean, this person needs a blogger to help them fill out a tax form so what does that say about their expertise?
# 2 Your IRA contribution wasn’t deductible was it? Sometimes your income is low enough that it is or you’re in the phaseout range. Maybe that could be causing an additional tax bill? Remember line 1 (which flows to line 14) is only for non-deductible money
That’s all I can think of. Line 14 really doesn’t go anywhere on your taxes except to line 2 of next year’s 8606. So putting $10 million there shouldn’t affect this year’s tax bill.
Lastly, I’m not an accountant. Maybe I’m wrong. Always possible.
LOL very true. I can’t believe how difficult this has been… Thank you so much for your help so far.
I think I might have found the problem? You mentioned “Line 14 really doesn’t go anywhere on your taxes except to line 2 of next year’s 8606. So putting $10 million there shouldn’t affect this year’s tax bill.”
When my CPA enters $6000 into Line 14, this is being rolled over into Line 5B on the 1040, which is adding to my taxable income. I’m guessing this is incorrect?
I believe that is incorrect yes. I don’t see why basis in an IRA would become a taxable pension distribution. Seems more like a software issue to me from your description.
LOL I know right… I can’t believe how much of a headache this has been. Thank you so much for your help so far!
I just want to confirm – even if this is our first time doing a backdoor Roth (Traditional IRA accounts were opened this year), we will input $6,000 into Line 14 right?
I think I may have found the problem. You mentioned that “Line 14 really doesn’t go anywhere on your taxes except to line 2 of next year’s 8606. So putting $10 million there shouldn’t affect this year’s tax bill.” However according to my CPA, our taxable income is increasing by $12,000 on Form 1040.(married filed jointly, both my wife and I contributed $6,000 to our individual IRAs). I’m guessing this is incorrect?
Hello! I mistakenly contributed to my Roth IRA ($6000) in 2022 and later recharacterized that amount (one month later) and converted. At the time of recharacterization and conversion to Roth, the $6000 is down to $5419 with a loss of $581. On my 2022 form 8606, I am left with $581 on line 14.
Fast forward to 2023, I did the backdoor IRA correctly. After contributing to the traditional IRA, I converted that $6500 to Roth IRA one week after (had to wait for the money to settle in Fidelity). The $6500 is now roughly $6506 after interest. I converted the full amount to Roth IRA. When I file the 2023 taxes, what do I fill in for line 2? Would it be $581 (last year’s line 14) even though I technically did not have any money in the tIRA at the end of the 2022 or would it change to $575 ($581 – $6 gained in tIRA between 2022 contribution and conversion)?
2023 form 8606:
line 1: 6500
line 2: 581 or 575?
line 3:
line 4: 0
line 5:
line 8: amount converted 6506
line 13: 6500
line 14: 0
line 15: 0
line 16: 6506
line 17: 6500
line 18: 6
Thanks so much for your help!
I actually tried to fill out 2023 8606 again, would this be correct?
line 1: 6500
line 2: 581 (from 2022 8606 line 14)
line 3: 7081 (lines 1 +2)
line 4: 0
line 5: 7081
line 6: 0
line 7: 0
line 8: amount converted 6506
line 9: 6506
line 10: 1.088
line 11: 7081
line 12: 0
line 13: 7081
line 14: 0
line 15: 0
line 16: 6506
line 17: 7081
line 18: -575 (is it valid to have a negative value here?)
I’m not sure you have your years right. You don’t fill out a 2023 8606 until you do your 2023 taxes in April of 2024. So I’m assuming when you say 2022 you mean 2021 and when you say 2023 you mean 2022.
Line 10 should never be more than 1.000.
So lines 11 and 13 should be 6506, not 7081
So line 14 should be 7081-6506b = 575
Line 16 would then be 6506 and 17 should be 6506 and 18 should be 0
Basically, you used up $6 of your extra $581 in basis you had due to losing money in the IRA before conversion and you’ll carry $575 of it going forward.
Thank you for the reply!
The years in the original post were actually correct – I am trying to figure out how to (correctly) fill out next year’s form 8606 while I still remember all the details. Doing future me a favor after messing up so many times.
I see where I made the mistake now – line 10 should never be more than 1. Thank you once again for clarifying this! Much appreciated 🙂
You rock, sir.
I may have missed it in another comment, but I think I have a unique situation regarding timing of my recharacterization:
Feb 2023: Contributed $500 to Roth IRA, VFSAX (2022 contribution)
+ 10 days: Recharacterized to Trad IRA, VFSAX. Transaction amount $491.
Mar 2023: Converted to Roth IRA, VSFAX. Transaction amount $477.
Already filed 2022 taxes with Turbo Tax using your detailed instructions (thanks!). Obviously should have done each step within a day, but I was trying to avoid a gain. Stupid me didn’t realize a loss was actually more of a PITA. Since I incurred a loss at each step (recharacterization and conversion), which amount should I try to gain in a traditional IRA before conversion next year (2024)? This year I am under the income limit so regular Roth IRA for me in 2023.
$9?
$14?
$23?
TIA!
$23.
OK, so if I understand I can only recharacterize until the tax deadline.
What are options for previous years when I was ignorant that I was over the MAGI?
If there are no options, are there penalties? How do I ameliorate them?
Thanks!
You’re supposed to withdraw the excess contributions and earnings on those contributions and pay the taxes and penalties due. I don’t know of a way to ameliorate them and they continue to grow over time.
The alternative I guess is to continue to claim ignorance and hope you never get caught. I don’t get the sense that this is a heavily audited area of the tax code.
This is for 401ks:
https://www.irs.gov/retirement-plans/consequences-to-a-participant-who-makes-excess-deferrals-to-a-401k-plan
Unless timely distributed, excess deferrals are (1) included in a participant’s taxable income for the year contributed, and (2) taxed a second time when the deferrals are ultimately distributed from the plan. See IRC Sections 402(g)(1) and 402(g)(2) and Reg. Section 1.402(g)-1(e)(2). A participant who fails to receive a distribution of the excess deferrals does not receive basis in his pre-tax deferral account equal to the amount of excess deferrals. See IRC Section 402(g)(6).
The amount of the excess deferral will not be taxed twice if a corrective distribution is made. See IRC Section 402(g)(2). The corrective distribution must include the amount of the excess deferrals, along with amounts earned on the excess deferrals during the calendar year during which the deferrals are made without regard to income earned during the “gap period” between the close of calendar year in which the excess contribution was made and the time of actual corrective distribution. See IRC Section 402(g)(2)(A)(ii). Additionally, the corrective distribution must be made be made no later than April 15th following the close of the calendar year during which the excess deferral was made. See IRC Section 402(g)(2)(A)(ii). For example, excess deferrals made during 2016 must be distributed by April 15, 2017. This April 15th deadline is not postponed by extending the filing of the employee’s federal income tax return.
To the extent that a corrective distribution is not made within the correction period, the excess deferrals may not be distributed until a distribution is otherwise permissible under the terms of the plan, or the distribution is necessary to avoid plan disqualification under IRC Section 401(a)(30). Reg. Section 1.402(g)-1(e)(8)(iii) provides that distributions of excess deferrals after the correction period may be distributed from a 401(k) plan only when permitted under IRC Section 401(k)(2)(B).
This is for IRAs:
https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits
Tax on excess IRA contributions
An excess IRA contribution occurs if you:
Contribute more than the contribution limit.
Make a regular IRA contribution for 2019, or earlier, to a traditional IRA at age 70½ or older.
Make an improper rollover contribution to an IRA.
Excess contributions are taxed at 6% per year for each year the excess amounts remain in the IRA. The tax can’t be more than 6% of the combined value of all your IRAs as of the end of the tax year.
To avoid the 6% tax on excess contributions, you must withdraw:
the excess contributions from your IRA by the due date of your individual income tax return (including extensions); and
any income earned on the excess contribution.
See Publication 590-A for certain conditions that may allow you to avoid including withdrawals of excess contributions in your gross income.
Thank you very much for your website and resource.
I think I’ve made some mistakes and I’m still trying to come up with a plan of how to proceed. Here’s our situation. Both over 50. For the first time ever, in 2022 we went over the MAGI limit. I only noticed this in early April 2023 as I was filing taxes. So I filed for an extension as there was not enough time to come up with a plan. Will also be above MAGI for 2023 as well.
1. Me
December 2022 — Contributed $7000 to Roth IRA at Vanguard. This was newly opened.
June 2023 — Recharacterized $7000 + earnings as traditional IRA.
December 2023 — Instead of converting to Roth IRA immediately, I waited till December. By this time the Roth IRA is now valued at $8300.
2. She
Jan – June 2022 — Contributed $583 per month to existing Roth IRA
Nov 2022 — Contributed $3500. Total = $7000.
June 2023 — Withdrew $7000 from the Roth IRA.
The total in the Roth IRA has gone down in value.
Oct 2023 — Filed MFJ taxes. But did not do any 8606 etc.
As of end of the year 2023, we will not have any Traditional IRAs.
Questions:
1. Me: I think I have to go back and file the 8606 for 2022 along with a letter saying that I have recharacterized. When I filed the 2022 taxes, I did not claim any deductions for the IRA so I assume that no tax amounts change. Is that correct.
2. Me: For 2023, I am not sure of what I will need to do in terms of tax reporting and filing.
3. She: Likely the withdrawn Roth IRA contributions lost value. Not sure what all I would need to file. No existing traditional IRAs.
4. No contributions made to any IRAs yet in 2023. I plan to do Backdoor Roths for both of us but want to do it minimizing any mistakes.
Thanks very much and great website.
She withdrew $7000? Or recharacterized 7000? Because the withdrawal was definitely a mistake you will regret. Not only will you lose that tax protected space, but if she really lost money on her 2022 contributions, you withdrew more than you had to and may pay a penalty on that withdrawal despite losing money! Or maybe you can just say you withdrew some principal. That’s probably the case.
1. Yes.
2. Easy peasy. It’s as if you contributed it to the traditional IRA in the first place, You’re just filling out an 8606 in which you report the contribution for 2022. On your 2023 8606 you’ll include that conversion amount with the conversion amount you did in 2023 if any.
3. If she really withdrew you’ll have to report that. That’ll be a mess. I’ve never done that report myself, but I imagine tax software will walk you through it. The tricky part will be figuring out how much money you lost so you can keep track of how much principal came out of that Roth IRA. I guess it doesn’t matter much in the long run as far as taxes you’ll pay so estimate it as best you can. But ugh, that would be a pain to try to figure out.
4. Well…if you can do it all by the end of the year I would. Vanguard and others often sit on the money for a week before letting you do the conversion, so its’ a gamble at this point. I guess the safest is to wait until next week and make your 2023 contributions in 2024 and your 2024 contribution in 2024 and then convert it all together. So on your 2023 8606 you’ll only report the conversion for what you contributed in 2022.
Good luck with the paperwork on that Roth IRA withdrawal. I’m sorry you did that and hope you’re mistaken.
Thanks Jim, for your response.
Unfortunately, the withdrawal was done in her case instead of the recharacterization. The rep on the phone (not at Vanguard) was not very helpful and I also bear some of the blame for it for not being more educated on this issue 🙁 Fortunately, the rep for my account (at Vanguard) was knowledgable about the recharacterization. The one bad thing about my transaction was not doing the back door conversion immediately.
As you correctly point out her Roth IRA withdrawal situation has become messy. All of her Roth IRA is in just one fund. I’m going to download all of the transactions into a spreadsheet. The contributions were made in the middle of the month and I can scrape a table that shows the values at the end of each month. I will have to do a pro-rata analysis to detrmine how much of the withdrawal was excess. Possibly there may be a penalty.
It has been a lesson and I’m learning that if you can, it’s best to contribute all in one shot rather than monthly.
For tax year 2022 I entered the correct amount of money for my solo 401k plan but the investment bank did characterize it correctly as employee and employer so that it all looks like employer contributions which is incorrect. They are not allowed to go back and fix this? Anything I can do to correct this error. The total amount is correct for the deduction but on their end it is showing as employer contributions not employee. Has anyone encountered this situation before?
Does it matter? Will it affect how much you pay in tax or something? If not, I wouldn’t worry much about it. Keep their refusal to fix it in writing with your tax documents in the unlikely chance of an audit on this subject.
Still an incredibly helpful post in 2024! Had a clarifying question if that’s ok:
My wife and I got married last year and didn’t know about the RothIRA limits. My wife made the full $6500 Roth contribution in 2023 and now we’re getting hit with the 6% penalty while filing our taxes. Per your original post, we’re going to recharacterize the Roth contribution (and any gains) to a Trad IRA so we get rid of the penalty on our 2023 return.
My question is: Can we then immediately backdoor Roth convert THAT money for 2023 and ALSO do a 2024 backdoor Roth conversion with a new $7000 (2024 limit)? Or is backdoor converting the 2023 recharacterized money going to be considered a 2024 contribution, since it’s Febuary already?
Thank you so much for providing such helpful information!
Yes.
No.
My wife and I contributed to our roth IRA directly for 2023 (we didn’t realize we were over the MAGI limit), and have already maxed out our 2024 roth IRAs through the back door. I want to recharacterize our 2023 Roth IRA contributions (and earnings), to our traditional IRA, and then transfer back to our roth IRA to fund 2023 via the back door.
1. How do I know how much earnings need to be transferred along with the contributions? Is it just the NIA?
2. Since I recharacterize the contribution and earnings, I assume I will just owe taxes on the earnings when I transfer it back to the Roth IRA?
1. You have to pro-rate the earnings as to how much belongs to that contribution and how much to what was already in there. See Worksheet 1-3 on page 29.
https://www.irs.gov/pub/irs-pdf/p590a.pdf
But here’s the truth from that pub:
In most cases, the net income you must transfer is determined by your IRA trustee or custodian. If you need to
determine the applicable net income on IRA contributions
made after 2023 that are recharacterized, use Worksheet
1-3. See Regulations section 1.408A-5 for more information.
2. That’s right.
Thank you for all your helpful advice, your website is a treasure trove.
Last year I got married and it turns out we are over the income limits for contribution to a Roth IRA, unfortunately I did not realize this until too late and now need to recharacterize my 2023 contributions. My Roth is with Fidelity, so I have opened a traditional IRA with them for this process with the plan to recharacterize my contributions ($6500) plus the gains (approximately $1800) into the traditional IRA and then backdoor all of that back into my Roth.
If I’m understanding correctly, I will just need to pay taxes on the gains, and file the appropriate 8606 forms to report the recharacterization (as part of my 2023 taxes, since i am recharacterizing my 2023 contributions) and the backdoor contributions (as part of my 2024 taxes since this did not occur until 2024)?
That’s right. You’ll owe taxes on the gains between contribution and conversion. And you’ll need to make sure the 8606s are right.
Hello White Coat Investor!
I was over the contribution limit for 2022. I recharacterized 3k from my ROTH IRA to TRAD IRA. I did file a 5329 for 2022 to pay the 6% penalty. (I assume I am still exceeding the contribution limit even though I kept the $$ in TRAD IRA). For 2023, I got the 2023 1099-R for the recharacterization. To my understanding, I need to file an amended return for 2022 + letter explaining the recharacterization). What form should I include for the amended return?
This year I can contribute full 6.5k. However I still need to file 5329 for 6% penalty for the remaining amount I left in ROTH IRA (that I over-contributed, 11k and did not withdraw). Could you please advise if I need to do any 8606? Thank you very much!
What penalty? Why is there a penalty for a recharacterization? Did you overcontribute to an IRA? Why did the custodian let you do that? And why did you only recharacterize $3K? Were you allowed a partial deduction or something? I’m so confused.
I’m guessing you didn’t file a 2022 8606, so do that. Whether you need to send in a 1040X with that or not is controversial. And you’ll need one for 2023 for sure if you’re doing Bakcdoor Roths.
Hi again! The penalty is for the 6% overcontributing to ROTH IRA. I only recharacterized 3k because 3k was what I overcontributed that year. I couldn’t recharacterized prior years. Yes I will file a 8606. I didn’t deduct IRA contributions when I filed my 2022 taxes, does that mean I don’t need a 1040X? I’m not doing backdoor roths. I have full contribution room for 2023 so I will let it take away my over-contribution…
If you overcontributed how does recharacterizing help? Did you make too much to contribute it all to a Roth directly? If so, why aren’t you doing Bakcdoor Roths.
I wasn’t sure how to do it. If I were to do it now, I would still have to file a 8606 for 2022 non-deductible contribution? Then I can convert it back to my ROTH IRA now? And I can do another 8606 for 2024?
I’m not 100% clear what you did exactly so it’s hard for me to tell you exactly how to fix it. If you can explain exactly what you did and when (amounts and years of contributions, conversions, withdrawals, and recharacterizations), maybe I can help more.
But yes, you need to do an 8606 for every year you make a non deductible contribution or have basis in an IRA. And after doing a recharacterization, you can certainly do a Roth conversion. If you do a conversion in 2024, you’ll want to report that on a 2024 8606.
I’m not 100% clear what you did exactly so it’s hard for me to tell you exactly how to fix it. If you can explain exactly what you did and when (amounts and years of contributions, conversions, withdrawals, and recharacterizations), maybe I can help more.
But yes, you need to do an 8606 for every year you make a non deductible contribution or have basis in an IRA. And after doing a recharacterization, you can certainly do a Roth conversion. If you do a conversion in 2024, you’ll want to report that on a 2024 8606.
Yes.
This is a great informational thread! I didn’t read every single one of the replies, but I’d venture to guess that I screwed up my backdoor in more ways and for more years than anyone you’ve heard from! (so proud). Quick background: I’ve maxed out a Roth for both myself and my wife for many years. my income has been steadily creeping up over the years, and when preparing 2019 taxes (in 2020) I realized I was over the income limit. At that point, I properly rolled an existing trad IRA into my employer plan, THEN recharacterized the Roth to trad, THEN converted back to Roth. I’m comfortable with the fact that all was legal and done in the proper order. Ill blame the rest of the story on laziness and a lack of understanding how badly I was complicating things… My income was just over the limit, and at the time I thought it might be going down during covid, so I didn’t change anything. Again in 2020, 2021, & 2022 I was over the limit and waited until after the end of each of those years to recharacterize and then re-convert. For unrelated reasons, I didn’t contribute to an IRA in 2023, but when reviewing my 2023 return, I realized the IRA distributions were incorrect. It took this large error to make me stop and really study the preferred way of performing the backdoor and the proper way to fill out an 8606. I feel like I have a pretty good understanding now, but still with a little confusion, mostly due to the fact that not only my original preparer doesn’t have a good handle on this stuff (filled the 8606 out incorrectly AND DIFFERENTLY every year), but I’ve now consulted with two additional professionals (both enrolled agents) and receive two different additional opinions!
Theres more than one place with disagreement, but the one that stretches my brain the most is 8606 Line 6. If I recharacterize $7000 in 2020 Roth contributions in April 2021, what goes on 2020’s form 8606 line 6? I’m supposed to treat the situation as though the $ was originally put into the trad IRA over the course of 2020. It “would have” still been there on Dec 31, 2020 since the conversion didn’t occur until later in 2021, but it wasn’t “really” there. If I look at the year-end statement, it will, of course, say $0 since the funds were technically still sitting in the Roth at that time. Do I need to do the math and figure the theoretical year-end vale of the account had the contributions been in fact made to the trad? That seems to make the most sense reading the instructions very literally, but not a conclusion any of the three tax professionals arrived at (or even agree with)
I don’t want this to go on forever, so I’ll leave it there for now. I’d love to get your take on this massively “screwed up” backdoor.
Thank You!
I think you put whatever the $7,000 (or whatever it was for the applicable year) you put into the Roth IRA directly was worth on 12/31 on line 6. That’s what would have been in the traditional IRA on 12/31. That’s going to take some math to figure out obviously. And you’ve got three years of 8606s to correct. I’m sorry it’s so confusing and we can’t all just contribute directly. Not my rules. Not my monkeys. Not my circus.
I have a Vanguard Rollover Brokerage Account opened in 2024 with $0 awaiting a Terminated Pension Plan Benefit of $25k before the end of the year. I have a Vanguard Roth IRA that I contributed ~$2200 into the Vanguard Federal Money Market Fund and ~$350 into VTI, also opened in 2024. Can I perform a Backdoor Roth of the entire $25k from the Vanguard Rollover Brokerage Account to my existing Vanguard Roth IRA without any penalties or severe tax implications? I file married and filing jointly and am under the MAGI for background. Thanks in advance for your guidance!
I think you’re using the term “backdoor Roth” when you mean to use the term “Roth conversion”. That $25K will be added to your taxable income if you do this. There are no penalties though. If you don’t do the conversion, it’ll likely cause you pro-rata issues down the line doing the Backdoor Roth IRA Process when you have a higher income.
https://www.whitecoatinvestor.com/roth-conversions/
https://www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/
Thanks, TWCI! You are correct about the Roth conversion confusion. When you say:
“If you don’t do the conversion, it’ll likely cause you pro-rata issues down the line doing the Backdoor Roth IRA Process when you have a higher income.”
Would this be an issue if I converted, say, $12.5k in 2024 before the end of the year to the Roth and the other $12.5k in January 2025?
Not if the only Roth conversions you do in 2024 are pre-tax dollars. Pro-rata becomes an issue when you’re making non deductible IRA contributions.
I have a few questions below:
1. Now that I have completed the $10,000 conversion into my Roth IRA for 2024, and I want to invest it into VTSAX(Transact/Buy Vanguard Funds), am I limited to the $7,000 limit for 2024?
2. If so, and I can only contribute ~$4500 in 2024, was it worth converting the $10,000?
3. If #2 is correct, should I move the other $15,000 remaining in the rollover in 2025 or only $7,000?
4. I was automatically adding $265 every two weeks to my Vanguard account for automated investments. Should I postpone that until the $25,000 is spread out over several years for the annual contribution limits?
I thoroughly appreciate any insight, TWCI!
1. The only limit is only contributions to an IRA. There are no limitations on conversions or rollovers nor on how much you can invest once the money is in the account.
2. If you’ve contributed $2,200, you can contribute $4,800 more to IRAs for 2024. Whether a $10,000 conversion is “worth it” is a very complicated question. I’d need way more info to opine on that.
3. You can convert $15K. Whether you should or not, again, is complex. More info here: https://www.whitecoatinvestor.com/roth-conversions/
4. Not sure what Vanguard account you’re referring to. You can invest an unlimited amount into a taxable account but if that $265 is going into an IRA it will count toward the $7,000 annual contribution limit. Not sure why that has anything to do with your $25K Roth conversion though.
It’s not really clear to me what you’re trying to accomplish and why so I’m just trying to answer the questions you’re asking so you have the facts of how this works, then you can decide if it’s a good idea or not for you.
Hello, my MAGI exceeded in 2024 and I did a recharacterization to traditional IRA then converted back to Roth IRA. I had to recharacterize $7,609.84 from my Roth IRA to Traditional IRA. Then converted back $7,678.00 from the Traditional the Roth IRA. Can you provide some guidance on how to fill out the Form 8606?
A recharacterization is treated for tax purposes as though it were made to the new account originally. So $7,000 contribution, $7678 conversion. You’ll owe taxes on $678.
How would you fill out Form 1040 Line 4a and 4b in this case?
If the recharacterization occurred in 2024, include the amount transferred from the Roth IRA on your 2024 Form 1040, 1040-SR, or 1040-NR, line 4a.
Would 4a (IRA distributions) be $7,609.84? What would 4b (Taxable amount) be?
Did you get a 1099 R?
Recharacterizations generally don’t show up on tax forms. Not sure if conversions show up on line 4A either. But let me check my 1040s.
Yes, looks like conversions do. So eventually $7678 on 4a and 678 on 4b for whatever year you did the conversion in. If that was 2024, then your 2024 return.
I contributed 7k to my Roth IRA for 2024 but i got married mid year and my MAGI is now too high for direct Roth contribution so I need to recharacterize to traditional. that whole process is fairly self explanatory.
My question is re backdoor Roth when i complete my conversion. I currently have funds in my traditional IRA and will not be able to move them before i do recharacterization. I am really trying not to complicate my taxes and not trigger this pro-rata rule you’ve been talking about. I know you said that there should be no money in the traditional IRA before doing backdoor – when you say money do you mean cash or do investments count as well? If it’s too complicated I will just keep everything in traditional even though our income is too high to deduct.
Additionally, this question might not belong here but is there any benefit (other than backdoor Roth) to contributing to traditional IRA as opposed to taxable brokerage account when income to high to deduct trad contributions?
Cash or investments both count the same toward the pro-rata issue. If you didn’t do any conversions in 2024, this isn’t a big deal. You can do the conversion step of your Backdoor Roth IRA now and you have until 12/31 to get rid of those assets in the traditional IRA. You can just convert them all and pay the tax bill or roll it all into a 401(k).
As a general rule, a taxable account will do better than a non-deductible IRA, but the tax protected growth in the IRA can overcome the difference in withdrawal tax rates (long term capital gains vs ordinary) with tax-inefficient assets over multi-decade periods of time. Plus there may be some estate planning and asset protection benefits. But really it’s best to just convert after tax IRA money to Roth money.
I did no conversions in 2024. Let me make sure i understand this correctly before doing anything. I can recharacterize now 2024 roth contribution of 7000 + 800 of NIA from Roth to Traditional. Immediately convert 7000 backdoor to roth and file it with 2024 without triggering pro-rata or any taxable event. I then have until 12/31/25 to get rid of my entire traditional balance either by rolling over to 401k or converting everything to roth and there will be no prorata rule triggered?
If i convert the entire traditional balance to roth now it would still be taxed under 2025 because it is after 12/31/24.
This is ridiculously confusing. You are heaven sent for helping people out.
No, you’d convert all $7800. (I assume NIA = earnings but familiar with that acronym) and owe taxes on $800. But otherwise, yea, you’ve got it.
Hi! Thanks so much for all you do. I’m hoping you have the time to weigh in on my current tax filing situation. I’m over 50 and got married in September 2024. My wife and I are filing jointly.
In 2024, I contributed $6,175 to a Roth IRA before getting married. The combined MAGI for my wife and I exceeded the Roth contribution limit. In March 2025, I re-characterized the $6,175 along with $1,427 in gains that were identified by Fidelity as part the re-characterization process. A few days later, I completed a backdoor conversion of those funds back into my Roth IRA for the total amount of $7,602 ($6,175+$1,427).
In addition, in March 2025 because I hadn’t yet maxed out my 2024 IRA contribution, I deposited another $1,825 into a traditional IRA account and a few days later completed another backdoor conversion to my Roth IRA. Both of these activities bring my total IRA contribution for 2024 to the max of 8,000. Because I completed the re-characterization in 2025 it’s my understanding that Fidelity will not provide a 1099-R before the filing deadline.
What I’m uncertain about is whether or not I must capture any or all of these actions on my 2024 tax return to be filed in April or because all of these actions were completed in 2025, I do so in April 2026? Any guidance you can provide is appreciated!
Congrats on the marriage.
Yes, the 2024 contribution should be reported on your 2024 8606. The conversions will be reported on your 2025 8606.
Thanks so much for your response and well wishes!
One follow up question that I forgot to ask. For the $1427 in gains that Fidelity identified as part of my Roth re-characterization made in March of this year, am I correct to assume that I will pay taxes on those gains next year as part of my 2025 tax filing?
Thanks so much for your time!
Yes. Although I think you mean Roth conversion or the recharacterization that you subsequently converted to Roth.
Absolutely awesome site! Thank you so much for these posts. Unfortunately, I came across your site mid-way through my “attempted recovery” of excess Roth contributions before the tax deadline. I’ve now made another error – I didn’t recharacterize my Vanguard Roth IRA to cash/settlement fund in my traditional, so now I have gains in my traditional IRA after the market just had its largest jump in history…. right in the middle of my recharacterization/backdoor.
Anyways, I’ve read hundreds of comments and I’ve confused myself after reading all of the different scenarios. I was hoping you could help me before I do anything else incorrectly. Current situation, I worked too much overtime in 2024 and my MAGI is over the limit, so my $7K Roth IRA contributions are in excess. Just a couple days ago I’ve recharacterized my Roth to a traditional IRA, and that’s where I currently sit with this process. I have 2 questions:
1) How can I convert back to Roth when my traditional balance is now a moving target with all of the market fluctuation? Sorry, I didn’t read your posts until after I’d already started the recharacterization. My traditional IRA balance is a moving target and I want to get it back to $0 balance.
2) I’ve still been continuously (automatic via vanguard) contributing to my 2025 Roth IRA, but I already know I’ll exceed the MAGI again in 2025 (and from here on out, so I need to do backdoor every year), so what’s my best recourse for my 2025 scenario? I currently still need to backdoor convert my 2024 recharacterization that just happened, but I think I also need to perform another 2025 recharacterization and backdoor for my 2025 ROTH contributions. I think I’m going to have to do 2 conversions in 2025 (1 conversion for 2024 and 1 for 2025), to get a clean slate for 2026? Can I even do this? I want to get to the point where I’m just doing the traditional contribution and Backdoor every year on Jan 2 like you suggest, but I need to get out of this loop I’m currently in.
Thank you so much in advance!
1) Just do it (the subsequent conversion). Or put it in cash today and do it tomorrow. Whatever. No point in waiting.
2) Stop doing that. You now have to follow the Backdoor Roth IRA process. If you’re rich enough to have to fund your Roth IRA indirectly, you’re usually rich enough to be able to do it all as one lump sum in January each year.
https://www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/
So clean this mess up now and do it right going forward starting next year. The clean up for your 2025 Roth overcontribution is the same as for your 2024 one. Stop contributing. Recharacterize what you’ve done already. Contribute the rest of your $7K to the traditional IRA. Then do the conversion step. Whether you do it as one conversion or two, doesn’t matter. Gets reported the same on the 8606 next year. Make sure you understand the pro-rata rule (nothing should be in a traditional, SEP, or SIMPLE IRA on Dec 31, 2025.)
That clears up nearly everything. I have cut off the auto-payments to the Roth, but just haven’t done anything else because I didn’t want to screw up anymore than I had. I will do my conversion to clean up my 2024 Roth IRA recharacterizations ASAP, which will be a 2025 conversion to clear my IRA to $0. I’ll then recharacterize what I’ve already contributed to Roth in 2025, and plus up my traditional IRA to the $7K max. Then I’ll convert that. So I’ll have 2 conversions in 2025. I assume I’ll receive one 1099-R in ~January 2026 that will include both 2025 conversions. And my tax owed will just be on the earnings I made from the 2024 recharacterization screw-up where I recharacterized into funds instead of cash. Sound about right? Thanks again for getting me straight! And thanks so much for such a quick reply!
That sounds fine. You could also do all the recharacterizations and contributions first, then just do one big conversion too. Yes, I would expect one 1099R either way. And yes, you should only have to pay tax on the earnings.
So for 2024 tax purposes…. since I contributed to Roth in 2024 and Recharacterized in 2025 (prior to April 15), I will only fill out Form 8606 Part 1, blocks 1-3 and 14. This will report my 2024 basis for my 2025 tax year, right? 2025’s 8606 will have all of the 2025 recharacterizations and conversions that we’d previously discussed. Thank you again.
That’s right.
Recharacterizations don’t show up anywhere. It’s just treated as though it were originally contributed to the traditional IRA.
Unknowingly contributed directly to a Roth IRA , not knowing I was above the MAGI to directly contribute to a Roth IRA.
Total excess contributions $24000
2020 done in 01/2021 $6000
2021 done in 01/2021 $6000
2022 $6000
2023 $6000
Since this was not known timely and we’re beyond the extension for those tax years, from researching and correct me if I am wrong, I am not allowed to do a recharacterization for the excess contributions for those years. So instead I will have to pay the 6% excise penalty on the amount for the years it has been in the account. I went ahead and pulled out the 24K from my Roth account. I was told by an accountant that since I am going to pay the 6% excise penalty on the excess contributions I do not need to withdraw earnings if any. Is this accurate?
Also since the amount was pulled out in 2025 do I need to amend my 2024 taxes or just wait till next year when its time to do 2025 taxes and I receive the 1099R for the withdrawal of the contributions?
Would greatly appreciate your input, thank you!
I doubt that’s accurate, but I don’t know for sure.
I think you can probably just report all that on your 2025 return since that’s the year you took it out.
This post was so helpful but I still have lingering questions. Like everyone else here, my wife and I both made the max 2024 Roth IRA contributions before we filed our 2024 return and realized this week we were above the MAGI threshold. I recharacterized the contributions plus earnings from each Roth to new Traditional IRAs. Here are my questions:
1) How is the IRS ok with us recharacterizing and reporting the contribution (Form 8606) and then converting the contribution back to the original Roth IRA (another Form 8606)? Now they know we did a backdoor IRA because they have all our forms. I know you said you can make the backdoor conversion immediately after recharacterizing, but is there a suggested amount of time I should wait before sending the second 8606 Form? Won’t that look weird? If they truly don’t care, then why make us jump through all the hoops in the first place? Why couldn’t I leave it in the Roth in the first place?
2) My wife has an old traditional IRA account with a different broker from when we were a lot younger and didn’t make as much money. I dont even know if it was before- or after- tax contributions. Let’s say it’s grown to $30,000. I understand I have to report this entire amount on Line 6 of 8606. Why? What does her old money have to do with this one-time backdoor conversion? Would it be more tax advantageous to not report it?
Thanks!
1. Because it’s legal, whereas what you did isn’t. Sorry, I don’t make the rules and I know the outcome is the same (well, you’ll owe a little in taxes). You only send in one 8606 per year and you don’t really report a recharacterization on it, it’s just as though you did a traditional contribution in the first place.
2. I don’t write the rules and yes, it would cost you less in taxes to cheat on your taxes, but that’s not really a strategy I recommend. The IRA custodian should know how much if any is basis. If they have no record of basis, then it’s going to be treated as all pre-tax.