In personal finance and the rest of life “there are no dumb questions” and I will try to cheerfully answer every question I'm given. I have certainly asked lots of questions that in retrospect seem dumb. But I'm getting sick of answering this one about Backdoor Roth IRAs. (If you have no idea what a Backdoor Roth IRA is, read my Backdoor Roth IRA Ultimate Guide and Tutorial first. Seriously. You need to know what it is. If you like, you can read the 941+ comments below the post where you will see variations of this question asked dozens of times.)
At any rate, I decided I was going to write a blog post about it so I could just link to the post instead of typing out the answer over and over again in comments, the forum, and emails. If I sent you a link to this post in response to your question, please don't take personal offense. I don't think you're dumb, but it's way easier for me to post a link to a comprehensive answer to this question than to type all this out every time.
Questions I Always Get Asked About the Backdoor Roth IRA
How to Account for the Pennies in Interest
Q.
I just did the Backdoor Roth IRA for the first time and was appalled to find out that over the three days I had that $6,000 in a money market fund in the traditional IRA before conversion it earned 37 cents in interest. Now I'm afraid the IRS is going to come after me and repossess my dog. What should I do to keep the IRS at bay?
A.
These are questions that don't get asked by people who have done their own taxes for years. The reason why is they know you don't report cents on your taxes. You just round down or up. So if you do a Roth conversion of $6,000.37, all the IRS knows (and cares about) is that you converted $6,000. Seriously. Nobody cares about that 37 cents. You just got a free 37 cent Roth conversion!
Q.
But that 37 cents is actually still in the traditional IRA! I didn't actually convert it.
A.
Great. Leave it there until next year. Then convert it with your next $6,000. It'll still be free since it isn't going to grow to 50 cents in a money market fund in one year.
Q.
Unfortunately, it turns out it wasn't 37 cents. It was 87 cents. Now what?
A.
You now have a taxable transaction, since you will round that up to $1.00. You will owe taxes on it. That could be as much as 45-50 cents added to your tax bill! Here's how you report it:
Easy peasy, right? By the way, if your tax preparer doesn't know what to do with it, send him a link to this post. (Dear tax preparer, please don't be offended if you were sent this link. I know the vast majority of your clients don't do Backdoor Roth IRAs.)
Q.
But now it's 2023 and money market funds actually pay interest. So now there is $5.65 still in the traditional IRA!
A.
Great. Same choices. Convert it to the Roth IRA (and owe a couple of bucks in tax on it) or leave it there, get pro-rated this year (paying two dollars in tax on that $6) and clean it up on the 8606 next year (where that $6 will be converted tax-free along with your next $6,500 that you contribute for next year.)
Opening A “Business” To Get An Individual 401(k) For A Rollover
Here's another little trick a lot of people may not know about. Some people don't want to do a Backdoor Roth IRA due to the pro-rata issue. This trick doesn't work so well if you have a business where each year you are making SIMPLE IRA or SEP IRA contributions. But it does work very well if the only reason you aren't doing a Backdoor Roth IRA is because you have a big fat SEP-IRA, rollover IRA, or traditional IRA that you are no longer making contributions to. (See line 6 of the 8606 above- you want it to be zero if you're doing the Backdoor Roth IRA.) There is always the option to just convert that tax-deferred IRA and pay the taxes on it, but if it is really large, that's probably not a good idea. So what can you do? You can start a business.
Step 1: Get an Employer Identification Number (EIN). It only takes five minutes and is free. You don't need an LLC or an S Corp or even a name separate from your own.
Step 2: Make some money. Doesn't have to be much. $10 is fine, but even better if it is enough money that someone gives you a 1099 ($600+). Babysit someone's kid. Mow your neighbor's lawn. Shovel a driveway. Do an online survey. Whatever. Make some money. Report it on Schedule C (lines 1, 5, 7, and 31) at the end of the year. Don't forget Schedule SE too. Congratulations! You're now self-employed! That wasn't so hard, was it?
Step 3: Open an individual 401(k) at Fidelity or eTrade (the Vanguard individual 401(k) doesn't take rollovers). You can contribute 20% of your $10-600 if you like (report it on Form 1040, line 28), but it's not required.
Step 4: Roll that pesky IRA over to the individual 401(k) before December 31st.
Step 5: Do the Backdoor Roth IRA as usual. (Contribute $6,000 to a traditional IRA, then convert it tax-free into a Roth IRA.)
Voila! You can now invest $6,000 a year ($12K a year if you do it for your spouse too) in a tax-free and (probably) asset protected account instead of your regular old taxable account.
What Does the IRS Say About Backdoor Roths?
The IRS didn't really weigh in at all about the Backdoor Roth IRA for years, leaving taxpayers and advisors wondering if the step transaction doctrine could ever be applied to it. I have yet to hear about a case where the IRS gave someone a problem (other than asked a few clarifying questions) about the Backdoor Roth IRA (please send me details if you know of one) and there certainly has not been a tax court case resolving this issue. But I found out recently that the IRS has at least said something about it, although what they said really didn't surprise me. As noted in this article in Financial Planning:
Michael Kitces maintains that planners who do them right away, shuttling IRA money into a Roth without a waiting period, run the risk of incurring the IRS' wrath. The IRS guidance on the matter, however, would seem to allay those concerns.
“There's no caveat about waiting,” the IRS says in an email via its spokesman Dean Patterson….
The IRS sent one of Marty McNamara's clients a worrisome letter triggered by a Roth conversion that could have produced an additional tax plus interest and penalties, he says. The client prepares his own tax returns, he adds.
The client's 1099-R forms showed the Roth conversion amount, McNamara says, while another form, Form 5498, showed the IRA contribution amount. Custodians automatically provide both forms to the client and to the IRS. Those two amounts had to match and they did, McNamara said, but the client failed to inform the IRS that he had no other IRAs.
“After some coaching on my end,” McNamara, a CPA and the cofounder of Marrick Wealth in Irvine, Calif., says, “my client was able to respond to the IRS with a letter explaining the nondeductible IRA contribution and subsequent Roth conversion. He also included a copy of the 1099-R and Form 5498, explaining the basis in his IRA was equal to the conversion amount and that he had no other IRA balances, so the conversion was non-taxable. The IRS responded with a letter explaining [that] no further action or taxes [were] required based on the information provided. Of course, we were both pleased with the outcome.”
I'll bet the law gets changed before this ever gets tested in tax court because after 8 cycles now, nobody in Congress nor the IRS seems to really care. The only question is whether the law will change to allow high earners to make direct Roth contributions or whether the law will change to once again disallow high earners from making Roth conversions.
What do you think? Are you one of the dozens (hundreds?) of people who have had this question at one point? Do you have a pro-rata problem? Can you solve it by starting a (very small) business? Do you worry about the step transaction doctrine? Comment below!
I am currently a resident making a measly salary so I am able to make a regular annual $5500 Roth IRA contribution. I also moonlight and get a 1099 from that. Is there any advantage to setting aside some of that moonlighting money into a SEP IRA or an individual 401K, or will that cause too many headaches with pro rata taxes in the future if I intend to make a backdoor Roth IRA contribution once I no longer meet the minimum income threshold (i.e. just pay the full taxes on the moonlighting money I made this past year and don’t contribute any of it to a tax-deferred individual retirement account)? Thanks!
If it were me I’d open an individual 401(k) now and use the Roth option as much as possible. If you don’t contribute to any other 401(k)/403(b), that could mean your first $18K from moonlighting could go into the Roth 401(k).
Hello,
Because there are no limits on conversion, why can you not put any amount into the IRA (say $10k per year post-tax) then convert that $10k into your Roth every year. Why stop at the $5,500?
There is a limit on contributions to IRAs. If you’re under 50, it’s $5,500 a year. If you’re 50 or older, it’s $6,500 per year.
I thought got there was only a limit on the amount that can go into a IRA as a deduction (pre-tax). So you could as much as you’d like into an IRA but only the first $5500 is pretax. Is that wrong??
I WISH there was no limit to the amount you could contribute to an IRA. But alas, only $5500/year regardless of whether Roth or Traditional, and regardless of whether it is a deductible or nondeductible Traditional IRA. My dream is to be able to contribute $100,000 per year to a Roth IRA. We’d all be set really quick.
Make sure you read up on the Mega Backdoor Roth IRA. What you dream of is possible with the right combination of jobs and 401(k)s.
Yes. That’s wrong. You can only put $5500 in no matter how much of that $5500 you can deduct. Sorry!
I am in the process of doing my taxes and I have realized that for 2016 I am not covered by any work retirement plan (profit sharing plan that will kick in this year). Thus I am eligible to contribute 5500 for both me and my wife (stay at home mom) into a deductible IRA. I also have earned a small amount last year enough to be reported to me on a 1099. Is it too late to open an individual 401(k) for 2016 and deposit some of those money and also roll the deductible IRA into it? Or just do a backdoor Roth IRA and forget about the deductible IRA? I know I should have done these things back in Dec, but … no excuses.
Need a bit of help with the above question. What would you do in this situation? Thanks
Yes. It is too late for an individual 401(k). You can still do a SEP-IRA for 2016, then roll it into an individual 401(k) opened now. You can still make a 2016 non-deductible traditional IRA contribution and convert it to a Roth IRA. If you are going that route, make sure the SEP-IRA is rolled into an individual 401(k) by Dec 31, 2017.
Wait a sec. A SEP is only valid if you employ at least one employee. I don’t think you can open one without employees can you? Otherwise you’d be directed to the solo 401k. I may be wrong.
Yes you can. 100%. A sole proprietor can use a SEP-IRA just for herself.
OK….loads of great information.
I’m preparing to make a conversion ( one time only) this year.
I’ve been a solo practitioner since 2015 and opened a new solo401k in 2015. Contributions made to solo 401k in 2015 and will be again ( very small amount) for 2016.
My plan is to transfer ( trustee to trustee) three older, individual IRAs into my solo 401k early this year…leaving within one of these IRAs my post tax contributions that have accumulated over the years ( the last of these contributions was made in 2016).
This post tax monies that remains within my old IRA would then be transferred ( trustee to trustee) to a new account that is a ROTH IRA.
I specified trustee to trustee because of the 2015 roll-over rule preventing more than one roll-over per 12 month period.
I was unaware of the the issue of waiting for a two year period after a contribution to an older simple IRA ( as documented above in responses). Does the two year rule differ as to the type of contribution ( in my case the 2016 contribution was all post tax)?
Does this mean I should wait until early 2018 to execute my plan while holding off on any post tax contribution to me simple IRA in 2017?
If there is grayness to the answers…id rather take the conservative approach and avoid extra paper work or communication with the IRS to explain.
Lastly, my income is currently -0- for 2017 so my last income related contribution to my solo 401k will have been for tax year 2016. Does that influence any of the above decisions? ( also raised in the responses to date).
Thanks for your time and efforts to clarify all that have
I’m not sure you understand that a SIMPLE IRA is a very different thing from “just an IRA.” I made that mistake myself once. A SIMPLE IRA is a small business retirement plan with a $12,500 a year ($15,500 if 50+) contribution limit. A traditional IRA is something anyone with earned income can contribute to with a $5,500 limit ($6,500 if 50+). The two year period applies to SIMPLE IRAs, but not traditional IRAs.
If you’re not going to have any income in 2017, you may want to look very seriously at doing a significant Roth conversion of pre-tax dollars too. But that doesn’t affect your post-tax conversions at all.
Thanks…..My IRA should be a traditional one but I’ll make sure that my bank has it classified correctly.
I will likely not have any 1099 income in 2017 …I do however have significant S Corp income that will be generated in 2017 and through 2018…..thereafter my ownership interest is bought out ( 1/1/2019)
Is, as you put it…” A significant conversion of pre-tax dollars…” Worth considering giving these circumstances……mind giving an example that relates to this situation where the pre-tax conversion has the added value.
If so, is waiting till 2018 to do the pre-tax conversion ( from the solo-401k accumulated funds) after I did the post tax conversion in 2017..the way to go?
Again thanks for the help
The general idea is that if you have a year where your taxable income is very low, it’s a good idea to do some Roth conversions up to the top of the 15% or maybe even 25% bracket.
Another question to this long chain. I have a SEP-IRA that I can’t wind down for a couple years (it’s at lending club and the loans don’t mature for a few yrs). Can I make $5500 contributions to a nondeductible IRA for each year in the meantime? Then, when I am finally able to transfer all my pre-tax IRAs to 401ks, then make the Roth conversion? I know I’d pay tax on any gains to my nondeductible contributions in the meantime.
I assume that to do so, I’d fill out a form 8606 every year. I think it would look something like this…
– line 1: 5500
– line 2: carrying my nondeductible IRA basis forward previous year’s line 14 (aka 0 for yr 1, 5500 yr 2, 11000 yr 3… until I convert everything)
– lines 5-13: BLANK because I am not making a Roth conversion for now. I would make a lump sum conversion by filling out lines 8-13 appropriately when I do get rid of my SEP-IRAs
– line 14: accumulating basis of nondeductible contributions (aka 5500 for yr 1, 11000 yr 2, 16500 yr 3…. until I convert everything lump sum)
Appreciate the help!
Yes. You can do that. That’s the purpose of the 8606 form- to keep track of your basis in your IRAs.
FYI- You can sell lending club notes. Many of them will have to be sold at a discount and it will take at least months to get rid of them all. Ask me how I know? (Or wait for the upcoming post.)
First year attending here who did a backdoor roth for the first time, had a question. I am using turbotax, and there is a section where we can input data from 1099-R. Do I still input this info, or just ignore it and file a 8606? Thanks!!
Or do I even need to record the 1099-R and file a 8606 only? If I don’t input the 1099-R then my refund leaps to about $1500 more.
If you are using TurboTax, I would recommend following the instructions from Harry Sit here:
https://thefinancebuff.com/how-to-report-backdoor-roth-in-turbotax.html
You enter your nondeductible Traditional IRA contribution, and then you enter your 1099-R indicating that you converted it to a Roth. Using this information, TurboTax files the 8606 automatically. You should not be taxed on the conversion, because you were already taxed on the money used to contribute to the nondeductible Traditional IRA.
I hope this helps!
Exactly. That’s how I do mine. I would have recreated Harry’s post, but I didn’t see any way to improve it!
I had a rollover IRA with Vanguard that i just rolled over to my job fidelity 401K Feb 2017.
Am i still able to contribute and do a backdoor roth IRA for 2016? since i had a rollover IRA balance in dec 31 2016?
Hope my question is clear. Thank you so much!!!
Yes. You’ll have some basis to report on your 2016 8606, but it’ll all work out fine especially since you didn’t do the conversion until 2017. You just have a more complicated 8606.
WCI thank you for empowering me and my husband. Your book and blog has been a great tool for us. We came to know about backdoor Roth through your site and thought of doing for 2016. So me and my husband both created traditional IRA with Merrill and converted to Roth next day. So far so good ….. a week later he was going through some papers and found out he had Pre Tax IRA with fidelity holding around 700 dollars
And without talking to me he rolled over to his current 401k.
My question is when we report Roth for him in 2016 taxes will he be taxed again on 5500 he contributed?
You’re welcome.
I’m always amazed when people have investment accounts they don’t know about. Good problem to have but I bet you never have it again!
If you made all your conversions and the rollover in 2017 you should be fine. You just put the 2016 contributions on 2016 8606s and the conversions on 2017 8606s.
Be sure to check your paperwork to make sure you don’t have any tax due at the bottom of the 8606.
Can the back-door transaction take place in the same calendar year an IRA rollover into a 401k took place (as long as the rollover is done before the back-door transaction occurs) to avoid the pro-rata rule? Or is it best to wait until the following calendar year? Thx in advance for your thoughts.
You can answer all these questions by working your way through the 8606. It is best to have no money in a traditional IRA on Dec 31st of the year you do the conversion step. The IRS has no idea if the rollover is before or after the conversion since 8606 doesn’t ask for dates.
I also intended to do a Backdoor Roth for 2016…I opened a Solo401k in 2016 (I have 2016 business income but will likely not have 2017 business income). I requested to rollover my SIMPLE IRA and SEP IRA to a Solo401k in December 2016. But they didn’t get it finalized ($0 balance in SEP and SIMPLE) until 2017. So my understanding is that I can now do my 5500 IRA contribution and then Roth rollover but I must process it as for 2017 and not 2016. Am I missing anything? Do I need 2017 business income since the SIMPLE and SEP rollovers took place in January 2017?
You should be okay since you didn’t do the conversion step until 2017. So your contribution for 2016 goes on your 2016 8606 and your 2017 contribution and all the conversions go on the 2017 8606. Since you will have no money in a traditional, SEP, or SIMPLE IRA on Dec 31 2017, there will be no pro-rata issue on your 2017 8606.
And no, you don’t need business income for anything but to open the individual 401(k) in 2016.
Thanks for your help!
I am a recently retired DDS. My wife is a working MD w/ an old 401k and a very new 403b. I plan on tutoring very p/t soon. I absolutely would like any tutoring income to be ‘self employment income’ – theoretically, considering IRS rules, can I work something out (if they’re amenable) where I can work as an ‘independent contractor’ for some tutoring service (will tutor sat math – would take a while to develop my own student tutees)? Or, it’s all or none – either work for someone and have no solo 401k, or suck it up and spend time w/ school guidance counselors, market a bit, etc on my own. Then I would take my previous defined contribution pension, inactive now, and either roll it into the newly created solo 401k if possible (the ideal), or otherwise an IRA rollover which I would then roll into the solo 401k, and be able to continue w/ backdoor Roth conversions through spousal IRA’s if my income isn’t $6500.
*Also, if my wife’s plan(s) permit, can I roll those over to MY new solo 401k for better investment options?
Thanks Jim!
I working on setting up a backdoor Roth for 2017. I file my taxes married, filing jointly. 1) Does the pro-rata rule apply to the IRAs in my name only? 2) I will get 1099 income for independent contracting work. Can I roll over my husband’s IRA money into my solo 401k? Thank you!
1. Yes.
2. No.
Retirement accounts are all individual, never joint.
2 more questions:
1: I unfortunately made so little Income in 2016 that I was instructed to remove the post tax contribution to my IRA that had been done in advance of my return being completed…plus the interest accrued.
Does this “event” in early 2017, influence my ability to transfer all of my IRA pretax monies to my solo 401k….prior to end of year 2017…..and convert the remainder ( now reduced post-tax contributions in IRA) to a Roth.
2. Is there anything about the Trump / GOP plan for tax reform that would hasten a conversion to a Roth ( as above) or slow it down or stop it altogether?
Thx……Frank
1. No, you only need income to contribute, not convert or do rollovers.
2. If tax rates really do go down (and nothing else changes), it would be advantageous to wait to do a conversion.
Hi James,
I’ve read the financebuff and your guide to backdoor IRA’s and you both mention if you have “a small sum” in a (SEP-) IRA, then converting that and paying the taxes on it is fine. By converting, do you mean just sticking it all in a roth ira? I have $7500 in a SEP-IRA and am unable to roll it over to a employer 401k/403b. $7500 would be too much for a backdoor ira, so what would I do with the other $2000? I don’t mind paying taxes on it if it’s little.
Alternatively, I see I could create an individual 401k. If i did, would that exceed my 18k personal limit or is this considered under the $53k limit? Whats the difference between “earning” $10 and $600? I’m thinking a 1099 requires a $600 minimum and filing a 1099 would look more legitimate?
Is reporting the Schedule C and SE a one time event or something that needs to be done on your own annually?
Thanks!
You’re confused. You can both convert the SEP-IRA to a Roth IRA (just “stick” it in there) AND do a separate $5,500 contribution to a traditional IRA and convert that to a Roth IRA. The SEP conversion will probably cost you $3K in taxes, but the backdoor Roth IRA won’t cost you anything.
Or you can start an i401(k) and roll the SEP IRA in there.
I guess if your business is only running for one year then you only do C and SE for one year.
The $18K limit is for employee contributions. The employer contribution is per plan, not per person, and is $54K per year. If you’re worried about “legitimacy” then sure, have your business make more money or get a 1099 or whatever. But that’s not required.
Ahh, I see. Thanks so much for taking the time to answer these questions!
My wife is a W-2 employee with a 401k. She has an IRA from priors jobs so we can’t do the Backdoor Roth IRA. I am an IC with an S-Corp, and want to hire her for a small amount and issue her an 1099 (~$700) so she can open a solo 401k and her move IRA.
Do we need to contribute to the solo 401k based on the small 1099 income she would receive? How would affect her 401k contributions through her employer? If so, how much do we contribute? She maxes her 401k at work.
Make sure she does legitimate work at a legitimate price. But yea, she can get an EIN and contract with your S Corp to do some work and you can give her a 1099. Be aware she’ll need to pay SS taxes on it that you might not have had to pay if it had been your income and Medicare taxes that you might not have had to pay if you had called the money distribution/dividend/profit instead of paying it to her.
No, you don’t have to contribute, but you probably should.
She could only make employer contributions.
https://www.whitecoatinvestor.com/multiple-401k-rules/
Thanks! Yes, she does IT work, so will pay her a legitimate wage. She earns more than than the SS base wage ($127k?) at her job, so that will be maxes, but we would owe the Medicare taxes on the 1099 income.
Can she max her W2 employee $18k 401k contribution at work AND contribute to the solo 401k? I thought it was $18k across all of them? So should we top her W2 employee contributions at $17500, then do 20% of $750 to the solo 401k?
$18K total employee contribution but each 401(k) has a $54K total employee + employer contribution. Basically, it works out that she gets to contribute about 19% of what you pay her into the individual 401(k).
So we don’t need to limit her W2 401k contribution? If she hits the $18k limit at her employer, she could still contribution 19% of the 1099 income to the solo 401k? She wasn’t planning on starting an S-Corp, just getting an EIN. Would this be sufficient?
No.
Yes.
Yes.
Your website is so helpful! Here is my situation- I have a whopping SEP-IRA, so I know I am not able to do a backdoor Roth. However, my sole proprietor husband has only Roth IRAs under his social security number. He is self-employed, files a Schedule C, but has no EIN.
-Can he contribute $5500 to a tIRA, non-deductible and then convert to the backdoor Roth soon after?
-Or do we need to get an EIN and do the solo 401K step in between?
My concern is also that it is November already and that processing delays in 2017 may cause issues if all is not completed until 2018. Maybe we should wait until beginning of next year?
Yes.
He can do a solo 401(k) too, but he doesn’t have to in order to do the Backdoor Roth IRA.
Two months is enough time to open a solo 401(k) and plenty of time to do the Backdoor Roth IRA (you have until April to make that contribution anyway, but I’d try to do it before the end of the year.)
Hi and thanks again for all of your great content!
Thanks again for all that you do. You are truly making a huge difference in the lives of so many…
Q: When I logged into Vanguard today to make the full traditional IRA contribution for 2017 (I know…I’m late this year) I noticed that my Traditional IRA has $0 in the money market fund (as expected) but the Roth IRA has ~$400 in a Federal Money Market Fund as well as ~$200 in the Prime Money Market Fund. I’m not sure how these balances got there or were left there but I’m worried about the tax implications now since this is definitely more than a few cents. I know it’s a taxable event now but should I continue with the $5500 contribution and conversion as usual and just know i’ll have to eat some tax on it? Thanks!
There shouldn’t be a tax issue with money left in a MMF in a Roth IRA. You probably ought to figure out how they got there though.
But yes, go ahead and do your Backdoor Roth IRA as usual. Money in your Roth IRA isn’t going to mess with that. There’s no tax.
Ok thanks!
Could they be dividends that were not reinvested?
If you don’t set your dividends to be reinvested, they usually are deposited into a federal MMA of some kind.
PK – That’s a great thought I’ll look into it. Thanks for the suggestion!
Such great content! This article is super helpful – thank you!
Q: 2015 contribution in 2016, 2016 contribution in 2017 and recently made my 2017 contribution in 2017…small steps! 2015 contribution actually lost money, so $5,401 was converted to Roth this year (2017), $5,500 for 2016 and 2017 to Roth this year too. Accrued $1.37 in interest and didn’t convert this. Is the $1.37 my basis for 2018? Is this what my 2017 8606 would look like?
Part I
Line 1 — 5,500
Line 2 — 11,000 (basis from 2015 and 2016 non-deductible contributions)
Line 3 — 16,500
Line 4 — 0 or blank
Line 5 — 16,500
Line 6 — 0 or blank (assuming nothing in any non-Roth accounts, or would this be the $1.37?)
Line 7 — 0 or blank
Line 8 — 16,401 (5,401 + 5,500 + 5,500)
Line 9 — 16,401
Line 10 — 1.000
Line 11 — 16,401
Line 12 — 0 or blank
Line 13 — 16,401
Line 14 — 99 (this is my basis and goes on line 2 next time, do I add the $1.37 here too?)
Line 15 — 0 or blank
Part II
Line 16 — 16,401
Line 17 — 16,401
Line 18 — 0
So clearly my confusion comes from both the ‘short’ year in which I had less than $5500 and then also the interest. Would love to know how my 2017 8606 should read and then where I start with my 2018 given the interest I mentioned. Moving forward, contributions and conversions are all in the same year! Thanks so much for any insight!
I know it seems like I do this all the time and have the form memorized, but every time I do it or help somebody else do it, I have to go pull up the form and its instructions to do so.
Basis is money that has already been taxed. The 2017 8606 reports three things- basis from tax year 2016 (i.e. what was in a traditional IRA that isn’t taxable upon converting), how much you contributed for tax year 2017, and how much you converted in 2017. The rest is just details and following directions.
Line 1- Non-deductible contributions made in 2017: $5500 Correct
Line 2- Your basis. This would be $5500 from 2015 and $5500 from 2016, so $11K Correct
Line 3- Add lines 1 and 2- $16,500 Correct
Line 4- 0 Correct
Line 5- Just a subtraction problem. $16,500 Correct
Line 6- The big kahoona. If you convert EVERYTHING and don’t have some other SEP or SIMPLE or rollover IRA out there hanging around, then yes, $0. But you didn’t. You screwed up. You didn’t convert the 1.37. If it was just .37, you could round down. But because it’s $1.37, you round down to $1. That seems like a terrible idea to me. It seems like a MUCH better idea to convert that $1 at some point in the next three weeks.
If you take my advice, and go convert that $1.37 to a Roth IRA, then you would fill out the rest as follows. But if you don’t take my advice, and don’t convert that 1.37, it will look differently.
7. 0
8. 16402
9. 16402
10. 1
11. 16402
12. 0
13. 16402
14. 98
15. 0 (That $137 would normally be taxable, but because you lost $99, it isn’t.)
16. 16402
17 16402
18 0
Hope that helps. Make sure your IRAs have $0 in them (or at least round to zero) on December 31st.
https://www.whitecoatinvestor.com/pennies-and-the-backdoor-roth-ira/
You owe me a drink. I plan to collect. 🙂
I’d be happy to buy you multiple drinks…. and some dessert. who doesn’t like some dessert? Thanks so much! Really appreciate it – this makes so much sense now… Happy holiday! 🙂
Apologies for the additional request! Your reply above for me was SUPER helpful. My question derives from my wife’s 8606. Unlike me where I lost money, my wife actually made a whole $1 in interest. For sanity sake, I’d love to see if I’m doing this correctly. She has 5500 from 2016 and 5500 from 2017…these along with her $1 in interest were converted in 2017.
Line 1 – 5500
Line 2 – 5500
Line 3 – 11,000
Line 4 – 0
Line 5 – 11,000
Line 6 and 7 – 0
Line 8 and 9 – 11,001
Line 10 – .999
Line 11 – 10,990
Line 12 – 0
Line 13 – 10,990
Line 14 – 10 (is this what goes on my 2018 8606 line 2?). Why is there a $10 basis to begin with?
Line 15 – 0
Line 16 – 11,001
Line 17 – 10,990
Line 18 – 11 (shouldn’t this just be $1? Shouldn’t I only be paying tax on the $1?)
I’m sure my math is maybe wrong somewhere, but curious as to what I’m doing wrong and why I have a basis of 10 and whether that goes on line 2. Going forward, I should only have 5500 contributions and conversions in each year – so there shouldn’t be a basis right? Thanks as always for your consideration and help!
I would put 1.000 on line 10 and 11,000 on line 11.
=11000/11001 = 0.999909099 If you round that to “at least three places” you’ll get 1.
I think that’ll fix your issue.
Thank you. I believe you mean 11,001 on line 11? Would this then in essence be (-1) on line 14? I’m curious as to what the basis should be for next year. I’m wondering if line 14 is just 0 and I essentially don’t pay taxes on the $1 of interest?
Yes, 11,001 and yes, -1 on line 14. But I would just use $0 for next year.
Hi and would greatly like your input as I am getting very confused! Self created problems truly due to procrastination!
Before April 17, 2017 tax deadline moved $5495 to my traditional IRA and $5500 to my wife’s traditional IRA and reported it in the 2016 tax via Turbotax on Form 8606 on Part I, lines 1,3, 14. No amount was reported in Part II, lines 16,17,18. Either of us do not have any prior traditional IRA accounts.
Due to procrastination on my part, I converted the 2016 traditional IRA contributions to a backdoor Roth IRA on 10/16/2017 which had increased to $5498. Similarly, my wife’s traditional IRA has increased to $5509 at the time of conversion.
#1: For my spouse, given the limit of 5500, I can only convert $5500. How do I deal with the extra $9 above the limit?
#2: For my Roth conversion- I have to pay taxes on $3 in 2017? How do I report it?
#3: For contributions for year 2017, can I move funds into traditional (anytime this year till April 15, 2018) and then convert to backdoor Roth anytime remaining this year or next year. How should this be reported in the 2017 tax filing?
I would greatly appreciate your response. The procrastination on my part to ‘muddy the waters’ goes on my lessons learnt list!
~p
1) There is no limit on conversions. Convert is all and pay tax on that $9.
2) You’ll report it on Form 8606. Just follow the instructions.
3) Yes. But I recommend you do both the contribution and the conversion this year if you can pull it off. It will make your life easier. Otherwise, wait until the new year to do both steps. But DO NOT just do the contribution for 2017 and put off the conversion step until 2018.It all gets reported on the 8606.
Hi,been reading through these to find my particular situation and I think this is it. So,just to confirm that I’m understanding it right, if I put $6000 in a traditional IRA a few days ago and it made 57 cents, I should convert that entire $6000.57 into my Roth IRA and just pay taxes on $1 via form 8606? I was confused i guess because of the “max allowable” contribution to an IRA this year being $6000. I thought that that meant that I am not “allowed” to convert any more than $6000, but am I correct in saying that I am “allowed” to convert over that $6000, but just have to pay the taxes on anything over $6000? Thanks again for all of your posts and helping us to understand this stuff!
Yes. No limit on conversions.
Thanks a lot for your response. Greatly appreciated.
I had made contributions (4K) in my 403b retirement savings as Roth IRA in 2017. The question is whether this amount should be included in the 5.5K max I could contribute into a Roth. In other words, can I put 5.5K or 1.4K (5.5K-4K) through the backdoor Roth?
~p
$5.5K. Totally separate limits.
Just wrapped up residency and income is over Roth IRA cutoff so I’m planning to do the Back Door Roth for 2018. I’m sure it’s come up somewhere but I couldn’t find it in a few posts…so am I allowed to make multiple payments into my Vanguard MMF and do multiple subsequent Back Door conversions in the same year as long as the total is $5500? Or can just one conversion take place annually? I was thinking more along the lines of dollar cost averaging my IRA and making 4 payments of $1375 and converting each payment individually.
Yes, you can do that. But come on. You’re an attending physician. If you make enough that you have to do your Roth IRA through the Backdoor, you make enough to do it all at once. If you have to save up a couple of months, fine. But you need to be putting 20% of your income toward retirement. If you make $250K, 20% is $50K. $5,500 is 11% of that, a little over one month’s worth. Just do the whole thing at once and over the next few years try to move when you do it up earlier and earlier until you’re doing it the first week of January. You can do it!