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!
Personally, I just fund the max every January because I can. I understand trying to DCA and get the best average entry point, but I’d rather not even be bothered by all that. Would rather spend my time skiing or fishing or doing something else fun, then converting into a ROTH every 3 months. Its time in the market that matters i think. But thats just me.
Hi,
I recently completed a Backdoor Roth conversion for my wife and myself for the first time and accidentally over-converted to the Roth on each of them. For some reason, Vanguard didn’t clear the money for a couple of weeks, so it had time to earn a $4 dividend in the traditional IRA. This dividend got converted into the Roth. The Vanguard website suggests that this overcontribution to a Roth IRA will be taxed every year, but that I can avoid this by removing the excess contribution and whatever it has earned thus far. My question is, will I be taxed each year on the earnings of the overcontribution? Or, will I be taxed extra at some later date when I take money out on whatever the overcontribution has earned over the years? Or, will I only be taxed once on the overcontribution? Thanks!
Sorry, here is the link to where I was reading about overcontributions on the Vanguard website:
https://investor.vanguard.com/ira/excess-contribution
What do you mean over convert? You mean you converted more than was in the traditional IRA? Or you overcontributed and then converted?
If you contributed $5,500 and then converted $5,504, you’ll owe taxes on $4, just one time, in the year you do the conversion. Is that what you’re asking?
I initially contributed $5500 to the traditional Roth. After a couple of weeks, this earned a $4 dividend. I converted this total amount into the Roth. You explain above very well how to deal with this come tax time, but I was worried that I would be taxed every year on the over contribution to the Roth IRA based on what I read on the Vanguard website.
Thanks!
After reading your blog, we are trying the back door Roth. I forgot to do a conversion from my Traditional IRA account before December 31st to Roth IRA. The amount is $5,533.
Can you please what can we do now? Assuming this will trigger a taxable event, how should we address it in Turbo Tax?
Does this complicate the Mega backdoor Roth plan (the sole reason we opened Traditional IRA was for funding it).
Secondly, if I now move that amount, there is a gain of $33 above the $5500 limit which will trigger a taxable event for 2018 taxes.
Finally, once we move it in Roth IRA, what do you recommend to invest in these markets?
Thanks and appreciate all that you!
Stop doing that. It makes your life harder than it needs to be.
Just do the conversion now, report it on your 2018 taxes, and you’ll owe taxes on $33. So your procrastination will cost you $11 and a little bit of extra hassle filling out 8606.
I’m not sure what your Mega Backdoor Roth plan is.
As far as what to invest in, you need a plan. https://www.whitecoatinvestor.com/investing/you-need-an-investing-plan/
If you don’t feel qualified to write your own, either hire a financial advisor to help you make one or take my “Fire Your Financial Advisor” course.
Putting some more clarity and timeline to my question above…
My employer’s 401k plan (Fidelity) allows making after-tax contribution. Additionally, the plan also allows in-service withdrawals. So, in 2017, I first maxed out my pre-tax 401k contributions. Then I started contributing money to the after-tax account. On Oct 17, 2017, I did a rollover from employer 401k to Individual ROTH IRA, a la the mega backdoor Roth. I rolled over the contributions as well as the earnings in the after-tax to Roth. The earnings weren’t significant.
My first question is how do I pay taxes on those earnings? Which tax forms do I need from Fidelity and how do I report the earnings to the IRS. Bonus if someone can provide a pointer to do so in Turbo Tax.
Now this is the part I’m really kicking myself for: I just realized that I had forgotten to convert my traditional IRA to Roth IRA last year to take advantage of the back door Roth.
I had transferred $5500 from my bank to Vanguard Traditional IRA on 8/11/2017. However, I forgot to do the Roth conversion for these funds. I checked today (3/16/2018) and I have an earnings of $33 in that account. Would this make the pro-rata rule kick in for my after-tax to ROTH conversion above? If so, how do I resolve this? How do I pay taxes on the $33? Can I still do a backdoor conversion of the $5500 from the traditional IRA to the ROTH this year? What happens to the remainder $33?
Thank you!
Ah, there’s your Mega Backdoor Roth IRA plan. This is totally separate from a regular backdoor Roth IRA and you can just do one without the other if you want.
The plan (your employer + fidelity) should send you the appropriate tax form. You’ll have to pay tax on the earnings. When Turbotax asks about Roth conversions, you just answer the questions.
There isn’t going to be a pro-rata issue here that won’t be cleared up by the end of 2018. You just made your 8606 unnecessarily complicated, that’s all.
Yes, you can do another Backdoor Roth IRA (and another Mega Backdoor Roth IRA) for 2018 if you want. You can pay your taxes on the $33 by either check or credit card or employer withholding with the rest of your tax bill. 🙂
HI WCI,
I recently did a backdoor Roth for myself and my wife for tax year 2017.
I made a non-deductible contribution of $5500 into a traditional IRA account at Vanguard in March 2018 and a few days later, had the amount converted to a Roth. I did the same for my wife.
I noticed a few days later that in the traditional IRA account, there is $1.54 left in each of our accounts (presumably accumulated after a few days in the money market account). I’ve read your post here and asked around at bogleheads also.
The amount I have is unfortunately a little more than a few cents. I think I know what to do but just want to make sure.
It seems that the options I have are:
1. Convert the $1.54 to a Roth now and resubmit the 8606 (which has been submitted by my CPA already) and pay taxes on the 1.54.
2. Leave the $1.54 and wait until the 2018 non-deductible contributions are made and then convert 5501.54 for tax year 2018.
Also, I didn’t realize until now that although the tIRA contribution is reported for tax year 2017, the conversion should be reported for tax year 2018.
When I looked at the return that my CPA sent me, form 8606 part I looks correct to me (we have not discussed the burning issue of the $1.54 yet) but in part II where it talks about the conversion for 2017, lines 16 and 17 have 5500.00. Line 18 is 0.
Part III of the form is left blank. It looks like I will need to have form 8606 corrected as well.
Do you have any other suggestions? Thanks.
jsong23
Yea. My main suggestion is do both the contribution and the conversion during the calendar year and the conversion the day after the contribution so you don’t have to deal with this stuff!
At any rate, the taxable $2 probably isn’t even going to be taxed due to the fact that you round line 10 to three decimal places, so either option is fine. Personally, I’d just leave it there and convert it next year. Currently my traditional IRA has $0.42 in it.
Sounds like your accountant screwed up 8606. You certainly did NOT do a Roth conversion in 2017 from what you’re telling me, so line 16 is wrong. Maybe line 8 too. Sorry your accountant doesn’t know how to do this form.
Hi Jim
Just discovered your site after 3 years of being an attending. I invested in a Roth IRA 1 x as a resident. Then I got busy with life and never thought about personal finance..until now. I am very interested in backdoor IRA but it appears that me and my husband have several tens of thousands in traditional IRAs and SEP – IRAs. Being new to personal finance, would you suggest just waiting till we are in a lower income bracket in older age or converting like you did? Also, if you do recommend waiting, if we max out our 401k what type of account should we put it in if not a backdoor IRA?
Thanks so much!
Why not roll them into 401(k)s?
My husband and I both have 401ks from our respective employers. I’m assuming there is no limit to how much we can contribute to that from non-tax deferred accounts?
Contribute has a very specific meaning and yes, there are limits on contributions. I’m not sure what you’re asking. There are no limits on rollovers or conversions.
Perhaps I’m using the wrong terminology.. I think you answered the question though which was is there a limit to the amount you can roll over from a traditional IRA to your 401k, which is no, there is no limit.
Let’s say that your $5,500 in a money market fund in the traditional IRA before conversion earned 87 cents in interest, and your broker only did the conversion of $5,500 (partial conversion) and thus leaving $0.87 behind in the IRA.
Everything was done in the same calendar year. There are no other Retirement accounts.
How will you report that on your form 1040 (e.g. what will you put on Line 15a and 15b)?
Also will it change anything in the From 8606 Lines 6 to 18?
Thanks again for writing this wonderful article.
Also in a different situation, how will you report it on 1040 when you do a “full” conversion (as in your above example)? (e.g. what will you put on Line 15a, 15b and Line 32)?
($5,500 in a money market fund in the traditional IRA before conversion earned 87 cents in interest, and your broker did a FULL conversion of $5,500 and thus leaving NOTHING behind in the IRA. Everything was done in the same calendar Tax year. There are no other Retirement accounts.)
I think in this situation $5,501 will appear on on Form 1040 line 15a and $1 on line 15b. Not sure about Line 32. What do you think?
Hard for me to follow what you’re asking exactly or to redo an entire 8606 to answer it. I’d just follow the directions line by line. 15b on 1040 comes from lines 15c and 18 on Form 8606 for instance. So yea, $1 on 15b is the taxable amount.
Technically I think you’d have to round up to $1 and put that on line 6 of 8606. But I think the % calculated later on the form is still not going to give you a problem.
I apologize for the confusion.
Married filing joint. 2016 form 8606 line 14 was $0 (for both of us)
For the Tax year of 2017, in the fall of 2017, We contributed $11,000 to two taxable individual IRAs ($5,500 per person). Later that year, we got a total dividend of around $1.60 (around 80 cents each), and the total increased to around $11,002 ($5,501 in each account). In the winter of 2017, we did a “partial” conversion of these IRAs into backdoor roth and left these 80 cents behind in the each IRAs.
We did not have any other preexisting IRA, and this contribution from after tax dollars to the IRA was NON-deductible .
My impression is that due to these extra $2 dividends, conversion may be partially taxable due to pro rata rule.
Now, how should I fill the form 8606 and form 1040?
My entries after following the instructions on the form 8606:
Form 8606 (for both of us)
Line 1: 5500
Line 2: 0
Line 3: 5500
Line 4: 0
Line 5: 5500
Line 6: 1
Line 7: 0
Line 8: 5500
Line 9: 5501
Line 10: X0.99982
Line 11: 5499
Line 12: 0
Line 13: 5499
Line 14: 0
Line 15: 0
Line 16: 5500
Line 17: 5499
Line 18: 1
Form 1040
Line 15a: 11000
Line 15b: 2
Do they like right to you? I could not find any example online so decided to ask the experts.
Thanks again for your help! I started doing backdoor roth in 2016 after buying your book.
I don’t care about the season. I care about the dates. Did you convert during the calendar year or after January 1?
Hi Thanks for the reply,
I did the conversion before Dec 31st.
I have been following your advice and therefore to keep things simple, I make contributions and conversions in the same tax year as the 8606
You know, all I do when people ask me this go to Form 8606 and read the instructions again. I don’t have them memorized. Then I follow them. So you filled your form out this way:
I apologize for the confusion.
Married filing joint. 2016 form 8606 line 14 was $0 (for both of us)
For the Tax year of 2017, in the fall of 2017, We contributed $11,000 to two taxable individual IRAs ($5,500 per person). Later that year, we got a total dividend of around $1.60 (around 80 cents each), and the total increased to around $11,002 ($5,501 in each account). In the winter of 2017, we did a “partial” conversion of these IRAs into backdoor roth and left these 80 cents behind in the each IRAs.
We did not have any other preexisting IRA, and this contribution from after tax dollars to the IRA was NON-deductible .
My impression is that due to these extra $2 dividends, conversion may be partially taxable due to pro rata rule.
Now, how should I fill the form 8606 and form 1040?
My entries after following the instructions on the form 8606:
Form 8606 (for both of us)
Line 1: 5500
Line 2: 0
Line 3: 5500
Line 4: 0
Line 5: 5500
Line 6: 1
Line 7: 0
Line 8: 5500
Line 9: 5501
Line 10: X0.99982
Line 11: 5499
Line 12: 0
Line 13: 5499
Line 14: 0
Line 15: 0
Line 16: 5500
Line 17: 5499
Line 18: 1
Form 1040
Line 15a: 11000
Line 15b: 2
On line 10 you only have to round to 3 digits. So I’d round that to 1.000. That should simplify the rest of the form dramatically, no?
In the sample form 8606 that you have displayed in this post, your line 8 is 5501, and line 10 is 0.999, so line 11 should be $5495.50 (line 8 “5501” X line 10 “0.999”). But you have calculated line 11 as 5500.
Therefore I assumed that your line 10 is “0.99981821” (Line 5: “5500”/ Line 9: “5501”) rather than 0.999 and did my calculations that way without rounding.
So I am somewhat more confused now. I guess in the form displayed by you in this post, line 10 needs to be changed to either 0.99981821 (or rounded to 1.000 for simplification).
Yea, I probably should round that up huh?
Hello – great article and thank you for helping so many people with this penny problem. I did a backdoor roth IRA conversion for the first time this year and deposited $5500 into my Roth and was left with $0.63. Understood that I have to pay taxes on $1, but my confusion is on whether I should push it into my Roth now or wait until next year? Does it make my taxes more complicated doing one way vs. the other since my IRA basis is technically not zero?
Thank you.
Doesn’t matter much, but I’d do it now.
Great article. What is the EIN for? Where does it get reported or used ?
The EIN is required to get an individual 401(k). If you file a partnership or corporation return it gets used there too.
I did the backdoor Roth. for my wife and I. Great, worked out, 5500 for each of us. First time.
Two months later, but in the same calendar year, I rolled over my 401k from a previous employer into a traditional IRA. Happened fast and I had forgotten about the rule that I needed to have $0 in any traditional IRA anywhere in order to be tax free for a backdoor Roth. No sure I had a choice anyway, as there weren’t other 401K options for me.
I think I am now screwed. Is there any provision for the fact that I did the backdoor Roth 2 months earlier?
You’re not screwed, but you’ll need to do something about it. Best to do it before December 31st, either rolling it into a 401(k) or converting it to a Roth IRA.
No, there’s no provision. Doesn’t matter when you do the Backdoor Roth. If it was the same year you had money in the traditional IRA on December 31st, it gets pro-rata’d.
Thank you.
Another problem though I think: I am allowed only 1 rollover per 365 days, so even if I can find a 401k home for the recent 401k—> traditional IRA rollover that was done, I don’t think I can do that change for another year.
—
Only one rollover where you take possession of the money. As long as it is a direct transfer, you can do as many as you want.
Excellent. Thank you !
Hi WCI, I loved your “How to fire your financial advisor” course! So I did backdoor roth by contributing $6000 (post-tax dollars) in November 2020, made the conversion immediately to backdoor roth ira. I look at my account today (01/04/21) to find 1 penny in my Traditional IRA account (staff from fidelity said it accumulated onto my account 5 days after I converted to backdoor roth ira in 2020). I have also just contributed $6000 today to my traditional IRA with plans to convert that to backdoor roth ira once the money has settled. Because I technically had 1 penny as of 12/31/20 (from interest gained from super brief period when my money was in traditional IRA last year), does that mean I have been “pro-rata’ed” and what does that mean for me taxes-wise moving forward? Should I now then convert $6000.01 to my backdoor roth ira for 2021 to try to clear out my traditional IRA? I read extensively the majority of the comments today but was a bit confused as you said to just convert all remaining pennies (in the same calendar year) but at the same time in another post you had kept a certain amount of pennies left in your traditonal IRA. Sorry for all the confusion and TIA for the advice.
Warm regards,
Vincent
Yes, you got pro-rated. No, it doesn’t matter because everything rounds down. You just report $6K on your 8606. Just move that penny over with this year’s conversion to clear it out. But you’ll probably find a new penny! You can often just move the penny (or more typically pennies) over a week later.
The point of the this post was that this all doesn’t matter so quit worrying about it. Best to move them all over ASAP, but if it’s less than 50 cents, it’s fine to leave it and even if it is $10, the pro-ration won’t hurt you much.
Thank you so much for the quick response! You’ve been a godsend. So last follow up question is when it is time to file my taxes (I usually do them in April), does it really affect how I file my taxes or complete my 8606 form (since the 1 penny will likely round down to 0)? This is the first time I’ve attempted the backdoor roth method.
Warm regards,
Vincent
No, it doesn’t affect it. $6,000.01 becomes $6,000 on your tax forms.
I have secured your website looking for the answer to a question I have but didn’t find it so I thought I would post this question. We made a post tax contribution to a traditional IRA in 2015 with the intention of converting it to a Roth. However life got in the way and we didn’t do the second step. So we still have the traditional IRA that has earned some interest that is under $100. Since we didn’t make the tIRA in 2018 how do I report this on 8606 assuming I convert it to a Roth? I know I will have to pay the taxes on the interest but since it’s a small amount I just want to do that.
The bad news is it sounds like you need to file 1040Xs and 8606s for 2015, 2016, and 2017.
The good news is if you do the conversion now, it’ll all be cleaned up after filing your 2019 8606 in April 2020.
How to do it? Just follow the instructions. Report the amount converted on line 16. The basis goes on line 17. The taxable amount ($100) ends up on line 18.
Just did my 2019 traditional IRA contribution at Fidelity. Is there a reason it has to be invested (such as in a money market) or can I just leave it in the settlement CORE FDIC-INSURED DEPOSIT SWEEP until it’s ready for the conversion?
Last year I had invested it in SPAXX money market fund, but by the time Fidelity let me covert to the Roth it had earned enough to be taxed. Not a big deal of course as you showed in your post – but trying to simplify the 8606 if I can. (and to not worry about how many pennies are accumulating and if the IRS will repossess my dog!)
Thanks!
You can leave it in the sweep.
In June of 2018, I made a backdoor $5500 contribution and then 5 days later made the conversion. I logged in today (1/4/19) and notice there is still $2.14 in the tIRA Vanguard Money Market Settlement Fund. From the Account Activity records, it appears as if there was a Dividend Reinvestment of $1.35 which then grew to $2.14.
– From reading the previous responses to similar questions, I should make a contribution of $6000 in 2019, but sweep the $2.14 (or whatever that grows to) in with the money when I make the conversion (so…if I did it today, it would be a conversion of $6002.14) and then pay taxes on the $2.14 with my 2019 taxes. Is that correct?
Also, should I change the dividends and capital gains distribution elections so that this doesn’t happen again? Or, is it only an issue because of the 5-day wait between contribution and conversion?
Thank you
Yes.
I don’t think you can. Even if it is only one day, it’ll earn something.
I forgot to convert and it made $10.15. since its beyond pennies, whts the best approach. convert the whole 6010.15 or leave 10.15 there.
Convert it all. You’ll owe tax on $10. I think I did a 40 cent conversion once just to keep it clean.
sorry to bother. but a quick question
I did a Roth Conversion, and I tried to move all of my money to 401K before the move
I was left with about 250$ leftover in my tIRA (6250$) and I converted it all to roth
where can I go to calculate how much will be owed on this extra 250$?
I have tried searching online for a calculator or a formula, but maybe I’ve missed it
thanks
Multiply $250 by your marginal tax rate. It’ll likely be between $50-100.
You’ve helped me in the past and hope you’d be willing to do so again – this time albeit should be much simpler! We converted my wife’s 2016 and 2017 IRA contributions last year, a total of $11, 001. She earned a mere $1 in interest as we didn’t do this quickly enough. Her total basis was netted to -1 for 2017 and earlier. She made a 5500 contribution Jan. of 2018 and converted that the same month. Line 1 will of course read 5500, but how do I fill the rest of the form given her current basis is -1?
On the other side of things, I myself converted 3 years of IRA contributions last year (2015, 16, and 17) and actually lost money. I converted 16,401 last year which left me a basis of 99 for 2017 and earlier years. How do I reflect this for 2018? I also contributed 5500 for Jan. 2018 and converted that.
Net question is really how to handle my wife’s -1 basis and my positive 99 basis and how to reflect that on the 2018 form correctly.
Thank you so much for your help!!
I’ve scanned through the comments on this post, and didn’t see a similar situation to mine, so I hope you can help me.
All these people who are asking about their IRA gaining money before the conversion and having to pay taxes? Well, I’ve got the opposite problem. One of our IRA’s lost money in between the contribution and the conversion to Roth, about $499 (it was our first attempt at this, and we forgot to do the conversion for about eight months).
So, on my 8606 I’ve got $5001 on line 8, which leads to a basis of $499 on line 14. Except, I emptied out the IRA, which means it doesn’t have any value. I know that value will end up going on line 2 of next year’s 8606. And, with the tax law changes, I’m under the Roth threshold again, which means I won’t be doing the backdoor Roth this year.
Does this mean I’ll have to carry through and keep filing 8606’s every year with just this basis until some day I open up an IRA again and hopefully make that money back?
Am I filling something out wrong? How can my basis be higher than the amount that I actually have in my IRA?
No, you’re doing it right. I don’t think the IRS anticipated that scenario very well.
https://www.bogleheads.org/forum/viewtopic.php?t=188326
I think you’ll basically be carrying that $499 forward for many years, but at some point you may be able to use it to your advantage.
How much tax will I owe on the cents? How is this determined? For example $2.60?
Thank you
Tax forms are rounded to nearest dollar.
Couldn’t find this question answered anywhere. I had a roth IRA set up as a resident and contributed $5500 to it in summer 2018. I graduated, and my attending salary pushed me above the limit for contribution so I had that $5500 (and the $260 it gained) re-characterized into a Traditional IRA in February 2019. I did not immediately convert it back to my Roth so now I have $6110 sitting in my traditional IRA (as it continued to earn money). Am I correct in wanting to contribute an extra $6000 now (for my 2019 contribution) and then converting all $1210 of it to my roth IRA? And then how do I report this on the 8606?
You must have a 401k or 403b now, no? If you do, might be simpler and less of a hassle (tax-wise) to roll your traditional IRA into the above, THEN perform your backdoor Roth conversion to avoid pro rata restriction. At least that’s what I’d do.
You wouldn’t want to do that because the dollars are post-tax in that traditional IRA because he didn’t qualify for a deduction.
Sure, I’d do that. Just work through each line of the 8606 ad it should be pretty straightforward. You’ll end up owning taxes on the $610. No biggie.
Thanks for the info on opening business and creating individual 401k.
If I do day trading on the side (currently report profit/loss under Schedule D & 8949), can I consider that a business, create EIN, report profit/loss on Schedule C (without Schedule D) without creating LLC or S corp?
With your instructions of creating EIN, reporting income on Schedule D, is there opportunities to also deduct business expenses? (I know i’m probably milking it, especially since the main purpose is to move IRA fund to indiv 401K, but just curious).
Seems a little squirrelly. Better run that one by an accountant.
Contributed $6000 to Vanguard TIRA, it grew to $6000.53 once shares became available for conversion. So $6000.49 was converted to Roth and $0.04 was left behind. Maybe this will not cause extra paperwork.
I wouldn’t think it would.
Thanks very much for the extremely helpful posts.
I had a question question about your calculation for Line 11 on the form. Multiplying line 8 (5501) by line 10 (0.999) gives 5495; however 5500 is entered on line 11 – is this rounding up ok? Unless I am missing something simple.
I ask because i have a conversion of 6003 for 2019 year x0.999 = 5997 (or 6000?). The former triggers a basis in traditional IRAs in line 14.
Thank you for your help.
This shouldn’t matter much. But I think your answer is in line 10, where it says AT LEAST 3 places. Line 10 comes from dividing line 5 by line 9. Line 5 is 5500. Line 9 is 5501. 5500/5501 = .999818…. If you round that to 3 places, it rounds to 1, not .999. But it appears when I did the math that I multiplied by .999818, which gives you 5500. I suspect that is how most tax software does it too. Because it’s AT LEAST 3 places.
Great clears it up. Thanks very much
I actually have $3.96 in earned interest while doing my 2019 backdoor Roth conversion. Will I be able to report it in my 2019 taxes filed this year and report it as stated in line 16?
Yes, you’ll owe taxes on $4. No biggie.
My backdoor Roth conversion for 2019 has $3 in profit on the initial contribution sitting in the money market before I did the Roth conversion. I’m using FreeTaxUSA for my taxes. My current issue is how the software is filling out my Form 8606. It leaves lines 8-11 blank. Still gets to the correct total on line 13 (nontaxable portion of distributions). It also is still doing lines 16-18 properly and showing $3 as the taxable amount (line 18). My question is whether leaving lines 8-11 blank on Form 8606 will cause some sort of issue, maybe in an audit situation? It seems the software has calculated the taxes appropriately even though those lines are blank. By the way, your website has changed my life, and I am forever grateful.
I doubt the IRS will care and you’re welcome.
So if I have .62 cents from interest in my IRA when I do a backdoor roth and wait until next year to convert it with my $6,000 does that mean I need to include the .62 cents as pro rata for that previous year?
Just convert it now.
It’s from last year.
Bummer. But still not a huge deal. So you’ll owe tax on $1 and your paperwork is slightly more complicated.