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!
Hi there, great post ..one question ..when I initially contributed to tIRA, my money was held for a few days before it was available to convert to ROTH and in those few days, there were earnings of $1.01. I converted the entire amount to ROTH. Obviously I need to pay taxes on that $1.01 ( $1 rounded) – right ?? you have shown an example of how to report this earning above in the post ..can you please show an example of how to report if your initial tIRA contribution was after January 1st and before Apr 15th, 2020 ( contribution for 2019) and then also had small earning at conversion time ?
Yes.
I’ll think about another post combining the pennies post and the late one, but I think you can figure it out if you just follow the instructions:
https://www.whitecoatinvestor.com/late-contributions-to-the-backdoor-roth-ira/
Thanks, the late contributions post was very helpful. I really like how you are showing the current year and the following year side by side. One more question if you don’t mind, since I am only filling out 4 lines now ( 1,2,3 and 14), I really am not sure where my 1.01 taxable amount will go ..here is my thinking for tax year 2019 – please correct me if I am wrong:
Line 1 :6000
Line 2:0
Line 3:6000
Line 14: 6000
This is the same as you show in the post .. I don’t think I need to report the 1.0.1 this year, instead, it will be next year – correct ?? i think i file the form 8606 exactly as you show in the post (with $6000 as amount instead of 5500 of course) for tax year 2019 – correct ??
Next year ( assuming I make another 6000 contributions and also convert to roth before Dec 31 for the year 2020) will look like below :
Line 1 : 6000
line 2 : 6000
line 3 : 12000
line 4 : 0
line 5: 12000
line 6 & 7 : 0
line 8 : 12001.01
line 9 : 12001.01
line 10 : 0.999( 12000/12001.01)
line 11: 12000 ( 0.999*12001.01)
line 12 : 0
line 13 : 12000
line 14 : 0
line 15 : 0
Part 2 :
line 16 : 12001.01
line 17 : 12000
line 18 : 1.01 ( this is my taxable amount for tax year 2020, not for year 2019 – correct ??)
Please let me know – appreciate your help !
It gets reported where you say how much you converted, line 8. No need to include the penny.
Thanks – I will drop the penny, looks correct otherwise ?
I didn’t plot it all out line by line, you’ll have to hire an accountant if you want that service. I made sure you added the $1 on line 8 and that it showed up at the end. But since you got those right, the rest should be fine.
Thanks very much
So a couple of days ago I contributed 6000 into a traditional IRA and was planning to roll it into a Roth IRA to do a Backdoor Roth when the funds were available. I was finally able to do it today, and the traditional IRA grew to 6637! So I freaked out and just converted the 6000 to the Roth. Then I did the 637 as another conversion to the Roth…..So would I treat this like the “87” cents example you listed in the post? Help!
Yes. You’ll owe taxes on $637, but no big deal.
Phew thanks so much :).
Can you explain why when filing your tax from on Part 1 line 11 (multiply line 8 by 10) you get $5500 on that line rather than $5495 which is actually 0.999 x $5501? I understand that your taxable component should only be $5500 but the math doesn’t work out. Are you allowed to round up by $5? Thanks for any help!
First, I don’t think the IRS cares either way, so don’t worry too much.
Second, I think you’re technically right per the form you’re only supposed to go to three digits.
Third, that’s not actually the error. The error is that line 10 should be 1.000 because 5500/5501 = 0.9998 which rounds to 1.000, not 0.999.
Fourth, you made an error too. $5501*0.999 = $5495.50, which is rounded to $5496.
Like I said the IRS doesn’t care much but if they really did, line 11 should be $5500.
I find myself always coming back to this post. Perhaps a silly question but one I hope you can help address. I’ve filed the 8606 the last handful of years to report my nondeductible contribution and subsequent conversion. What I’ve recently struggled with is line 2 and general basis. I don’t want to find myself paying taxes twice so am unsure what I should be reflecting here. It specifically calls out ‘total basis in traditional IRAs’, which year after year should be zero since I’m converting all funds. My wife has 99 in line 2 for her 2018 basis (I’m not totally sure why), but would she essentially carry over 99 every year to each form 8606? Sorry if this doesn’t make sense – I’m just trying to be sure I reflect basis the way I should be so I’m not paying taxes twice.
I had a 40k roth ira balance before having to do back door conversions the last 5 years – all of those funds are after tax dollars as are my wife’s (she’s only done back door the last 5 years). I want to be sure form 8606 tells that story correctly. Thanks for any insight – it’s very much appreciated.
-Frank
If you’re doing this every year, that line is always $0.
I’m not sure why your wife has $99 either. Were they earnings from a prior year? Why not convert that $99 into the Roth IRA to clean it up?
The $99 was actually for me and my CPA put it on my wife’s form in reviewing. I don’t fully believe he knows what he is doing and that is super frustrating.
I, for myself, converted 3 years of nondeductible IRA contributions to my Roth in 2017 (2015, 2016 and 2017). So my 8606 for 2017 read 11k for line 2. I ultimately only converted $16401 instead of the full $16500 because I lost a small amount of money. So on line 14 where it asks for my total basis for 2017 and before, I wrote down 99 – the different between the two amounts.
In 2018, that 99 was listed on my wife’s form for line 2, instead of mine… although I’m not even sure I need to put 99 anywhere moving forward or perhaps the 99 was a mistake all together? My 2018 8606 just read $5500 contribution and conversion with zero basis and imagine my 2019 should read $6000 for contribution and conversion with zero basis. Is that correct?
My continued confusion is around basis. If basis is money that has already been taxed, why would I even have 11k listed on line 2 for 2017 in the example above? Everything has always been a nondeductible after tax contribution so in my head my basis should always be zero.
I truly appreciate any follow-up color to the above. I know it’s not something you might love doing! Just want to fix what I need to fix so I can get back to reporting every year with simplicity. Thanks so much.
-Frank
In 2020, I contributed $6,000 to 2019 IRA and $6,000 to 2020 IRA. Waited 1 week to convert and got$1.40 for money market interest. How do I report the interest? Would the$ 1.40 divide between 2 years or shift it all to 1 year?
I forgot to file 8606 for 2019.
Round down to $1 and add it to the amount converted on line 8. Conversions are not “divided” between years, the entire $12001 conversion is reported on your 2020 taxes, the year you did the conversion.
And file a 1040X with an 8606 for 2019. You’ll just report the $6,000 contribution on that form. Your basis (line 2) on your 2020 form will be $6000.
Hi,
I have an tIRA with $190K balance and $5K basis (from a previous year backdoor conversion) as of 12/31/2020. I have also done a backdoor conversion of $6K in Jan 2021. Can I still rollover my pre-tax money from tIRA into a solo 401K? If yes, should I do it in 2021 or wait for 2022 and do the rollover first and then do the backdoor roth contribution after that?
Yes.
2021 or your conversion done in January 2021 will be prorated.
Finished my back door with WCI help and then converted by 401k into a consolidated IRA. All good.
I just received a sizable check from a securities settlement litigation. The stock had been held & then sold in my 401k.
The check they sent is made out to the closed 401k.
Q: Can I deposit this into my IRA? Do I need the plaintiff firm to reissue it? How do I instruct my financial institution/ brokerage regarding the deposit? It’s not a contribution, just a recouping of some of the loss from the stock sale made in 2017 while the stock was still held in the 401k. Conversion of the 401k to IRA happened later in 2018.
See if the IRA will take it. If not, have them reissue it. If they reissue it to you, get it into the IRA right away or it’ll be considered a withdrawal.
There is still something not clear to me here. For background, I did a Roth conversion for the first time this year in Fidelity. They make you hold the money in the tIRA for 7 days. Nothing grew during that week so I made the conversion of $6k to my Roth. However, the next day, I saw my tIRA have $0.01, presumably Money Market growth from the $6k over the span of that week.
Can I not just make a 2nd conversion of 1 penny now so the total on the year would be $6000.01 which would just then be rounded down to $6k flat on the 8606? If so, why do you recommend holding it in the tIRA and converting with your Roth conversion the following year? Why not just do it right now while the money is guaranteed to be low?
This may seem minor but your original post about the pro-rata rule states “You want this number to be zero. Make it zero.”. So I’m nervous about having that penny sit there and grow in my tIRA over the next year and then having some sort of balance on Dec 31st. This info seems a bit conflicting to me, so could you please advise?
I just read a few comments of people with my same situation that I previously missed in which you seem to indicate that I should just be able to simply make a 2nd conversion of that penny and just round down $6000.01 to $6k flat on my 8606. To save you time, could you just state yes this is correct or no?
In any case, thanks a lot for making this fantastic source of info!
I see a few more recent posts that I missed with others experiencing the same issue as me. To save you time, can you just state if it’s correct that I can just make a 2nd conversion immediately instead of waiting until next year?
Thanks for this great source of info!
Yes, that is an option. You’re not saving me time by asking four times though! 🙂
Lol – I had some PC issues last night, thought my responses weren’t loading for some reason 😀 Thanks a bunch! I decided to just transfer the remaining penny from the tIRA over to the Roth for peace of mind. Fidelity also thought that that would be acceptable. Thanks again for being such a fantastic resource! I have bookmarked this page for next year’s meltdown 😀
Sure, if they let you. But you don’t need to sweat it. As far as the IRS is concerned $0.01 is $0. How much do you think that penny is going to grow at 0.05% or whatever the MMF is paying? It’ll take a century to make another cent.
I see a few more recent posts that I missed with others experiencing the same issue as me. To save you time, can you just state if it’s correct that I can just make a 2nd conversion immediately of one penny instead of waiting until next year?
Thanks for this great source of info!
Hey WCI, first off, I would like to say that I really appreciate this post and the time and effort you put in answering all of the questions on this page and on the website as whole.
I am in a similar situation to the ones who have already posted – I made a 6k contribution to a traditional IRA account in Fidelity for the first time in 2021 and converted it to my Roth account about a week after (the earliest time it would allow me to). When I checked a couple of days ago (January 1st 2022) I just noticed that I had 0.01 balance in my traditional IRA. My question is, would it matter if I just left this 1 cent in my traditional IRA, given that the status of the backdoor Roth is currently up in the air in 2022? And just to clarify, if I leave this cent in my traditional IRA, it won’t have a significant effect on my Form 8606 and for taxation purposes?
Also, what are your thoughts on the backdoor Roth for 2022?
Thanks for your time and happy new year!
No.
No.
I completed my 2022 Backdoor Roth IRA today. If Congress changes the rules (unlikely) and applies them retroactively (very unlikely) they’ll need to also provide a way to reverse the BD Roth IRA process, because none currently exists. If it happens, I’ll do a post to show you how to reverse it, but I think it’s pretty unlikely.
You know it’s really funny. This whole post was written to answer your specific question, but you still feel a need to ask it personally. Our CTO James points out that sometimes people really just want reassurance rather than information. So here’s your reassurance, you’re going to be fine. There was $0.01 left in my traditional IRA all last year, I still reported it as $0 on my Form 8606. Nobody cares.
WCI,
I have a question(s) regarding the value ( or not) of a Single Premium Deferred Annuity.
Second question is about the value (or not) of a Qualified Longevity Annuity Contract.
As an ex-Physician aged 65, ( and many of your readers) I’ve already accumulated an IRA account value that will, after Secure 2.0 passes ( assumed) necessitate MRD at age 74.
That amount plus Social Security ….if little value is added over the next ten years AND tax bracket rates remain as low as they are…..give me an AGI ( 85% of SS + MRD) that is already in the current mid-24% bracket.
The Single Premium Deferred Annuity requires ten years to complete before full liquidity ( you can take out 10% annually) that puts me at age 75 and therefore ALL income derived from that product would come out as regular income…and likely with other investment income be taxed at the current 32% rate……there’s a high water mark of zero losses in these products and capped participation gains related to the S&P or a Fidelity Factor weighted investment formula (the latter assuming less risk). Still, losses in the Market adjusted to the zero loss high water mark minus fees of 1.5% means the account drops in value slightly. That’s ok over a ten year span….the big question for me at my age ( and any similarly older physicians who’s MRD and SS will push them into a higher tax bracket, is whether it makes much sense.
The Qualified Longevity Annuity Contract seems, except for the dollar limit ( ~135K) to be a reasonably smart play as it drops your Total IRA amount subject to MRD and defers it until up to age 85 when the product has to start distributions.
Seems like a reasonable hedge regarding extended Age and running out of money etc.
I don’t know how to start a new conversation on your site. So my apologies to adding this new question into the Roth conversion conversation.
Thanks in Advance and Happy New Year.
Frank
As far as starting new conversations on the site, the best places to do those are our communities–the WCI Forum, the White Coat Investors Facebook Group, and the r/whitecoatinvestor subreddit. You can also search the site for your topic and post a comment there, but it’ll have a lot fewer eyeballs on it.
As a general rule, I’m not a huge fan of annuities. Are there exceptions? Absolutely.
A good SPIA is one of them.
For someone who wants “longevity insurance”, a single premium deferred annuity can make a lot of sense. But JUST as an investment? Not a huge fan. I’d rather see it done without the insurance wrapper.
QLACs are just deferred annuities bought with retirement account money. If you don’t want the deferred annuity/longevity insurance, don’t buy the QLAC.
As a general rule, I’m not a fan of equity indexed annuities or life insurance. Too many moving parts and too many promises that aren’t what most understand them to be when they buy them (get stock like returns without the risk!)
You seem driven by a “fear” of RMDs that I think is probably inappropriate. Read more here:
https://www.whitecoatinvestor.com/dont-fear-the-reaper-rmds/
You also seem concerned about running out of money. Is that a realistic concern for you or just anxiety? If realistic, then consider single premium annuities, whether immediate or deferred. But buy them for the insurance value, not the investment value.
WCI,
Thanks for the fast response and the info on starting a new question.
I’m less concerned about “running out of money/ living too long” and more focused on the investment value of these products. My comment on the QLAC deferring monies from MRD and stretching the process to age 85 was only to highlight a potential benefit.
I’m also not concerned about MRD’s. Mostly highlighting that considering additional investments that pay out as ordinary income ( I’m assuming that the annuity payment are not qualified dividends etc) you have to factor in what the tax will be to weigh the true value of the investment.
What makes SPIA’s a “good” annuity, in your view? Simply the recurring income or is there something else?
Thanks again
Frank
They’re just really straightforward and easy to compare and price. You give a lump sum. You get a guaranteed monthly return the rest of your life. Nowhere to get confused. Plenty of competition to ensure fair pricing and low commissions. Think of it as buying a pension from an insurance company.
Thank you for this wonderful article. How do you determine/estimate the tax penalty of converting a traditional IRA directly into Roth IRA without doing the back door. You mentioned that < 10K in a traditional IRA is small and might be okay just converting directly and paying the tax bill, while 100K is large and one should probably do a backdoor IRA to avoid a large tax bill.
With pre-tax money, it’s the amount of money multiplied by your marginal tax rate. In the 24% federal bracket and 6% state bracket and you convert $10K, it’ll be $10K * 30% = $3K that you owe in taxes.
But you’re misunderstanding my point about clearing out an IRA in order to be able to do Backdoor Roth IRAs without proration. If you have a large pre-tax IRA, then roll it into a 401(k) instead of converting it.
Thank you for that explanation.
Hope someone still checks this.
I put 6k in my Traditional IRA, and kinda let it sit there for a while. So now we are no longer talking pennies and it’s more like $4.59. Now I have a few questions.
1) Can (should) I just move 6k to my Roth IRA and leave the rest in the traditional for next year?
2) can (should) I just move 6k and take out the $4.59 back into my bank account?
3) can (should) I move the entire amount and pay taxes on the $4.59?
1) No, move $6,004.59
2. No
3) yes
Sorry for the follow up.
After moving the $6004.59, now there’s an additional $1.51 in the traditional account. Now what?
Roll it over or leave it there and roll it over next year. It should still round to zero in the pro-rata calculation.
Hi Jim,
Excellent post. Thanks for all that you do. I had this issue with my traditional IRA accruing $2.57 cents while sitting in the money market for 2 days prior to the conversion. Fidelity sent me a check for that amount and the traditional IRA account is now at $0 to be in compliance with question 6 of form 8606. Are the steps for reporting this transaction basically the same when filling out form 8606 as those you outlined in the post?
No, that’s an IRA withdrawal. Not sure why you did that instead of just leaving it or converting it into the Roth IRA, but it would be reported differently.
Thanks for clarifying. I’m relatively new to the WCI community, hadn’t come across your post, and had reached my $6000 contribution. It seems like it’s not an issue to roll over a few extra dollars to the Roth IRA and pay taxes on that, and probably simpler for tax time. Would leaving it behind in the traditional IRA not be an issue for the pro-rata rule?
If you convert a few extra dollars, you pay tax on those few extra dollars. If you leave them in the IRA until next year, you get pro-rated, but the pro-ration is trivial. Either way, doesn’t matter. That’s the point of this post, that every one gets all worked up about those few dollars and they don’t matter no matter what you do with them. IMHO, easiest to just convert them.
Thanks for showing form 8606 example. I don’t understand why line 6 is “zero” and the extra dollar (the rounded interest earned dollar) doesn’t show up until line 8?
2022 is my first back door, I’ve got $1.74 in the traditional IRA settlement fund.
If I’m reading line 6 correctly I need to round my balance to $2 and put in in line 6 on the form, ya?
Is your example from the subsequent year?? Would I fill it out like you in 2023 assuming I get it properly cleared to zero in 2023?
On your form did you not exceed the $5500 Roth limit from that year by contributing $5501?
6 is the amount in your IRAs at the end of last year. The “extra penny problem” (or extra dollar problem) doesn’t affect that issue. Line 8 says $5501 in the example in the article.
If you roll (convert) that $1.74 into the Roth IRA, you’ll owe taxes on $2, but you’ll still have $0 on line 6 and $6002 on line 8. If you don’t convert that $1.74 in, you’ll have $2 on line 6 and $6000 on line 8.
The $6000 limit is for contributions only. There is no limit on conversions.
Did that answer all your questions?
I deposited $6000 to traditional IRA in year 2022, also I did the roth conversion of it in year 2022. But the money market account in traditional IRA gave me $1.13. Should I convert it roth as well or just pay taxes on it by following the steps here https://www.whitecoatinvestor.com/pennies-and-the-backdoor-roth-ira?
Yes, just convert it.
Thank you so much for this amazing post! I am in the latter category where my interest of $0.63 will round to $1 and I will pay taxes on it. In your video on Form 8606, I recall a question on the form asking if the balance was $0 on 12/31 for the tIRA. Is it OK to convert this $0.63 from tIRA to my Roth given that I have already maxed my Roth for this year? This is my first time doing this and understanding conversions vs. contributions. Thank you so much for any explanation!
Yes. The $6K limit is only for contributions, not conversions. Technically your $0.63 will round to $1, but your proration should still be $0 so you’re fine.
Thank you for this incredible article! I come back to it year after year and always find it so helpful.
So, I understand needing to pay tax on any interest earned on the $6,000 between funding my traditional IRA and converting it to a Roth IRA. However, are such rollovers subject to the same excess contribution rules as traditional (as opposed to backdoor) Roth IRAs, also? As best I understand it, if you overfund your Roth IRA (i.e. deposit $6,500 instead of $6,000 for tax year 2022), you either have to withdraw the excess contribution ($500 in this case), recharacterize the excess contribution, or pay a 6% tax penalty on the excess contribution every year until you’ve done one of the above or applied the excess contribution to a future year.
In other words, beyond having to pay tax on the interest earned on the $6,000 prior to the rollover, do you also have to reconcile the excess contribution if the total amount rolled over ends up being in excess of the annual contribution limit?
Thanks in advance!
No. It’s not an excess contribution. The contribution was just $6K. You’re not overfunding your Roth. You can do a Roth conversion of any amount at any time. No such thing as an excess conversion and the fact that you did a conversion doesn’t change the fact that you made your contribution to the traditional IRA.
Thank you! Very helpful.
@thewhitecoatinvestor
I may have a little variation that I’m curious about how to handle as I haven’t run into or seen it before. I have been doing backdoor Roth’s for the past 3 years without issue. This year, I contributed $6500 on 1/6 to my Vanguard MMF. It took 3 days for it to settle to allow me to covert it to my Roth IRA on 1/9. When I did the conversion, it showed a converted amount of $6502.26. Apparently, Vanguard payed me a $2.26 dividend after having the money in the MMF over those three days (it’s specifically listed as dividend, not interest on transactions). It “auto swept-in” to the Roth account though, and shows 0 cents in my traditional IRA. Is this going to create an issue? Will I just end up paying taxes on the $2.26?
Thank you for the help
No.
Yes.
Thank you
I converted 6k tIRA, but gained $7.56 dividend after conversion.
The $8 was there 12/31, and it’s still in tIRA.
I have 9k total in roth IRA now, including the $6k rollover.
Will I be pro rated on the $8 or $6k?
is there anything I can do now? convert now or later when i have 6k total in tira?
$8. The tax consequences will be like $3.
Convert it this year so it doesn’t happen again next year.
In January of this year (2023) I contributed 6500 to my traditional IRA. I waited one business day then converted the 6500 to my roth IRA. At the beginning of February I received 70 cents in dividends from the money market fund. As I understand it, I can either roll over the 70 cents this year (2023) to my roth IRA and pay the taxes, or contribute 6500 in 2024 to a tIRA and convert 6500.70 in 2024 and pay the taxes thereafter, is that correct? Leaving the 70 cents in this year and converting it next year in 2024 would trigger the pro rata rule, but the only consequence of that would be paying taxes on that 70 cents next year?
Sounds like you’ve summed up this blog post well.
Hi! I did a back door Roth conversion on January 3rd of 2023. This is my first time so I did a make up contribution of 6000 for 2022 and 6500 for 2023. I converted from my settlement fund of the traditional IRA to the Roth 3 days after opening the account. Now I notice I still have $4.42 still in the traditional IRA in the settlement fund. What’s up with that and how should I deal with it?
Also- I sent my accountant to your website to do the paperwork correctly. He said because the conversation for 2022 happened in 2023 that he won’t report it until next year. Thoughts??
I don’t understand. You’re leaving this comment under the post that tells you what to do with it. What else can I write in this post to make it more clear? convert the $4.42 into the Roth IRA. You’ll owe taxes on $4. Worst case scenario you don’t and you get prorated on $5 and owe $1 in tax, the same $1 in tax you would owe for the conversion and next year you just convert $6505.
Your accountant is correct. All that will be reported on your 2022 8606 is the $6K contribution. The conversion will be reported on your 2023 8606.
Sorry- I’m so new at this. I just wasn’t sure if I could convert it immediately.
My tax accountant said to report 2022 and 2023 next year…
Conversions in the year they’re done. Contributions in the year they’re for.
Hi, thanks so much for the helpful article. So I did the Back Door Roth conversion in 2022 and have $3.80 left in my traditional IRA earned from interest. I am planning on leaving the $3.80 there, contributing $6500 to my tIRA in 2023, and converting all the money ($6503.80) to Roth IRA in 2023.
I’m now filing taxes for 2022 and I’m not sure how to report the $3.80. Do I include this on Line 6 on form 8606 and this becomes pro-rated? Or should I still report $0 on Line 6? Thanks so much!
That’s fine. $4 goes on line 6.