By Dr. Jim Dahle, WCI Founder
In personal finance (and in 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've been answering this one about Backdoor Roth IRAs for years and years. (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 3,500 comments below that post where you will see variations of this question asked dozens of times.)
At any rate, I decided long ago 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. Now, I'm republishing it for those who missed it the first time. 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 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 I was appalled to find out that, over the three days I had that $7,000 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. If you do a Roth conversion of $7,000.37, all the IRS knows (and cares about) is that you converted $7,000. 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.
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. 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 2024, and money market funds actually pay interest. 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 $2 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 $7,000 that you contribute for next year.)
More information here:
How to FIX Backdoor Roth IRA Screwups
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. The Backdoor Roth IRA doesn't work so well if you have a business where you are making SIMPLE IRA or SEP-IRA contributions each year. 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 where you are no longer making contributions. (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 it's free. You don't need an LLC or an S Corp or even a name separate from your own.
Step 2: Make some money. It doesn't have to be much. Ten dollars is fine, but even better if it is enough money that someone gives you a 1099. 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. You can contribute 20% of your self-employed income if you like (report it on Form 1040), but it's not required.
Step 4: Roll that pesky IRA over to the individual 401(k) before December 31.
Step 5: Do the Backdoor Roth IRA as usual. (Contribute $7,000 to a traditional IRA, then convert it tax-free into a Roth IRA.)
Voila! You can now invest $7,000 a year ($14,000 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.
More information here:
How I Failed and Then Mastered the Backdoor Roth IRA
The Backdoor Roth IRA When Life Is in Flux (and Why to Beware a Contribution in January)
What Does the IRS Say About Backdoor Roths?
The IRS didn't really weigh in 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 asking a few clarifying questions) about the Backdoor Roth IRA (please send me details if you know of one), and there has not been a tax court case resolving this issue. But I found out a few years ago that the IRS had at least said something about it, although what it 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.'”
Nobody in Congress or 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?
[This updated post was originally published in 2017.]
Am I reading the following correctly:
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.)
Whether we decide to convert to Roth IRA or leave it in the tIRA, 8606 should be filled out for both cases for the tax year the dividend is received in?
Thanks!
The 8606 should be filled out for any year you do a non-deductible contribution for or for any year you do a Roth conversion in. Dividends are irrelevant to whether or not you need to fill out 8606.
I’m having a hard time on this part:
“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.)”
What leads to the proration? I’m not sure how leaving it in the tIRA leads to a proration
Thanks
Thanks for this post. I’m still a bit unclear though. If my Traditional grows to $6505 while I wait to do a conversion, I convert the ENTIRE thing to a Roth and just pay taxes on the extra $5 when I fill out form 8606, correct?
Yes.
I just want to make sure I’m reading this correctly I have .37 cents and .80 cents extra in my IRA and my wife IRA after doing Roth backdoor conversion for us this year. Are you saying I should transfer this into the Roth making the contribution slightly over the 6,500 limit or leave it in the IRA. Thanks
You mean the conversions slightly over $6,500, not the contribution. The contribution was $6,500 and that’s the limit for contributions. There is no limit on conversions. Either option is fine, but it’s cleanest to just convert it if they’ll let you without much hassle.
Your article is incredibly educational and informative.
But I have a specific question, I moved all the money to Roth IRA, but there’s $1 left in the Traditional IRA due to interest. Before converting the accrued interest, there is a prompt, “I elect not to have federal and state income taxes withheld”. If I click “Yes,” what will happen to the taxes on that amount?
Furthermore, I made a contribution to my IRA during the middle of the year, which falls under Tax Year 2023. If I intend to contribute for Tax Year 2024, am I allowed to make the contribution on January 1, 2024, or should I wait until after the 2023 tax deadline?
Thank you!
You’ll owe them on April 15th.
You can make a 2024 contribution between January 1, 2024 and April 15, 2025.
Great post! Thank you so much for sharing this.
Question – I have 5.06$ interest sitting in Traditional IRA. This is due to money market interest while I waited to contribute to roth IRA(backdoor).
What if I leave the 5.06$ this year in trad IRA? is that better for filling tax OR should i just go ahead and convert it to Roth IRA. I’m not clear which is a better option.
Can you please advice. Thank you!
Convert it. You’ll owe taxes on $5.
Thank you. Is there a deadline when I should complete it? end of Dec 2023? Also can i convert it to the same Roth IRA that I have. Sorry this was my first time doing this so asking so many question to be cautious.
Yes, do your conversion before the end of the year to make paperwork easier, but no technical deadline. Same Roth IRA is fine.
This comment should be pinned. It took me a while to find this. I did a late contribution and conversion (both in Nov), when I emptied my tIRA it showed zero, so did not think of it. But when I came back today to look at my account, there is $1.81 interesting sitting in my tIRA.
So what I did is reported this $2 (rounded up) on 8606 and my question is should I do conversion to ROTH now or do it with my 2024 contribution and conversion step?
Doesn’t matter. Either is fine. It’s only $2. I’d do it before December 31st though.
Hi,
I read the post and the most recent comments. I’m writing to verify something. My spouse put $6500 in her traditional IRA earlier in 2023 with a plan to do a backdoor Roth but she left it in there too long. I see that you advise converting the $5 leftover through the back door and this is more like $70. Does the advice still stand? And I know I’ll pay taxes on it I’ll follow your example that you put in the post for the form.
Thanks,
Tam
Sure. You’ll owe tax on the $70. No biggie.
Hi there!
This past June was my first time doing a backdoor IRA. I contributed $6500 to my traditional IRA. The cash took awhile to settle before I can transfer it so I ended up gaining around ~$2 in interest. I ended up just converting it all. Today, I was checking my fidelity and my traditional IRA earned around ~$2 again in interest (probably when the transfer took awhile). So I converted that again to my Roth IRA. So in total I converted over the $6500. How would my Form 8606 change? Do I just follow the same process you did in the third Q&A prompt above (the one with the $.87 prompt)? Really appreciate the help!
Your conversion amount on line 8 will be $4 higher. So you’ll owe taxes on $4.
I’m doing my re-characterization now because I realize that I’m over the income limit for 2023. My plan was to re-characterize $6500 from my Roth IRA to my traditional IRA this week and once it settles move the $6500 plus any earnings that I had made back into the Roth IRA unfortunately, in this case, I think that it’s going to be, about $500. In this case, will you still recommend moving the $6500 plus the likely $500 of earnings that I made into my Roth IRA and paying taxes on that amount (line 8 on 8606) or should I transfer the excess earnings to a 401(k)? From your comment below it seems like the deadline for this was December 31?
Yes, move it all into the Roth IRA and pay the taxes.
Re your “Start a business” – do you need an EIN? I have been freelancing for quite a while on 1099 and no client every asks me for an EIN – just my social. Or, is an EIN needed to open the solo 401k? And then, can you write an article (if you haven’t already) demonstrating the math of the pro-rata rule messup and how to identify what part you can roll out to that 401k if the funds have been pro-rata’d just once? (ie first time back door Roth screwup).
Oh good, you have a business. Yes, you’ll need an EIN to open a solo 401k. It literally takes 30 seconds and is free.
https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-number-ein-online
Just start using it going forward.
The math isn’t complicated. I’m going to use hypothetical numbers. You can just plug your own numbers in.
You had $57K pre-tax and $6,500 post-tax. Then you did a $6,500 conversion. So you converted $6500/($57000+$6500) =10.2% * $6500 = $665 in post tax money and $6500-665 = $5,835 in pre-tax money. So that leaves you $5,835 in post-tax money. So if the IRA is now worth $51,000, then $5,835 of that is “basis” or post-tax money. So you’d roll $51,000 – 5835 = $45,165 into the solo 401(k), leaving $5,835 behind, which could then be converted tax-free. This all works better if you put it all in cash before you start moving it around by the way.
Incredible Dr Jim. Of course, I’m gonna have to read that over and over with a pen and paper – you know how hard it is for some of us (who are not doctors! I just write those “So doctor…” IVAs reps bang on your door with) to activate our math synapses. I think a great companion post to your Backdoor Roth Screwup series would be this explained with an idiot proof diagram – perhaps using a “coffee and cream” analogy – the $57k is the coffee. The $6500 is the cream. Or the pee in the punch. Whatever! All I can say is so many articles try to explain the math and it’s just not intuitive.
It’s funny how the internet has differing opinions. Eg on the topic of needing a EIN, this post begs to differ with you…
https://www.irafinancialgroup.com/learn-more/solo-401k/do-i-need-an-ein-for-my-solo-401k/#:~:text=There%20is%20no%20formal%20requirement,is%20an%20owner%2Donly%20plan.
“There is no formal requirement that an EIN be acquired for a Solo 401(k) plan since it is an owner-only plan. Many plan sponsors will use the plan participant’s social security number or business EIN as the plan tax identification number.”
Go ahead and try to open one without an EIN and let me know how it goes. 🙂
I agree the business’s EIN is probably fine but sometimes the plan gets its own. But I don’t know of a provider that does it with just a SSN.
Dr Jim, I’m back. I just created a Fidelity solo 401K with a new EIN. (I’ve since read about the power of your mega backdoor Roth solo 401k et al but one step at a time… ).
Now it seems the new solo 401K will solve 2 issues:
1. Taxes on 1099 income: I am yet to pay taxes on $140k of 1099. No one told me about quarterlies etc as I never had this situation before (a lot of “freelance” in my industry is on W2, the misnomer that it is). Reading your posts, it seems I can channel $40-60k into the 401K which is advantageous. The question is how much…
2. Clearing up the 2022 pro-rata rule mess – so I don’t have an ongoing basis tracking nightmare. But how do you figure out what part goes east and what part goes west now it’s a year later? Below is what my accountant filed last year. Do those numbers change because that money has since been sitting in that rollover account for a year?
ENTER THE BASIS IN YOUR IRA(S) AS OF 12/31/21 6,000.
2. ENTER ALL IRA CONTRIBUTIONS MADE FOR 2022.
INCLUDE CONTRIBUTIONS MADE DURING 2023 –
FOR THE 2022 YEAR (DO NOT
INCLUDE ROLLOVER CONTRIBUTIONS). 7,000.
3. ADD LINES 1 AND 2 13,000.
4. ENTER THE VALUE OF ALL YOUR IRA(S) AS OF
12/31/22 (INCLUDE OUTSTANDING ROLLOVERS). 52,027.
5. ENTER THE TOTAL IRA DISTRIBUTIONS RECEIVED IN
2022 (DO NOT INCLUDE OUTSTANDING ROLLOVERS). 7,000.
6. ADD LINES 4 AND 5 59,027.
7. DIVIDE LINE 3 BY LINE 6 (NOT MORE THAN 1) 0.2202382
8. NONTAXABLE PORTION OF THE DISTRIBUTION.
(MULTIPLY LINE 5 BY LINE 7) 1,542.
9. TAXABLE PORTION OF THE DISTRIBUTION.
(SUBTRACT LINE 8 FROM LINE 5) 5,458.
10. AMOUNT ON LINE 9 ALLOCABLE TO AMOUNTS
CONVERTED TO ROTH IRAS BY 12/31/22 0.
11. TAXABLE PORTION – ADJUSTED FOR CONVERSIONS
(SUBTRACT LINE 10 FROM LINE 9) 5,458.
Fidelity told me to speak to my “tax advisor” as all they do is hold the bag. I assumed “tax advisor” =
accountant – that I could give him/her the above pro-rata sheet + a copy of last year’s return + a list of potential expenses to date – and they’d tell me what goes where.
But they’re saying I need to speak to a “financial advisor” who in turn say I need to “speak to my accountant.”
Don’t they need to speak to each other? Isn’t there someone who can just do this? I welcome you recommending someone. I just need to know I have the numbers right. My old accountant retired and I’m discovering accountants are are either non-available, non-communicable or simply don’t know how to do this stuff and don’t want to know…
While it’s always understood you’re not offering “financial advice” thank you for simply making these things clearer!
Thanks for all the info, and for answering everyone’s questions in the comments. Apologies for yet another variation, but wanted to make sure I’m doing the right thing.
Did a backdoor Roth contribution in early 2023 for tax year 2022 (I know I should’ve done it earlier but was still learning about all the nuances!). It gained interest up to $3.5 dollars after I did the conversion, so I just left it in the tIRA with a plan to do a backdoor Roth for tax year 2023.
I just contributed the 6500 to the tIRA and am waiting for the funds to be available to do the Roth conversion. My plan was to do the conversion with the entire 6503.5 total, and then if any further interest accrues, convert the leftover interest again to make sure that my tIRA balance was 0 by end of year, which means I’ll pay tax on 3.5 plus whatever extra interest I convert.
Any issues with that plan? Not sure if contributing to the 2022 tax year complicated matters (besides making the forms more difficult to fill out). Thanks!
I don’t know why people try to rush this in at the end of the year. I guess you guys like living on the edge.
Yes, convert all the money in the account to minimize pro-ration. If it’s only $3 no big deal, but if you don’t get that $6,500 converted before the end of the year, you may not like the results as much. I guess it doesn’t matter all that much for you given none of that money is pre-tax, but I’d still try to empty it as much as you can before 12/31.
$0.80 was originally visible in my Rollover IRA, then visible in my Roth IRA after conversion.
I converted my $6,500 Traditional IRA to Roth IRA which *only showed $6,500 at the time of conversion…got through the final confirmation page which also showed $6,500. Was happy not to see any pennies.
However, after all the steps were completed, I suddenly saw $6,500.80 in the Roth IRA. What does this mean?? Do the same pennies rule apply here? I don’t believe the $0.80 is from this transaction with the $6,500. The $0.80 was ALWAYS visible in my Rollover IRA, even before the Roth conversion.
Under transactions it’s broken down to:
12/19 Sweep in: Traditional IRA -Settlement fund: -$6,500
12/19 Contribution: Traditional IRA CASH $6,500
12/18 Sweep out: Rollover IRA -Settlement Fund $0.80
12/18 Conversion (incoming): Roth IRA CASH $0.80
12/18 Conversion (incoming): Roth IRA 89.86 shares $4000
12/18 Conversion (outgoing): Rollover IRA -89.86 shares -$4000
12/18 Sweep in: Roth IRA Settlement Fund -$.80
12/18 Conversion (outgoing): Rollover IRA CASH -$0.80
Currently my Traditional IRA AND Rollover IRA both show a balance of $0.00
When I click Roth IRA account I see this:
Settlement fund: $0.80.
Total credits and debits: $6,500
Available balance: $6,500.80
Funds available to trade: $6,500.80
Funds available to withdraw: $0.80
What do I do with the $0.80 in this case? Tomorrow when I buy funds, do I trade all $6,500.80?? Or do I trade $6,500 then separately “convert” the $0.80 and get taxed on it?
Update: As of this morning (Step 3) my total Settlement fund is $6,501.74. I know in a post you advised there’s a rush to complete step 2 after 1, but no rush for step 3. I had completed step 2 when it showed $6,500 in my settlement account. However now I am seeing $6,501.74…should I be concerned and how much should I be investing for Step 3? Does the pennies rule still apply the same in this case?
If you have $6,501.74 in your Roth IRA settlement account you can go ahead and invest it all. There is no conversion or investment limit, only a contribution limit.
Okay great, so I DON’T have to worry about the tax forms on this $2.00? Since my initial conversion was only $6,500?
Thanks for helping this newb.
That’s right. You don’t pay taxes on any money made while in a Roth IRA. If it was made in the traditional IRA and then moved into the Roth IRA you would pay taxes on it.
Fantastic!
Could you make sense of this $0.80 that was in my Rollover IRA *before I converted it to the Roth IRA? Does this $0.80 need to be accounted for (tax-wise) given my Rollover IRA conversion? I really don’t understand the specifics of where this $0.80 came from and just trying to understand it and if there’s anything I should do regarding it on taxes.
12/18 Sweep out: Rollover IRA -Settlement Fund $0.80
12/18 Conversion (incoming): Roth IRA CASH $0.80
12/18 Conversion (incoming): Roth IRA 89.86 shares $4000
12/18 Conversion (outgoing): Rollover IRA -89.86 shares -$4000
12/18 Sweep in: Roth IRA Settlement Fund -$.80
12/18 Conversion (outgoing): Rollover IRA CASH -$0.80
Sadly in residency I didn’t have a clue and paid no attention to the retirement account. I know I made no elective contributions, as it was only after graduation I I was told I had an account and that I could rollover…sad, I know. I just wanted to check in about this account (residency ended June 2022) regarding taxes. Do I need to worry about this account and the rollover (Oct 2022) and the Roth conversion (Dec 2023)? I took a standard deduction on my taxes last year.
1) Do I need to do anything tax-wise for this account either (should’ve last year 2022) or this year (2023)?
2) I don’t know if the 457b was pre-or-post tax…guessing pre-tax…I tried to access the account and documents but since I completed a rollover it looks like everything is deleted on that 457b account.
Oh, it was in the traditional IRA? It’s likely earnings on cash and when you converted it to the Roth IRA you owe tax on that 80 cents.
No, there’s nothing to worry about. It’s not a big deal to be pro-rated on some tiny amount but you’re not going to get prorated anyway.
Convert it into the Roth IRA if they’ll let you. Don’t worry about it if they don’t. It doesn’t matter if you invest that 80 cents or leave it in cash. It’s 80 cents.
Okay to confirm:
1) Try to convert the $1.74 to Roth, and invest the $6,500?
If not possible then
2) Invest all $6,501.74?
For taxes, is this (below) applicable only if I invest all $6,501.74?
Line 16: $6,502.00
Line 18: $2.00
Is there a way to report the “pennies” on the online version of TurboTax (that doesn’t let you view or use the actual tax forms as described in this tutorial)?
I just got my 1099-R from Vanguard and was surpirsed to realize that in the time between my traditional IRA contribution and the conversion to the Roth a few days later, it must have generated $2.14, but I didn’t notice until I went back to look at my transaction history on Vanguard today to figure out why the extra dollars were being reported on the 1099-R. Luckily it all got converted to the Roth instead of staying in the traditional IRA (thanks to the option that Vanguard offers to convert the the entire balance instead of a fixed amount), but now I just can’t figure out how to report this on the online version of Turbo Tax.
Thanks!
Brian
I found that back in the day I had to use the downloadable version to get forms mode and recommend you do the same. Maybe it can be done on the online version, hard to say. I haven’t touched Turbotax in the last 2 or 3 years.
Thank you for this tutorial, your website has been extremely helpful! I left my contribution and conversion until December 2023. I contributed $6500 which earned about $1 of interest before my funds were available to do the Roth conversion. I converted the entire $6501 from my traditional to roth IRA. I later discovered that I received about $6 in dividend payments at the very end of the year into my traditional IRA account. I plan to covert this $6 with my Roth conversion for 2024.
I understand the $6 remaining in my traditional IRA at the end of 2023 gets reported on form 8606 line 6 (gets pro-rata’d). Where I”m getting confused is line 14 ends up totaling the same $6, even after rounding, and it seems like for 2024 this $6 will get carried forward as basis in line 2. As such, it seems like I’m being taxed on this same $6 multiple times (both in 2023 and in next years forms for 2024 in line 2 and line 8)? Am I misunderstanding something ?
You’ll get pro-rated. So you’ll pay tax on $6 in 2023. Then you’ll have $6 in basis for 2024, which won’t be taxed again.
My wife and I did the Backdoor Roth conversion for first time ever in 2023.Unfortunately this was done in December 2023 late in the year. Each of us contributed $6500 to traditional IRA and converted to a Roth IRA and this was successful before the end of the year. By December 28th 2023 the balance in the traditional IRA was zero. However, once we opened the accounts in January 2024 we realized that we had about $5 to $6 each from dividends and interest in the traditional IRA that was placed on December 30th 2023. We have not yet contributed to the traditional IRA or did any further conversions in 2024. What should we do next? How do we report this when we file taxes for 2023?
Thanks for your help!
Just include that ‘$6 in your roth conversion for 2024. You’ll be pro-rated for 2023 but it’ll all be cleared up in 2024 so no big deal. It’s not like getting pro-rated is illegal or that getting pro-rated on $6 is some sort of terrible thing.
I’m in a similar boat as ^^ with unexpected dividend of $10 coming in on 12/29/23 that I did not catch and had converted the $6500 over to roth IRA from tIRA in 2023. I understand I’m geting pro-rated but does that change anything with tax forms? Just do 8606 and IRS will prorated the rest from the $10?
Due to personal circumstances and a very steep drop in income this year in 2023 as well from switching jobs and a hiatus, I don’t think I’ll need to backdoor roth in 2024. Should I just leave the $10 in the tIRA then and contribute $10 less than max to rothIRA in 2024? ($6990? given new limits of up to 7k for 2024 for roth ira)
You’ll have $10 on line six for 2023. I’d just convert the $10 to Roth.
For clarification, do you mean convert the $10 this year for 2023 tax year or convert it 2024 tax year with my regular (non backdoor) roth IRA with my lower income next year
Too late to do it for the 2023 tax year. That’s what I would have done, but that ship sailed 3 weeks ago.
Hi Jim, following up on my first year doing the backdoor roth screw up Q above…thank you so much you are a godsend. If I made it through med school, I should be able to figure this out
Since I converted $10 above in Jan 2024 can I still just have one form 8606 as below? This is what I’m doing for taxes for 2023 with one form 8606 even though I converted 6500 in Dec 2023 from tIRA to roth IRA and then $10 in dividends (that remained in tIRA on Dec 29-Dec 31, 2023) in Jan 2024
line 1: 6510
line 2: 0
line3 : 6510
4: 10
5: 6500
6: 10
7: 0
8: 6500**** –>this part I ‘m somewhat confident it should be 6500 and not 6510? right?
9: 6510
10: 0.999
11: 6490
12: 0
13: 6490
14: 20
15: 0
16: 6500
17: 6490
18: 10
If you left $10 in there, your conversion will be pro-rated, but not a big deal. Just clean it up with your conversion next year.
Go ahead and contribute all $7,000 for 2024. You’re not simplifying anything by contributing $6990. You’ll just report your contribution as $7,000 and your conversion as $7010. Or more likely $7020 because the same thing will probably happen next year. If you want to clean it up, do a second Roth conversion of the dollars earned in the traditional IRA.
I think I’ve got a new twist here. I’ll cut to the chase- Instead of converting my $1.xx to Roth I sent it back into my taxable account to zero out my tIRA account. In doing so I was prompted to withhold tax and did so
Would have preferred to incinerate the $1, but my understanding is it is just subject to the same penalty the excess Roth conversion would cause?
Fidelity ended up giving me two 1099-R statements, one showing the complete roth conversion, the second showing the $1.xx in box 1 and 2, the tax withheld in box 4, and code 1 in box 7.
My question is, how will this change the boxes on my 8606?
There’s no such thing as an excess Roth conversion, just an excess IRA contribution, which you did not do.
IRA withdrawals or distributions (which is what you did) are reported on the 8606 on line 7. So you’d put $1 on line 7 and you’d owe a 10% penalty on it plus taxes at ordinary income tax rates (since it is earnings).
Don’t do that next time. Just convert it.
Did my contribution and backdoor roth conversion in 2023. I had $1 in my Traditional IRA from 2022. After I made my $6,500 deposit on Fidelity, I immediately did the backdoor Roth however only $1 was converted from my Traditional IRA to my Roth Ira because the $6,500 fund was not yet available. So I did the entire process again later that week – this time emptying my entire Traditional Roth (or so I thought).
The next week, I had $8.14 in my Traditional Roth so I did another backdoor Roth conversion.
Do I need to fill out 3 separate 8606 forms for these transactions?
If not, line 8 on form 8606 should just be 6509.14, correct?
Thank you
No. One form. The conversion amount was $6509.
Hi WCI, is the “pennies” conversion something that we need to track manually by ourselves, or is this information all available through Form 1099-R?
For example, I converted $6,050 in March 2023. I didn’t look at my IRA accounts until November 2023, and saw that there was $1 remaining in the Traditional IRA -> converted this to Roth IRA.
That results $51 in gains that I need to report. Do boxes 1 and 2a on Form 1099-R (Distribution Code 2) automatically calculate this and will have $6,051 listed?
It’s all tracked on Form 8606. The amount still in the IRA won’t be on the 1099, but will need to be manually put on the 8606.
When you have leftover earned money in your traditional IRA after doing the back door Roth, can you transfer that money into a Roth 403B without paying any penalty taxes? Do you have to mark your 8606 form in a special way or no since this is a 403B?
Also, when you do a re-characterization, do you have to pay extra taxes if the amount being re-characterized from a Roth IRA to traditional IRA is above 6500 (2023)?
I guess you could, but most would move it into their Roth IRA.
When you do the Roth conversion after the recharacterization, yea, you’ve got to pay taxes on gains.
Great post that I’m constantly referring back to. First year doing a backdoor roth.
After I converted 6500 from tIRA to Roth IRA Dec 2023, I had $8.01 generated in my traditional IRA from dividends in a Money Market Fund in the last week of Dec 2023. Unfortunately, I didn’t catch this until Jan 2024 where I then converted it to roth IRA based on advice above. Will my 8606 tax form still look like your example above or does it get complicated now that they are different years…2023 vs 2024.
Pretty cool that it’s dollars now and not just pennies.
You’ll be prorated but only on $8. So maybe you’ll pay $3 in tax. No big deal. Just convert it now and report it right on the tax forms. The pro-ration for 2023 will be cleaned up in 2024.
$8 will be on line 6 for 2023 and for 2024 $7008 will be on line 8.
This is my first year filing my own taxes and I got stuck with an extra $5 that got converted in my roth account. How do I “pay taxes on it” in turbotax? Is there a step by step guide like this one?
Thanks!
https://www.whitecoatinvestor.com/how-to-report-a-backdoor-roth-ira-on-turbotax/
I’ve been following your post on How to Report a Backdoor Roth on TurboTax, and also looking at this post as a guide.
I have downloaded the desktop version of TurboTax.
For line 1 on 1099-R: Do I simply fill out line 1 as $6,501 (rounded up from $6,500.91) and the extra dollar will be accounted for automatically??
Or, is there another way to do this while on TurboTax that aligns with what you have shown on the Form 8606 on this post.
Thank you!
Your contribution was $6500, so that goes on line 1. If you converted $6501, that would go on line 8.
On Turbotax it asks for the 1099-R to be filled out exactly as it appears on the 1099-R.
Here’s what my Vanguard 1099-R looks like:
Line 1 (Gross distrubtion): $6.500.94
2a (Taxable amount): $6,500.94
7 Distribution code: 2 (IRA/SEP/SIMPLE checked)
8 (Other amount): nothing listed
Are you saying I should put instead:
Line 1: $6500
Line 2a: $6500
Line 8: $6501 ?
Do you know how I enter the excess in Turbotax? I converted $6504 in 2023. $4 accumulated in the traditional IRA before converted to Roth. How do I enter account for the $4 in turbotax so the proer 8606 is generated?
You put it in when you enter the Roth conversion step.
https://www.whitecoatinvestor.com/how-to-report-a-backdoor-roth-ira-on-turbotax/
https://ttlc.intuit.com/turbotax-support/en-us/help-article/retirement-benefits/enter-backdoor-roth-ira-conversion/L7gGPjKVY_US_en_US
https://thefinancebuff.com/how-to-report-backdoor-roth-in-turbotax.html
sorry if this is has been asked but i can’t find it elsewhere.
this year i contributed 6500 but converted 6501. i’m filing with hr block and they calculate line 10 as 1.000. per the current form and the one in your example the instructions mention rounding to 3 digits. i’m wondering why your answer is 0.999 although it seems 5000/5001 would be 1.000
my concern is HR is using this fraction to calculate my nontaxable portion line 11 as 6501 and a line 18 nontaxable amount of 0 although my conversion is over the limit.
i can override this fraction calculation although I wouldnt be allowed to efile and worry that would leave me without whatever guarantee they provide and it does seem correct at face value. Hoping you can advise
thank you for all the help and advice you provide
There is no limit on conversions. I wouldn’t worry about this. Just efile with what they’re calculating. Nobody cares about $1 even if you were wrong.
Hi Jim, thanks so much for this detailed and thorough post. I have been referring to this post and the Backdoor Roth guide for the past couple of years as my wife and I have been doing the backdoor Roth.
For 2023 – we each contributed $6500 to our traditional IRA and that earned $7 each while waiting for conversion. We did end up converting the whole amount (6507) to our Roth IRAs prior to Dec 31 and completed Form 8606 based on the step by step guide (we both got 0 on line 15c, and 7 on line 18). We are using OLT (OnLine Taxes) to jointly file our federal and state tax returns. I have the following questions below:
1. For Form 1040, is it correct to have the converted amount ( 6507 x 2 = $13014) in line 4a, and the taxable amount of $14 in line 4b? I wasn’t sure since this line pertains to “IRA Distributions”.
2. For the purpose of State tax filing, is the Roth conversion and/or the excess amount ($14) considered an IRA distribution as well?
Thanks so much for your time and expertise. I appreciate what you do and more power to you and your family.
1. That’s fine.
2. Not sure. Might even be state dependent? Does it matter to your tax bill?
Hello WCI,
Seeking your tax wisdom on this situation:
1) Converted a rollover of an existing Rollover IRA to employer 401(k) plan last year (to avoid pro rata rule) and closed the Rollover IRA upon transfer
2) Shortly thereafter (still last year), opened and funded ($6.5K) a new traditional IRA account that I immediately converted to my existing personal Roth IRA account and immediately closed the traditional IRA I had just opened after moving the money out
After this took place, I was sent a total of three “retirement distribution” checks from the custodian. Two checks (one for ~$30 and another for $0.65) were related to bullet point #1 described above. The third check was for $0.90 related to bullet point #2 described above. I tried to call to have these rollover as well, but the custodian said they would likely be unable to process it and to just cash the checks and pay taxes on those small amounts. My question is how should I report all three of these checks in TurboTax? Assume the $0.90 check can be processed how you described in the article on the form 8606 but wasn’t sure about the other two? Thanks in advance for your time and assistance for this tax rookie!
Why’d you close the IRA when you were done with it? Who told you to do that? Don’t do that next year. Just leave it open with a $0 balance. You can do a second rollover with a few dollars a few weeks later to keep it clean if you want.
I’m not the Turbotax customer service line so I’m not sure I can answer your Turbotax questions. I guess I’d treat them as an IRA withdrawal from prior to age 59 1/2. I found this by Googling and maybe it’ll help you:
https://turbotax.intuit.com/tax-tips/retirement/video-a-guide-to-401k-and-ira-early-withdrawal/L8l7NOKjK
Thanks – I wasn’t sure if you’d heard of something similar before so wasn’t sure the right approach. I thought the proper approach was to close it because if you held any balance in the traditional IRA you’d be subject to pro rata rule (albeit small amount).
Would you treat all 3 checks as early withdrawals or just the two described in bullet point #1?
You need the balance to be zero. You don’t have to close it. All that does is make you reopen a new one the next year and (if you close it while there is still a balance like you did) results in an early withdrawal penalty and hassle.
I don’t know exactly what the checks are for. It sounds to me like they’re early withdrawals from closing the IRA while it had a balance but you’ve got access to more info than I do.
Appreciate your advice – my understanding after hours of customer service discussions is that its the amount of interest I received while the rollover was being processed after I elected to roll them both over. For next year, I’m still not sure how to remedy – if I am left with $0.90 in the traditional IRA after moving it to my Roth IRA and try to move that money out, I believe I will once again accrue interest on the $0.90 for the days it takes to process the rollover and run into same issue
So it earned interest. Then sat in the traditional IRA. Then you closed the traditional IRA. So it’s an early withdrawal. You owe taxes at your marginal rate on it plus 10%.
When there’s $6 in there next year, you do another conversion a week or two later of 6 dollars. Then you ignore the 12 cents that shows up in there after that since you round down to the nearest dollar on your tax forms. That 12 cents comes over with your conversion the year after that.
Hello
Thanks for this informative post. I just completed my first backdoor ROTH this year and I had 0.67 left which i also converted this year. I was wondering if you get a 1099-R form to report this $1 and the event that it has been converted to a ROTH IRA. Since I just did it I don’t have a 1099-R handy yet from Vanguard.
I use freetaxusa software and in their IRA deduction worksheet they don’t give option to add $1 neither they give option to alter the generated 8606 which looks different than what you show above? I was wondering if you could post a screenshot of how your 1099-R reflects the conversion for a particular year?
Thanks again
Yes, the 1099-R will show the amount converted and yours will likely be something like $6,500.67 which will round to $6501.
If you just did the conversion in 2024, you won’t report it on your taxes until you file FOR 2024 IN 2025.