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.]
WCI,
Here is another repeat question to your pennies rule. To be fair, I’m a hospital maintenance man, so I do not perform colonoscopies on anything but pipes.
I contributed $7000 to my traditional IRA a few months ago. It now has $7040.39.
I understand that I want to convert the entire $7040.39 to a ROTH. And I will be taxed on my $40.39 at my given tax bracket.
However, June 1st Fidelity will give me around 13$ in interest earned from the month of May.
What do I do with that additional 13$ when it hits my traditional account June 1st, but I already converted to ROTH?
Thanks,
Hubert
Do another Roth conversion of $13 and pay taxes on that.
Thanks. Roger roger.
You need a meme plug in so I can respond to your help with memes 🙂
Transferring now, buying stonks monday morning.
Much appreciated.
I’m an single individual under 50 years old and bank with Ally. I contributed $7k to traditional IRA (year is 2024) and in the 2 days it took for me to convert the $7k traditional to my roth IRA it gained $0.87. I mistakenly transferred only $7k to my Roth IRA and left the $0.87 in the traditional. I am now unsure if I should now transfer the $7k roth IRA to my invest Roth IRA or if I should first convert the remaining $0.87? If it’s the latter, should I then invest all of the $7,00.87 to my invest roth IRA or should I leave $0.87 in my banking roth IRA?
Secondly, I performed the backdoor roth prior to maxing out my traditional IRA, now that the money’s been converted to roth and transferred out , can I immediately start contributing towards maxing out my traditional banking IRA? Or is there a latncy period that has to pass first? What makes the IRS understand my traditional IRA contribution was the limit of $7k and not the apparent $14k for the year? Is that where the form 8606 comes in? Thanks
The latter.
Yes.
Interesting that you’re using two Roth IRAs. Seems overly complex.
You know you can only contribute $7K TOTAL to all IRAs in 2024? It’s not $7K for a Roth IRA AND $7K to a traditional IRA.
Yes it does make it more complicated, I haven’t done this with any other bank but that’s how ally has it set up. In order to invest funds in the Ira it has to be transferred in an invest of the same IRA tax classification.
Yes I do know the limit but I may not understand it correctly so that does bring up another point of clarification. The point of the backdoor roth is that I can contribute another $7k to my Roth IRA but I can still max out my traditional IRA at $7k as well correct?
You don’t have to use a bank IRA at all. Just open an IRA at Vanguard or Fidelity or wherever and make the transfer there from your bank account. No 2nd IRA needed.
The point of a Backdoor Roth IRA is it allows someone who otherwise is not allowed to make a Roth IRA contribution directly to still make one indirectly.
High earners with a retirement plan at work can’t deduct a traditional IRA contribution.
High earners can’t contribute directly to a Roth IRA.
So what high earners do is make a non deductible IRA contribution, then convert it to a Roth IRA. That is the Backdoor Roth IRA process.
All the details can be found here:
https://www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/
No you cannot max out both a traditional IRA AND a Roth IRA each year. It’s one or the other (or technically a mix of the two, but no more than $7K total for those under 50 in 2024).
I see so the backdoor roth only allows to continue roth IRA contributions but does not grant you a second means of maxing a retirement account i.e I can only contribute $7k still. So the question now is, since I deposited $7k to my traditional then converted it all to my Roth does that mean I messed up the amount I was supposed to convert towards the backdoor roth? Or does that mean I’m just now simply capped and I maxed out my roth and shouldn’t put anything toward my traditional? And does it matter ? ( I know the difference in tax and pre-tax with how it affects your current tax year and all that but I just mean from tax penalty standpoint am at any fault other than the “pennies” rule with the $0.87 in the traditional and $7k in the roth? Next question is so do most people (who know what they’re doing unlike me) (in general) contribute half to their traditional as their “max” stand point and then use the backdoor to contribute an additional half post tax? Or do most people who do the backdoor view it as continuing to gain the post tax and do what I did and dump all of it in the roth? (I know it’s hard to say what others do and it’s personal preference and based on what their income is expected to be during retirement but if you can provide some general comment that would be helpful).
Lastly moving forward, I have a fidelity account already so I’d to switch to them if it’ll make the trasnferring of funds easier for IRA’s because Ally is a whole painful process. Should I perform a rollover of my funds over to them now or just wait for the next tax year? Thanks for all your help
You’re now capped.
Most people do what you’ve already done. It’s not really personal preference. Making non deductible traditional IRA contributions is markedly inferior to making Backdoor Roth contributions.
I’d do the transfer now. It’s not that hard.
If I have 75 cents in my traditional after the Roth back door ira conversion, can I just withdraw the 75 cents? I know I’ll pay taxes on the 75 cents, but any other drawbacks or reasons not to do this?
Probably best to just convert it into the Roth IRA if you’re going to pay tax on it anyway.
I read through all the comments and didn’t see anything that fits my situation.
I got married last year and became ineligible for a Roth IRA , and simply forgot the backdoor existed. Through the first months of this year I contributed $1600 to a TIRA and invested it before remembering the backdoor. I’ve since saved up the remaining $5400 and am ready to convert it all to the roth. My question is how to handle the $1600 currently invested. By share price, it’s now valued at $1750. Do I convert the shares and pay tax on the $150 of growth or is there another path to completing the conversion?
The $1600 can be converted, but if yoidn’t get the $5400 contributed to the IRA in time for 2023, you’re out of luck there. If that $1600 was a 2024 contributions, then you could still do the $5400. Either way, you’ll owe taxes on $1750-$1600= $150 at the time of conversion.
Thanks for the help, and yes, its for 2024.
Although I did this pennies correction last year, this year I am in a situation where I have almost 20 dollars in my traditional IRA, not sure where I went wrong, at this point am I better off just withdrawing it all and paying the taxes to start fresh from zero for next year’s backdoor?
Convert it all to Roth now, you’ll owe taxes on $20, and you’ll have $0 in the IRA on 12/31 so no pro-rata issue.
But I’ve already contributed my max 7000 to my IRA from the conversion. Will I be penalized for going over the contribution limit?
There is a $7000 contribution limit, no limit on conversions.
Thank you!
Question about the .87 cent taxable amount. Multiply line 8 x 10 (5501 x .999) = $5,495.499 for line 11 but you show $5500. Just curious if you are supposed to round up? I ended up with .87 cents extra that I converted from my IRA to my roth and want to make sure I am doing the 8606 correct. Thanks!
Not sure exactly what you’re asking. You owe tax on $1. No big deal. If your 8606 shows something other than that, you probably did something wrong.
Sounds good. Thanks.
I opened my traditional IRA a few days ago and mistakenly invested the cash value in an index fund prior to converting it to a Roth. Currently the index I invested in is a few percent down (loss of a couple hundred dollars). Would you transfer as is and accept the left-over basis, or wait a few days to see if the loses recover, and potentially pay tax on the gains?
You don’t have very long to wait given the year end is coming up. Although if you haven’t already done an IRA conversion in 2024 it’s just slightly more complicated paperwork not a proration. It’s not crazy to wait though and would certainly be the fastest potential way to resolve this issue. No guarantee the market goes up any time soon though.
Thanks for the comment. Appreciate your feedback!
Very informative article. Here is my situation, any help would be appreciated.
I contributed $6500 for year 2023 on 04/01/2024 and converted to Roth IRA as soon as it allowed me to before 04/18/2024.I have also published 8606 for 2023 tax returns, indicating contribution to tIRA, but conversion to Roth was not reported as it happened in year 2024 for tax year 2023(Fidelity publishes form 5498 the next year for contribution and conversion).
Now in December , I contributed 7k to tIRA(2024 limit) and I have $9.15 already in tIRA. Once 7k settles in , I convert all $7010 to Roth IRA before 12/31/2024 and pay taxes only $10,correct?
Secondly, there will be two conversions to Roth IRA in year 2024(which includes 6.5k for tax year 2023 and 7k for tax year 2024). Any problem with this?
Thanks
Yes.
No.
Thanks. Appreciate the response.
I made the “stupid tax” mistake and put money in a violate fund in my IRA which has not dropped to about a $300 loss. Should I just roll over now before 12/31/24 and carry the lose forever. Or convert next year where i have confidence that fund will bounce back to a gain position? Any thoughts? Is cleaner than the other when in a loss position?
If you didn’t do any conversion in 2024, I might wait a little for that loss to go away before converting. Or you can just go ahead and do the conversion and carry the loss forward for years on 8606 until it gets used up $5 or $11 at a time.
I have not dont any other conversions (this would be my first roth IRA conversion). Ive got everything sorted that its my only IRA so no pro-rata. Can you send me a link to the process if I wait until next year to convert say once I get to equal or a small gain position?
https://www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/
It’s the same process. You just wait until it’s above $7K, then convert. Hopefully it does that at some point in 2025. No guarantee I guess though. It could go down even more. But I might wait a few weeks to see.
Perfect so the scenario i just described is not considered a late conversion, even though im doing it in February? The only contributions were made in Nov of 2024.
There is no deadline for conversions, only contributions, and the deadline for a 2024 contribution is April of 2025.
Thanks for these articles. Could you just help clarify something for me? As with many in here, I had a little bit of interest (53 cents) generate in the day or so that my $7,000 was sitting in my Vanguard traditional IRA account while waiting to convert it to a Roth. Now when I try to go back in to my Vanguard traditional IRA and try to convert this $0.53 that’s sitting in the settlement fund in to a Roth I get the message “Error: This account has no holdings available to convert. Select a different account to continue.”
Is this because I have already converted $7,000 for 2024 or because this amount is too small to convert?
I’m trying to figure out the best option on how to proceed here as converting this 53 cents to a roth doesn’t seem doable for whatever reason. Do I just leave it in the traditional IRA into the new year and pay the negligible tax? And if so, will this incur any penalty that makes the roth backdoor conversion not worth it? Or do I withdraw it by asking Vanguard to send me a check as they won’t make a electronic transfer for amounts less than $1 and accept the minimal penalty for withdrawing money from a traditional IRA before age 59?
Thanks!
And to clarify, this $0.53 showed up in my traditional IRA after I had converted the $7000 to a roth so at the time of the conversion it only showed up as I had $7,000 to convert, not $7,000.53 to convert.
It’s December 29th. Please think about these things sooner in the year in the future. I can’t figure out why anyone is doing anything with a Backdoor Roth IRA in December but I’m getting almost as many BDR questions this month as I will next month.
As discussed in the article, the only way to truly eliminate the “pennies” issue is to do another Roth conversion of the pennies. If Vanguard won’t let you, I guess they won’t let you and $1 will be pro-rated. Not a huge deal. You’ll clean it up next year. But I can’t make Vanguard let you do a 53 cent conversion.
There is no limit on conversions. The $7,000 limit is on contributions.
Yea, just leave it. Pay the tax on $1 and next year when you do your conversion convert $7,000.53.It’ll be fine. There’s no penalty. No don’t withdraw it.
Please forgive me if this has already been asked, but what about the opposite situation? I deposited the $7000 contribution into a traditional, but instead of money market went into a VFIAX. Funds were held up for a week and a half. And by the time I converted, the basis dropped and the conversion into Roth ended up as 6950. Any tax implications here? Do I just claim capital loss on taxes?
You’ll be carrying forward that loss on form 8606 until it gets used up 53 cents or $7 or whatever at a time. Or you can let it sit until it gets back to basis and then convert. This is why I tell people to put it in cash while it’s in the traditional IRA.
You can’t claim a capital loss, those only occur in taxable accounts.
This is my second comment. So I made the contribution to tIRA for year 2024(7K) by 12/23/2024, but Fidelity wont allow me to convert funds to Roth till 01/16/2025 as they say it needs to settle in.
Can I still convert this after 01/16/2025? Can this be done without any tax implications?
Thanks
Hello Moderator,
Can you please comment on this? what are the drawbacks of converting the money deposited( in 2024) in year 2025?
Thanks
GP
There’s no moderator looking at these comments. This isn’t a forum, it’s a blog. Other readers sometimes answer questions posted in the comments section, but the only person I know of who reads them all is me. My name is Jim Dahle and I’m the founder of this website and the author of this blog. Thanks for stopping by and I hope it’s helpful to you. Sorry I missed your comment the other day. I think I’ve answered several dozen Backdoor Roth questions (including this one multiple times) this week but apparently your version of this common question got lost in the shuffle. I guess the alternative is to hire a financial advisor for 5-15,000 a year to answer your financial questions. Or you can keep posting comments or emailing me and see if I get to it between ski days.
If you didn’t do a Roth conversion during calendar year 2024, then there isn’t really any tax consequences to doing the conversion step of your first Backdoor Roth IRA in 2025 after contributing in 2024. You just need to make sure you fill out the tax paperwork (Forms 8606) properly. The contribution will go on the 2024 form and the conversion will go on the 2025 form, presumably with your 2025 contribution and conversion.
Thanks Jim for the detailed write-up. Really appreciate the valuable advice you are providing here.
I deposited 7k into traditional IRA early December to do backdoor Roth (I know, not great to do this in December but I’m a new attending/moving and had to pay for other stuff first). Fidelity wouldn’t let me do the transfer until the night of the 30th when the cash was finally available to withdraw. I got paid an $18 dividend into the trad IRA account on the 31st which I didn’t know about until today (Jan 1). Assuming I’ll be assessed pro-rata rule since my traditional IRA balance is $18 at the end of the year and it’s now 2025? Do I now just leave it and convert with the 7k for 2025’s backdoor? Thanks.
Why people refuse to wait for the first week of January is completely beyond me.
Yea, you’ll be pro-rated. Luckily it’s only $18 and will be cleaned up easily with this year’s Backdoor Roth IRA process. Yea, just convert the $18 with this year’s BD Roth. And do it before December!
**this may be similar to the question posted before this
I contributed to a traditional IRA mid november. It took almost 3 weeks for the money to become available to transfer (I am new to backdoor roth). On December 11, I transferred the money to the Roth IRA and I kept the account open. On December 31st I got paid a dividend of $8.98 and didn’t see it until today (Jan 2). What do I do now? Thanks
You convert it to a Roth IRA in 2025 when you do your 2025 Backdoor Roth IRA process and you make sure you fill out your paperwork (2024 Form 8606) propertly. You’ll have $9 on line 6 and will be pro-rated on $9. Not a big deal.
Following the trend of this question.
My understanding is that the prorated amount for 2024 (8606). So there will be a taxable amount on line 18. Will that be 9 dollars in this example?
Now fast forward when you say clean it up (I assume 2025’s 8606 ). We contribute 7000 (Line 1) and there will be a basis of 9 (line 2)? But since it was taxed in 2024 (8606), when we convert the 7009 in 2025 it will be tax free?
Yes.
That’s right. You don’t pay taxes on that $9 twice, just once.
Thank you! I just now realized Fidelity credited $0.33 in my TIRA on December 31st and was already panicking…
I did a backdoor Roth last year in 2024 but was left with $7.84 in dividends. I am planning to convert this $7.84 along with my 2025 $7000 backdoor Roth contribution.
I understand that I will be subject to the pro-rata rule for 2024 since I did not convert the $7.84 to Roth at the end of the year.
However, since I am now converting the $7.84 in 2025, how do I report this on the form 8606? And how do I ensure it will be converted tax-free? I ask because I saw this line in the article that mentioned the leftover balance being converted tax-free:
“…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.)”
You report conversions in the year they’re done. So that $8 would be added to your conversion amount on your 2025 8606.
Thank you. Since I am paying taxes on the $8 on my 2024 8606 through the pro-rata rule, what line would I report the $8 conversion amount on for the 2025 8606? Line 2 (basis)?
Conversion amount is reported on line 8
https://www.irs.gov/pub/irs-pdf/f8606.pdf
Enter the net amount you converted from traditional, traditional SEP, and traditional SIMPLE IRAs to
Roth, Roth SEP, or Roth SIMPLE IRAs in 2024. Also, enter this amount on line 16 . .
I will already be paying taxes for the $8 in the 2024 8606 through the pro rata rule. I already know to add it to line 6.
On form 8606, Line 5 gets the net amount for Lines 1-4. Line 9 adds up Lines 6-8. Line 10 divides Line 5 by Line 9 to find the nontaxable ratio to apply.
When I convert the $8 in 2025, I want to avoid being doubly taxed as I would have already paid taxes for the $8 in 2024. In the 2025 8606, wouldn’t I also need to include this $8 on Line 2 in addition to your mentioned Line 8? As this would make the nontaxable ratio 1.0
Never mind. I figured out that yes, I will include the $8 on Line 2 (basis) of my 2025 8606, which will prevent me from being doubly taxed on the $8. Thank you so much for your help!
Hi! It was my first time doing a backdoor Roth towards the end of December through Fidelity and I thought I did all the right steps. Transferred $7000 into a traditional IRA then converted to the Roth. By that point, the traditional IRA had $0 in it. Suddenly on December 31st, I ended up receiving $2.06 from interest and dividends back into the traditional IRA b/c the money sat in the money market while I waited for it to settle to convert over to the Roth. I’ve been trying to read through the comments and the common consensus is that the traditional IRA should be at $0 by December 31st and now that’s no longer the case with my account. B/c I received this interest, did I totally mess it up now? Should I roll the $2.06 over into the 2024 contribution? Better to roll over into the 2025 conversion with my next $7000? Any advice on what to do is greatly appreciated!! Thank you!!
You’ll just be subject to the pro-rata rule and pay minimal taxes on the $2. You can convert the $2 now to your Roth IRA so the interest doesn’t keep accruing.
Your 2024 8606 will have the pro-rata rule applied on the $2, and your 2025 8606 will clean everything else up. See my comment inquiry above yours for more of what I mean 🙂 I’m in the same situation as you
I can’t figure this out. I keep getting this question. Doesn’t the post this question is asked under include the answer? Maybe I need to fix the post, dunno.
I think one thing is here:
> 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.)
it’s sort of worded like neither option is better than the other. But in the comments above you seem to more strongly advocate for doing the conversion of the extra interest asap, so that you’ll have $0 in the traditional IRA at year end. So maybe updating the post to better convey that preference would help preempt some of the questions about “should I convert now or wait till next year”.
Also, Fidelity’s current 3 week hold on funds transferred in is likely causing more people to have interest since that makes it impossible to convert fast enough to avoid it, so maybe more comments is also just a result of more people being in this situation 🤷♂️
Good idea, thanks!
Oh gosh! I just realized so many other people above me also posted the same question. Thank you so much for the help!! I appreciate it!! :)) I read through everyone’s comments and it’s beginning to make more sense. Also wish fidelity didn’t have the weird 21 day hold on our money before we can covert it to the Roth. I hope they change that new rule!
Lol. It’s hard to read all the comments when there are 500 of them eh?
I know there’s variations of this questions, but I think I need a personal example to understand. So we contributed late (March 2024) 6,500 for the year 2023 to a Fidelity traditional IRA (they told us we had to wait 1 wk), then 1 wk later converted 6500 to Roth IRA. We saw $11 grew in our traditional IRA when looking at contributing for year 2024. We contributed 7K (late again, but less late) in Jan 2025 for the year 2024. And according to the Pennie’s article, I understand we should convert the FULL $7011 and then we just pay taxes on the $11 when filing out the 8606 form (a form we didn’t fill out last year on TurboTax, but don’t believe we need to?). Is that correct? Or does pro rata apply? I tried hard to find the answer, but I guess I’m trying to see if we’re in trouble because we didn’t convert the $11 over to the Roth IRA PRIOR to Dec 31st 2024. Thanks for any advice.
You need to go back and file 2023 8606s showing your non deductible IRA contributions.
Your 2024 8606 will show your $6500 conversion and a $7,000 contribution. Line 6 will be $11.
Your 2025 8606 will show a $7,011 conversion plus whatever else you do this year conversion wise and for this year contribution wise.
You’re not in trouble. You’re just making life harder than it needs to be. But there won’t be a big financial price to pay for what you’re doing, so long as you send in those 2023 8606s (one for each of you).
Thank you so much for the explanation! Do you know how to go about filing a 8606s for the previous yr (2023) on Turbotax (if it never prompted us to fill out a 8606) ? I saw your link “How to Report a Backdoor Roth IRA on Turbotax” but I am unsure if we can edit previous years tax forms, while we’re filing for this year. Thank you!
I’m not really the Turbotax help department and they change a little every year. Here’s a link to the post on that subject though:
https://www.whitecoatinvestor.com/how-to-report-a-backdoor-roth-ira-on-turbotax/
If Turbotax didn’t fill out an 8606 you either didn’t need to or didn’t report what you did properly in Turbotax. I’ve never filed a 1040X with Turbotax. Seems easier to do it by hand to me. But I bet it can be done with Turbotax. You can probably just fill out your 8606 by hand and send that in.
Hello –
In 2023, I did my first backdoor Roth conversion. However, for the traditional IRA account that I opened up to do this backdoor conversion, I closed it immediately after transferring the money out (which you noted was a no-no after I came here to ask your advice). As a result, my broker sent me 2 separate checks (one for $0.89 and one for $32.73) in early 2024 directly for the interest earned during that conversion time period.
Fast forward to 2024 tax year, I performed my second backdoor Roth conversion for $7K and earned $2 in interest – which I converted to my Roth IRA account in two separate transactions (i.e., I moved $7,002 to my Roth) without closing my traditional IRA account (now with a $0 balance).
For the 2024 tax year, I have received 3 separate 1099-Rs from my broker: one for $7,002, one for $0.89 and one for $32.73. The $7,002 1099 was coded correctly for the backdoor as a 2 in box 7; the $0.89 1099 was coded as a 1 (Early distribution, no known exception); and the $32.73 1099 was coded as a G (Direct rollover of a distribution to a qualified plan). However, for the 2023 check amounts ($0.89 and $32.73), I deposited these both into a checking account (although they were later rejected/not accepted by the bank) as I assumed I would need to pay a tax on these amounts in the 2024 tax year anyway.
Given the 1099 distribution codes listed above, I’m not sure the proper way to log these in TurboTax and was hoping to get your thoughts on how to reconcile. Also, for the $7,002 1099 is it OK to enter this as one contribution of $7,002 in Turbo (or should I list as one $7,000 contribution and a separate $2 contribution)? Turbo is saying I will owe 6% tax each year on the $2 – but I thought this would be a one-time tax event?
Thanks in advance for your time and assistance with helping out a rookie.
Sounds like the third 1099 was wrong. You should ask them to fix it and make it like the second one.
As far as taxes, you made a $7,000 contribution and a $7,002 conversion so report it that way.
https://www.whitecoatinvestor.com/how-to-report-a-backdoor-roth-ira-on-turbotax/
Thanks – would I only be responsible for a one-time taxable event on the $2 interest for this year or is it every year as Turbo stated?
Most years now I end up having to pay taxes on a little interest. $1 one year, $4 the next etc.
One other clarification question – when you say report it as a ‘$7,000 contribution and a $7,002 conversion’ – does this mean in Turbo I would report $7,002 in the Income section under the 1099-R and $7,000 in the Deduction section? Do I need to report the $2 as a nondeductible contribution to my IRA when they ask you that question in the Deductions section? Thanks again!
Yes. No, it’s not an IRA contribution.
Hi. My question is probably simple for you but still trying to figure out as I am new to this.
I want to do a backdoor roth for the first time. I have a small amount in a Roth I created two years ago when below tax thresholds and then just left it alone. Last year in 2024 after reading your material, I realized I should convert my small rollover ira of $6,000 to my Roth to pay taxes on it for 2024 before doing a backdoor, leaving me at $0 for any traditional IRAs, and avoiding pro rata rules moving forward. I converted this rollover ira to my roth last year, leaving me at $0, So its now February of 2025 and I want to make the full backdoor roth contribution and conversion. You have stated it is “cleaner” to make your contribution and your conversion all in the same calendar tax year although you can make your contribution up until your tax filing date of the next year. I would like to make this clean and easy as possible moving forward since my goal is to do this every year in January. So can I make the contribution and conversion for 2025 now? Or do I have to wait until after April tax filing? I read somewhere on your material that my conversion of my rollover IRA in 2024 can influence this decision – or may have misunderstood. Sorry if I am all over but appreciate any feedback
I contributed full 7k in 2024 for traditional IRA. literally had a dividend come in on Dec 31, 2024 that I didn’t catch for 15.52 leaving me with a balance of 15.52 into 2025. I understand reading above I should just convert now in 2025 and it will pay taxes on the 15.52???
Embarassingly, I did this last year in 2023 with $8 that were then converted Jan 2024. I literally set reminders to check around end of December 2024 for any dividends this time around which I diligently did the last few days of December up until 12/31, assuming it would be a holiday and low and behold the dividends came in.
My 2024 conversion will still be 7k correct and line 6 for 2024 will be 16?
Your 2025 8606 will be $7,016 conversion unless I mess this up AGAIN next year right?
Whatever you converted in 2024 will be your 2024 conversion. Sounds like $7,008? Yes, 2024 line 6 is $16. 2025 conversion will be $7,016. This is no big deal. It’s just getting the numbers right on the 8606.
I performed a direct rollover of my larger traditional IRA into my practice 401k in 2024. I then performed a backdoor Roth IRA through fidelity for 2024. I unfortunately accrued a small amount of interest due to their new 3 week hold policy for ACHs, which remained on 12/31/24. I plan on reporting this residual ~$5 on line 6 and will take the pro-rata for this year and clean it up with the 2025 contribution as mentioned above. My issue – and source of my question – is that I just realized that my original traditional IRA that I rolled over into the 401k in 2024 had also accrued interest after-the-fact and remained in that account on 12/31/24 – let’s call it $20. This is a separate account and institution than my fidelity backdoor traditional IRA account. Do I treat this differently since it was a rollover into a 401k? Or do I just add that amount into the Line 6 for 2024 reporting as it’s still just a traditional IRA. And if I do just add this additional $20 to line 6 for pro-rata, what would my options be for this account in 2025 so I can finally zero and close it? Transfer the residual to my fidelity and into the Roth? The fact that it is a separate institution and bank has me questioning my options. Thanks!
If the money is in a traditional IRA on 12/31/24, it gets reported on line 6 of Form 8606 and causes pro-ration.
You have to do another rollover/transfer to get rid of it. Sorry. That can go to the 401(k) or your Roth IRA. The latter would be taxable.
Hi, I contributed 7k to traditional IRA in 2024, and before conversion to Roth it grew to $7,001.02. When I did the conversion, I converted the full $7,001.02. Based on the article it seems I just need to report this on form 8606 so I can pay the extra tax on the ~$1.
My question is how to do this within TurboTax? Can I access and edit form 8606 directly in turbo tax? Or do I try to put the $1 on line 4b of the 1040 form like it says at the bottom of form 8606 example you posted (and if so same question – can I access and edit the 1040 directly in turbo tax)?
Thanks in advance for you help!
When you put in the amount converted put in $7,001. You can also just modify the form itself in “forms mode”. It’s been years for me, but back in the day, you had to have the “desktop” downloaded Turbotax to have access to forms mode.
I saw the comment “client failed to inform the IRS that he had no other IRAs.” does that mean that if I have a separate IRA (Roth or Traditional) I cannot do a backdoor Roth? Doesn’t seem to make sense to me
I don’t know what your comment is referring to. But if you have money in a traditional IRA on 12/31 of the year you do the conversion step, that conversion will be pro-rated. That doesn’t keep you from doing it though, it just makes it less effective at doing what you were hoping to do (i.e. a tax free Roth conversion/backdoor contribution)