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Get your taxes done using TurboTax
AnnetteB6, my sincere thanks. I hope I have not overstayed my welcome with my lengthy Q&A! I would be glad to bow-out after this volley and save your time for others you're helping 😉.
I've used TurboTax competently for many years and this is the first troublesome scenario I've encountered. I am so concerned now because I appear to have made a $2020 error that is potentially irrevocable.
We paid tax on the $7500 when I earned the money and now it appears we will have to pay taxes again in our 2023 taxes because of the $7500 Traditional IRA I temporarily established using after tax income --- essentially taxed twice on the same dollars. With that said, please see below for a potential remedy that may have been too obvious (?). If the path below doesn't work and, given it's not 15 April 2024 yet, is there any action I can take with my financial institution to undo my mistake?
As I mentioned above, is the following the remedy to my problem? ChatGPT (below) confirms the expertise in your answer regarding the timing of the traditional IRA Back Door Roth conversion with respect to the tax year(s). One quite significant item I see below could save the day...it may be the case that the Back Door...neither part of the transaction... is reportable for our 2023 claim since both transactions transpired in 2024. The entire transaction will be reportable in our 2024 taxes when I file them in 2025, including the 2023 Traditional IRA basis for the '2024' Back-Door Roth conversion. Could this be true? If so, seems like I would bypass the issue completely in my 2023 tax filing.
Sincerely, 1csm
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If you have time, here's the ChatGPT. Is this incorrect advice?
In your scenario, you made a contribution to a traditional IRA and converted it to a Roth IRA on February 23, 2024, but you designated the contribution for the 2023 tax year. Here are the timing and taxation factors:
Timing:
- The contribution to the traditional IRA and the conversion to the Roth IRA both occurred on February 23, 2024.
- However, you designated the contribution for the 2023 tax year.
Taxation:
- Since you used after-tax dollars to fund the traditional IRA contribution and immediately converted it to a Roth IRA, the conversion amount is considered non-taxable.
- There will be no tax owed on the conversion because you have already paid taxes on the $7500 contribution before contributing it to the traditional IRA.
- However, it's essential to ensure that you report the conversion accurately on your tax return for the year 2024.
Reporting:
- Although you designated the contribution for the 2023 tax year, the contribution and conversion will be reflected in your 2024 tax filing since they occurred in 2024.
- The contribution to the traditional IRA should be reported on your 2024 tax return. You may need to indicate that it is for the 2023 tax year, depending on how you handle the reporting.
- The conversion to the Roth IRA should also be reported on your 2024 tax return. You'll receive a Form 1099-R for the conversion, which you'll use to report it on your tax return. Since the contribution was made with after-tax dollars, the taxable amount of the conversion will be $0.
In summary, while you designated the contribution for the 2023 tax year, both the contribution and conversion will be reflected in your 2024 tax filing. The backdoor Roth IRA transaction will be treated as a non-taxable event due to the use of after-tax dollars for the contribution.
