Hi,
We are MFJ. In late 2024, my spouse got a letter from John Hancock regarding a 401k profit sharing plan from an old employer, and that we had to make an election on the vested balance (or otherwise a forced distribution would be made). Without thinking too much about it, she rolled this over from John Hancock into her active Vanguard account. Before rolling this over, I'm unclear on how this account was contributed to (i.e. it seems as though the balance was from employer contributions and she herself did not make any contributions). In any case, the balance was ~$2700. She rolled this over into vanguard, and it got rolled over and lives in her account as a "Rollover IRA". This account sits alongside her existing vanguard traditional IRA and roth IRA accounts, giving three accounts in total. She typically uses the existing traditional IRA and Roth IRA accounts to do yearly, planned backdoor roth conversions (e.g. contribute max amount to traditional IRA, and then immediately convert to Roth IRA). After rolling over this account, I did not realize that this separate account is considered a traditional IRA balance, and thus prohibited her from doing completely tax-free Roth IRA backdoor conversions. I've since realized (unless I'm wrong?) that this means I am subject to pro-rata rules for the years I've had this balance and have done a backdoor roth conversion (2024 and 2025). Thus, I'm hoping to get some confirmation and help on:
- Confirmation that yes, this situation limited (and continues to limits) our ability to do completely tax free backdoor roth conversions. It seems as though Rollover IRAs are considered Traditional IRA balances, but I'm not clear on whether it matters how the original amount was contributed to when it was in John Hancock.
- How to correct our 2024 Tax return in Turbotax (and thus how to file 2025 tax return correctly)
- Best path forward to free us to do completely tax free roth conversions moving forward
Re: #2 (Correcting tax return in turbotax). When I filed originally, I chose the following options during the retirement 1099-R flow):
- Moved money to another qualified retiremenet account
- Combination of rolling over, converting or cashing out the money
- Amount converted to Roth IRA account: 7000
- No, Did not make and track nondeductibe contributions to IRA
- Value of Traditional, SEP, and Simple IRAs as of Dec 31, 2024: 0
- Looking to confirm: I Assume I have to amend this to show $2700 (The balance that in the rollover IRA account?). Looks like this increases my federal tax due by $~700. Are there any other changes that need made? Since This account still lives in the account today, do I fill in this section the same way for 2025 tax return?
- Outstanding Rollovers & Characterizations: left blank
Re: #3 (Best path forward): According to my limited research, it seems my options are as follows, but hoping to confirm.
- Convert the rollover IRA to a Roth IRA and pay taxes on that conversion one time, but then this would be free to do tax-free roth backdoor conversions moving forward?
- Rollover back into an active 401k. She recently started a new job and will be eligible for 401k in ~2 months. So, if allowed, we could see if we can rollover from vanguard to the new, active 401k. In this option, where there be any tax implications?
Thanks in advanced!
