@techie353 wrote:
Ok, it seems this recharacterization to traditional IRA will now mean $5400 will get taxed twice. My initial $6000 Roth contribution was already taxed. So taxed again for 401(k) withdrawals in retirement or when converting from traditional IRA to Roth. Is taxation for conversion of traditional IRA to Roth IRA is just $5400 or $5400 and gains? If I convert traditional IRA to Roth IRA this year, can I make an additional contribution to Roth IRA for 2022 via the Backdoor Roth?
Otherwise, my other option is to cancel the recharacterization and withdraw the excess Roth contribution plus earnings for 2021. And be able to do a Backdoor Roth for 2022 with no taxation.
I have to defer to my colleague @dmertz , even though I don't understand the logic, he is correct and I am wrong.
Normally, when you do a partial rollover or conversion of IRA funds that have a non-deductible basis, that basis is split between the various transactions and you can't just say, "I'm only withdrawing the non-deductible part" or "I'm only withdrawing the after-tax part."
However, working through the instructions for form 8606, this is not what will happen in your case. After the recharacterization, you will technically have a $6000 non-deductible contribution in the IRA as of December 2021. But that has no effect on the rollover to the 401(k). The part you rolled over is all pre-tax, and the part remaining is all after-tax. After you recharacterize the Roth contribution to a traditional IRA, you will be left with an IRA with the same non-deductible contribution, reported on line 14 of form 8606 as part of your 2021 tax return, and all the pre-tax money that used to be in the IRA will be in the 401(k).
You can then do a Roth conversion in 2022, and it won't be taxed ("backdoor Roth"). You can also do a new backdoor Roth by making a 2022 non-deductible IRA contribution and then converting it.
Sorry for the mistake. I don't actually know why this situation happens in this way, when non-taxable IRA bases usually cause problems, but you are in the clear. You can let the recharacterization proceed, file your return, and do your conversion as planned.
I think.
