JasonH24
Employee Tax Expert

Retirement tax questions

A backdoor Roth IRA allows you to get around income limits by converting a traditional IRA into a Roth IRA. 

 

However, you can not use your existing IRA for a tax free conversion because 401k contribtions are pre-tax.

 

The first step to funding your ROTH IRA is to make a Non-Deductible contribution to a Traditional IRA. When you do this it will be reported on Form 8606 to the IRS so that they know you have basis in your Traditional IRA.

 

The second step is to convert the amount in the Traditional IRA to a ROTH IRA. You'll get a Form 1099-R the year you make the conversion. Your 1099-R will say code 2 in box 7 (or code 7 if your age is over 59 ½) . You should report your conversion for the year you receive this 1099-R. When you indicate that the 1099-R was a conversion it will once again be reported on the Form 8606 which will allocate available basis to reduce tax on the conversion.

 

The thing that may complicate your situation is you have a previously existing Traditional IRA. If your traditional IRA contains a mix of deductible and  nondeductible contributions. The IRS doesn't allow you to choose which portion of the IRA you're converting, meaning you can't just roll over the nondeductible – and therefore nontaxable – part.  The allocation of deductible versus nondeductible contributions is calculated on Form 8606 when the conversion is made. The conversion is still possible but a portion may be taxable. The long-term benefit is that any gains in the ROTH IRA will not be taxable upon distribution.