Backdoor roth conversion pro rata mistake

[chunkypb23]

Hi all,

I think I made a pro rata rule mistake, which I am pretty sure is too late to fix due to changes made by TCJA, but wanted to double check first. Timeline as follows:

3/2020: Nondeductible 6000 contribution to trad IRA with Vanguard -> Conversion to Roth IRA with Vanguard. Balance: 0 in trad IRA, $$ in Roth IRA.

6/2020: Moved Roth IRA to TD Ameritrade.

7/2020: Rolled over multiple old 401ks to new trad IRA with TD Ameritrade.

12/31/2020:  End of year balance: $$ in trad IRA and $$ in roth IRA. 

Now, I am realizing I'm going to be double taxed on most of my attempted backdoor Roth conversion, and it's my understanding that I can't undo or recharacterize it due to changes made by TCJA?  Is this correct, or do I have a way out here?

[MaryK4]

Your Roth IRA should be a separate account.  Your 401k rollovers are in the traditional IRA account.  You cannot "backdoor" the 401k rollovers- if you want them switched to Roth IRA you can do so, but you will have to pay the taxes.

The nondeductible traditional IRA contributions are taxed funds, they only get the tax treatment if you deduct the contributions.  The 401k funds, however are pre-tax so there is no "backdoor" option.

[chunkypb23]

No, you misunderstand the timeline.  I was not attempting to backdoor my 401k contributions.

First, in March I did a standard backdoor Roth conversion, which isolated would have been fine and I would have ended the year with 0 in trad IRA and +6000 (+gain/-loss) in Roth IRA.

However, I forgot about this when I rolled over old 401ks into a traditional IRA.  I left it alone for the whole year.

The result is, on 12/31/2020 I had a significant positive balance in traditional IRA, from the 401k rollover, that is unrelated to the Roth conversion in March.  I have to enter a large positive number on form 8606 line 6.  Line 7 I enter 6000.  Therefore, line 10 is close to 0 -- instead of 1 -- which it would have been if I had not made the error of leaving my 401k rollover in the traditional IRA on 12/31/2020.  Therefore, I owe tax on the 6000 March Roth conversion as if it were a distribution from the balance on 12/31/2020, even though in March the balance was 0.

My understanding is, prior to 2018, I could have recharacterized it back to traditional IRA and undid the damage, but I am no longer allowed to due to the tax cuts and jobs act.  So my question is, is there any other way out?

[ReneeM7122]

It depends.  To reverse a conversion by recharacterizing an account back to traditional IRA status you must submit the required form to your Roth IRA trustee or custodian by October 15 of the year after the conversion takes place. If October 15 falls on a weekend, the deadline is the following Monday. This flexibility makes the conversion idea that much more appealing.

If you’ve already filed your tax return for the year of the conversion but it isn’t yet October 15, you still have until that date to reverse the conversion (with extra days in years when October 15 falls on a weekend). To get back the tax you paid on the  conversion you would then need to file an amended tax return (using Form 1040X) by the due date for amended returns. (Usually you have three years after the date you filed the original return, but you shouldn’t wait that long to seek a refund from reversing a Roth conversion.)

 can reverse a Roth IRA conversion.

Here is a TurboTax article with more information.