Backdoor Roth IRA: Transferring money from traditional IRA to Roth IRA

[VAer]

I already know the basic concept of backdoor Roth IRA, now I have some very specific questions:

I have a full time job with 6 figure salary. I am an somewhat active trader and my total income depends on stock capital gain. If my stock capital gain is fine, and I may not be qualified for roth IRA contribution directly; of course, if I have stock capital loss, then I may be qualified for full Roth IRA contribution or partial Roth IRA contribution. So at this point, I don't know what my 2021 income will be (I think it will be likely that I am not qualified for Roth IRA contribution), to be safe, I would like to contribute to traditional IRA  NOW then transfer money to Roth IRA (backdoor Roth IRA).

I think that my traditional IRA will not be deductible or partially deductible (due to income limit and workplace retirement plan), so it is likely that my traditional IRA contribution will be after-tax money too.

When I file 2021 tax return: how should I report two activities --- Traditional IRA contribution and Backdoor Roth transfer? As I remember, Turbotax does ask IRA contribution, but how should I report backdoor Roth transfer? What form should I use? Exactly how should I handle it if I file tax return with Turbotax?

If I contribute $6000 to traditional IRA now, if it is partially deductible (some contribution is after-tax money and some contribution is before-tax money), then I should pay tax on some of transferred amount. In this case, where will the tax be paid from? For example, if I need to pay $300 tax on the $6000 transfer, can I transfer all the $6000 and pay $300 tax from bank account next year? Or $300 tax has to be deducted from traditional IRA account before being transferred?

Thanks.

[hbl3973]

VAer,

First, let me qualify by saying that the advice you receive in this tax forum may only be worth what you paid for it: nothing.  However, I have had experience with both nondeductible IRA contributions and "backdoor" Roth conversions.

Starting from the top:

When a traditional IRA contribution has been made but some or all of it is not deductible, you now have a basis in the IRA which is calculated and reported on Form 8606.  From that point on, each time you contribute to a traditional IRA or take a withdrawal from it, you would file a new Form 8606 to reflect any change in that basis.

A distribution from a traditional IRA results in a 1099-R form showing the amount of the distribution plus any tax withheld from that distribution.  (As IRS Publication 590-B https://www.irs.gov/publications/p590b states on page 20, you have a choice whether to withhold tax.  The default amount is 10%.)   In TurboTax you would enter that 1099-R info and inform TT that you rolled over the full amount.  If tax was withheld you can and should replace it with funds of your own so that you do not have an early distribution equal to the tax and subject to an additional 10% penalty.

The amount of the distribution that is taxable is calculated by dividing the basis of all your traditional IRA accounts by the end of year value of all those accounts and multiplying the amount of that distribution by that ratio.  Those end-of-year balances can be read off your end-of-year account statements.  All this is computed as well on Form 8606 as a Roth conversion.  Important:  You do not get to choose any one specific IRA account for this calculation.  In that sense, a backdoor Roth is really only such if you have no other traditional IRA accounts at the time you open the "front door" to put the money into a new traditional IRA.  Otherwise you do not get to transfer the full IRA basis over to the Roth account.

BTW, a contribution to an IRA does not result in any 1099 forms, but will eventually give you a 5948 form, often arriving well after tax time.  

[jtax]

@hbl3973 gave you a lot of very good information. Just a couple of additional points.

If possible do a Roth Conversion directly with your IRA custodian. The money will come out of your Trad IRA account and into your Roth IRA account.

Try never to receive a check or put the money in a non-IRA account. While you can do a "rollover" of such amounts, you must follow the rules and they are strictly enforced. A simple error can mean all of the rollover is income and a penalty applies. Better avoid those issues via a custodian to custodian transfer. (These days you can do it online without talking to anyone.)

If you do the custodian to custodian conversion you may get a 1099-R for it showing code 2 in box 7. That is "early distribution, exception [to penalty] applies." TT will use that and your careful answer about how much was converted to a Roth (probably all of the distributions). TT will put the total amount on 1040 line 4a and the taxable amount on 1040 line 4b. 4b will be the same as 4a unless you basis in the Traditional IRA (i.e. non-deductible contributions).

I highly recommend that you do not withhold. Pay the taxes on the conversion from other funds. The math is compelling on that score. But be careful to have enough withholding or timely estimated payments to avoid late payment penalties.

[VAer]

@jtax What does it mean "rollover"? Is backdoor roth IRA called "rollover"? I am not retired yet. 

I am asking about Backdoor Roth IRA.

Thanks.

[hbl3973]

VAer,

Yes, "backdoor Roth" is a rollover conversion of a traditional IRA contribution into a Roth IRA.  They call it backdoor as it allows folks with higher income to contribute to a Roth IRA, but the correct technical term is a rollover from a traditional IRA to a Roth IRA within the same tax year.