Backdoor Roth contributions for 2022 in 2023 and double taxation

[dala9304]

Hi experts! I'm running into an issue with the backdoor roth strategy that we started in 2023. Trying to summarize the steps and where I am stuck:

1. My wife and I each did the backdoor roth contributions for 2022 ($6000) and 2023 ($6500) IN 2023 (due to disasters in CA, we were able to do 2022 contributions until October 2023 with the extended tax deadline).

2. Fidelity issued us each a form 1099-r that states $12,500 as gross distribution (field 1) and taxable amount (field 2a).

3. TurboTax is now stating the $12,500 each as income (25k total) and taxing us for it. I can add the $6500 contributions each for this year, which will reduce the tax burden, but the $6000 each from 2022 remains taxed.

4. In 2022, our total income was below the threshold for non-deductible contributions for my wife since she does not have a work retirement account (see https://www.irs.gov/retirement-plans/plan-participant-employee/2022-ira-contribution-and-deduction-l...), which means, amending 2022 taxes would give us a small return (~1300 federal, 600 state) and now issue me a Form 8606 (not my wife, since hers was deductible)

5. With this Form 8606 of my amended 2022 taxes, I can now declare a nondeductible contribution of $6000 for myself. This reduces the taxable amount by $6000 ($6000 from my wife remaining)

6. My wife's IRA base is still $0 (given that she never had nondeductible contributions).

7. In 2023, we are above the threshold, so my wife's contribution for this year is non-deductible.

We are still taxed the $6000 contribution to my wife's IRA account (backdoor roth) we made in 2023 for 2022.

Can someone tell me if I'm not considering something? Is this correct? As far as I understand, we now used "pre-tax" money in 2022 (given that it was deductible), but we're getting taxed in 2023 for it again?

I have a feeling the switch from ira contribution deduction limits between 2022 and 2023 is the culprit here and turbotax cannot handle it?

[DanaB27]

Yes, if your wife made a deductible traditional IRA contribution for 2022 then part of her conversion will be taxable. When you have both pre-tax and after-tax contribution then the  pro-rata rule applies. This means that with each distribution/ conversion you will have a taxable and nontaxable part. 

For the Backdoor Roth to work as indented you must only make nondeductible traditional IRA contributions and do not have any pre-tax funds in the traditional/SEP/SIMPLE IRAs. 

You are not getting taxed again. Pre-tax means the money hasn't been taxed. The $6,000 were deductible in 2022 (pre-tax) therefore when you convert it to an after-tax account you will have to pay taxes.