Hi,
My husband and I file joint. He's working and maxing out his 401k. I am a stay home mom with no job or current 401k account. Before end of 2020, I already had a rollover IRA account that's funded from my previous employer's 401k account. I had no other traditional IRA account. Our total income exceeds the limit for contributing to Roth IRA.
In end of 2020, we learned about Backdoor Roth IRA and decided to give it a try. I then created a new traditional IRA, contributed using our after-tax money, and then converted it to Roth.
I followed this link to enter my contribution and 1099R.
However, after that TT is asking me to enter "total value of all of my traditional IRA, SEP, and SIMPLE IRA accounts on Dec 31, 2020." Following its instructions, I checked the 5498 forms from Fidelity. I found one for the new Traditional IRA account and another for the new Roth IRA account. Neither of them reflected the value of the my pre-existing Rollover IRA account.
My question is: should the value of the Rollover IRA account be included in this question? If so, how do I enter the 3 boxes?
@macuser_22 I think I've see you explain this better than I can.
@ansettax You are in a complex situation that is not to your benefit, and you really should have had financial advice before you tried to do a backdoor Roth in your situation. I have no idea if you can extricate yourself before the October 15 filing deadline, and it may be too late in any case.
When making a "back door" Roth conversion, you have to account for all your existing IRA balances. If you don't convert all your IRA balances to a Roth, then the backdoor gets very complicated. I can't explain it, but I found this article.
https://www.fool.com/retirement/iras/what-is-a-backdoor-ira.aspx
Workplace plans are not IRAs. Even though they have many similar rules, they are controlled by different sections of the tax law and some of the rules are very different. In your case, once you roll over your former 401(k) into an IRA, then it is an IRA, and the balance of this IRA will affect your ability to do a backdoor Roth. In Turbotax, you need to include all your IRA accounts, no matter how they were funded (but don't include qualified workplace accounts).
@ansettax wrote:
However, after that TT is asking me to enter "total value of all of my traditional IRA, SEP, and SIMPLE IRA accounts on Dec 31, 2020." Following its instructions, I checked the 5498 forms from Fidelity. I found one for the new Traditional IRA account and another for the new Roth IRA account. Neither of them reflected the value of the my pre-existing Rollover IRA account.
My question is: should the value of the Rollover IRA account be included in this question? If so, how do I enter the 3 boxes?
Yes. You must enter the aggregate year end value of all Traditional, SEP, and SIMPLE IRA accounts that exists. A so called "backdoor Roth" only works if you have no other Traditional IRA account whatsoever.
The "Backdoor Roth" does not exist in tax law. It is a procedure used by some to take advantage of a quirk in tax law that allows making a non-deductible contribution to a Traditional IRA when one cannot contribute to a Roth IRA, and the immediately converting the Traditional IRA to a Roth IRA, thereby getting the money into the Roth via "backdoor" tax free.
That "procedure" can only work of all these requirements are met:
1) No Traditional IRA account whatsoever can exist (that includes any SEP or SIMPLE IRA accounts) at the start. If existing IRA's contain any before-tax money or earnings then it will be partly taxable.
2) The Tradition IRA contributions must be reported on a 8606 form as non-deductible.
3) The conversion to a ROTH must be shortly after the contribution to avoid taxable gains.
4) The entire Traditional IRA value must be zero that the end of the year of conversion.
Otherwise the conversion will be partly taxable.
You can NEVER withdraw ONLY the nondeductible part - it must be prorated over the entire value of ALL Traditional IRA accounts which include SEP and SIMPLE IRA's. (For tax purposes you only have ONE Traditional IRA which can be split between as many different accounts as you want, but for tax purposes they are all added together).
For example using rough figures: if you had $60K of nondeductible contributions in an IRA with a total value of $600K (10:1 ratio), then when you take a $60K distribution from any IRA account $6,000 would be nontaxable and $54,000 would be taxable (same 10:1 ratio) , with the remaining $54K of basis staying in the IRA for future distributions. As long as there is any money in the IRA, there will be some basis.
TurboTax will ask for your non-deductible "basis" and then the *Total Value* of *all* Traditional IRA, SEP and SIMPLE accounts as of Dec 31, of the tax year. That is so the prorating of the basis can be properly proportioned between the current years distribution and the remaining IRA value. That is done on the 8606 form.
@Opus 17 @macuser_22 Thank you for your explanations. I guess the backdoor Roth doesn't quite work for my situation since I can not roll my IRAs into a 401k account w/o some hustle.
I guess now I need to ask Fidelity for the balance of my Rollover IRA account at the end of 2020. I don't know why they didn't provide a 5498 for it.
2020 is a done deal. If you did a rollover tomorrow, it would count for 2021 not 2020. You’re going to have to take the hit on your 2020 tax return and then think about how you want to handle the situation for 2021.
What you have now is a Roth IRA, and a traditional IRA that is partly pre-tax and partly after tax. You can leave it as is indefinitely, end it will just mean that a small proportion of your IRA withdrawal‘s in retirement will be tax free because they come from the after-tax basis in the account. However, you probably don’t want to do another back door Roth conversion without making sure you really know the rules. If you want to contribute after-tax money to an account in your name (because it is your only option given your spouse’s 401(k) and your income situation) then you can either make a nondeductible IRA contribution to your traditional IRA which will increase your after-tax basis in the account, or you could do a back door Roth but you would have to convert your entire current IRA balance. This could result in a substantial tax hit now, but you would never pay tax on it again. Then in future years, your back door Roth conversion would be a very simple matter, because you would open a new traditional IRA, make a nondeductible contribution, and then fully convert it.
You may want to talk to a professional financial planner. I am also in a position where I am trying to figure out whether to convert pretax money to Roth money. One of the factors to think about is that in retirement, withdrawing from a traditional IRA or 401(k) also makes your Social Security taxable. If all of your money was in a Roth account, then your Roth IRA withdrawals would never be taxable and your Social Security would never be taxable either. The problem is paying the tax to do the conversion, and whether paying the tax now pays off in the long run, which is too complicated for me to come up with a good answer at the moment.
Finally, I don’t understand your comment about moving money into a 401(k), or maybe I misunderstood you. Your retirement accounts are completely separate from your spouse‘s retirement accounts, and you can’t mingle the funds. If you currently have a traditional IRA and a Roth IRA, those are your accounts regardless of how you funded them, and you can’t mix the accounts with your spouses accounts. The only way you could put money into a 401(k) is if you went back to work.