Conversion of traditional IRA to Roth with mixed money - too complex or doable?

[Boyan]

Hi everyone,

My question is more of a high level ask: is this a doable thing or would it expose me to high risk even though what I intend to do is totally legit and procedurally doable; can TT handle this kind of thing with ease?

And now here's "the thing": I have a traditional IRA with mixed pre-tax and after-tax money. I want to slowly convert it to Roth IRA and by slowly I mean annually convert small amount of money as to control my tax bill. I know how to figure out the pro-rate rule (last day of year balance versus after-tax money) but will I face any other challenges with TT? Also I know that the brokerage WILL incorrectly report the conversion since they have no idea about the ratio of pre/after tax balances. Will this put me into a higher risk territory where my TT filing diverges from the brokerage report to IRS?

In summary, is this hassle worth it and am I stuck with this traditional IRA just because of my past stupidity to mix before/after tax money in the same IRA account? Thank you

[tagteam]

Check back as I am paging @dmertz.

[Opus 17]

Yes, turbotax can handle this situation.  You already seem to know the rules.  Each year that you make a partial conversion, you will generate a form 8606 that documents the non-deductible basis in the traditional IRA at the beginning and end of the year (so the year end number from 2024 is the beginning number for 2025, and so on) and calculates the tax due on the conversion.  You will want to keep copies of the form 8606 for as long as you have any basis in a traditional IRA, plus 6 years after.  (This is an exception to the general rule that you can throw out tax papers after 3 or 6 years.)

You are correct that the broker will not know the taxable amount, that is what form 8606 is for.  (The broker would generally not report the taxable portion in any case, because the pro rata rule aggregates all your traditional IRA balances into one calculation, and broker A won't know whether or not you have other accounts with broker B, C etc.)

Basically, Turbotax can handle this.  You should always review your return for accuracy before you file, and you will want to pay close attention to form 8606.  

[Boyan]

@Opus 17 Your reputation precedes you sir; thank you for the compliment but I don't know what I don't know so if there's an official resource on how to do what I'm thinking of doing I would love to check myself by following said guide to truly make sure I know what I'm doing. 

Also what's your advice on how the traditional IRA should look like - all liquidated to cash or can it stay invested as it is now and how would partial conversion handle those investments? 

[Opus 17]

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@Boyan wrote:

@Opus 17 Your reputation precedes you sir; thank you for the compliment but I don't know what I don't know so if there's an official resource on how to do what I'm thinking of doing I would love to check myself by following said guide to truly make sure I know what I'm doing. 

Also what's your advice on how the traditional IRA should look like - all liquidated to cash or can it stay invested as it is now and how would partial conversion handle those investments? 

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I'm not sure what you mean by an official resource.  There are some other forum posts and related instructions.

https://ttlc.intuit.com/turbotax-support/en-us/help-article/retirement-benefits/enter-backdoor-roth-...

https://ttlc.intuit.com/community/taxes/discussion/how-do-i-enter-a-backdoor-roth-ira-conversion-upd...

The overall concept of a backdoor Roth IRA is probably covered on hundreds of personal finance web sites and published books.  I can't endorse any specific book, although the "Lasser's" guides have a good reputation, I think.  And you already seem to know the basic rules, so I expect what you really want is to be able to review and understand the calculations when Turbotax makes them.   You might head to a bookstore and browse some tax guides to see if any of them have sample tax returns that show how the calculations on form 8606 work. 

 Of course, you can always download and look over the actual IRS forms and instructions,

https://www.irs.gov/forms-pubs/about-form-8606

And lastly, you could upgrade to Turbotax Live Assist Version if you want your hand held the first year.  This gives you a CPA who you can video chat with to answer specific questions and help you understand the documents.  There is also Live Full Service version, where the CPA does your return for you, but that may be more than you really need.  

[fanfare]

Broker will report correctly the amount of the conversion.

It is up to you to report the taxable amount using your Form 8606

@Boyan