how to contribute to a backdoor Roth IRA

[rzs]

I have not made any contributions to a traditional IRA, and the only IRA account I have had (in 2022) was a rollover account that transferred my previous employer's 401k, which only had a balance of $1 for reasons I am unsure of(it may be the interest of the money while it was there)

Recently(In february 2023), I transferred all the funds from my 401k account (from my previous job) to the rollover IRA. I wanted to contribute to a backdoor Roth IRA, but I realized that doing so would subject me to the pro-rata rule, as the IRS considers a rollover IRA to be a type of traditional IRA. I spoke with my employer, who informed me that they allow reverse rollovers (transfers from an IRA pre-tax account to my current 401k). Is it possible for me to make contributions to a backdoor Roth IRA for both 2022 and 2023 without incurring any tax implications?

[DanaB27 · Accepted solution]

Yes, if you are able to do a reverse rollover of the pre-tax funds then you are able to make nondeductible traditional IRA contributions for 2022 and 2023 and convert them to the Roth IRA in 2023 (backdoor Roth). 

Yes, you can avoid the pro-rata rule as long as there are no pre-tax funds in the traditional IRA on December 31, 2023.

After you entered your nondeductible traditional IRA contribution for 2022 on your 2022 tax return, you will have a basis on your 2022 Form 8606 line 14 that will be carried over to your 2023 tax return. The conversion will be entered on your 2023 tax return since it happens in 2023.

To enter the nondeductible contribution to the traditional IRA (on your 2022 and 2023 tax return):

1. Login to your TurboTax Account 
2. Click on "Search" on the top right and type “IRA contributions” 
3. Click on “Jump to IRA contributions"
4. Select “traditional IRA”
5. Answer “No” to “Is This a Repayment of a Retirement Distribution?”
6. Enter the amount you contributed
7. Answer “No” to the recharacterized question on the “Did You Change Your Mind?” screen
8. Answer the next questions until you get to “Any Nondeductible Contributions to Your IRA?” and select “Yes” if you had a nondeductible contribution before this tax year.
9. Enter your basis in the Traditional IRA from your 2021 Form 8606 line 14 (if you had a basis in the prior year)
10. On the “Choose Not to Deduct IRA Contributions” screen choose “Yes, make part of my IRA contribution nondeductible” and enter the amount (if you have a retirement plan at work and are over the income limit it will be nondeductible automatically and you only get a warning and then a screen saying $0 is deductible).

To enter the 1099-R conversion next year on your 2023 tax return: 

1. Click on "Search" on the top right and type “1099-R” 
2. Click on “Jump to 1099-R”
3. Click "Continue" and enter the information from your 1099-R
4. Answer questions until you get to “Tell us if you moved the money through a rollover or conversion” and choose “I converted some or all of it to a Roth IRA”
5. On the "Review your 1099-R info" screen click "Continue"
6. Answer "yes" to "Any nondeductible Contributions to your IRA?" if you had any nondeductible contributions in prior years.
7. Answer the questions about the basis from line 14 of your 2022 Form 8606 and the value of all traditional, SEP, and SIMPLE IRAs

Please see  How to FIX Backdoor Roth IRA Screw-ups and When the Reverse Makes Sense: Benefits of a Reverse Rollover for additional information. 

[rzs]

Thank you so much, That was very helpful. 

Regarding your question step 7 if i contribute $6000  for 2022 and $6500 for 2023 and convert them to IRA, then the basis should be 12500?

Thank you again. 

[AnnetteB6]

Yes, if you make a non-deductible Traditional IRA contribution of $6000 for 2022 and $6500 for 2023, then your basis will be $12,500 at the end of 2023.  

Be sure to include the non-deductible 2022 contribution to the Traditional IRA as part of your 2022 tax return.  This will report the $6000 as part of your basis on Form 8606. 

Then, enter the non-deductible 2023 contribution to the Traditional IRA as part of your 2023 tax return.  This will add $6500 to the basis of the IRA for a total of $12,500.  

[edited 3/1/2023 | 6:03 am PST]

@rzs