Question: Pro-rata rule and Backdoor Roth IRA, How do I avoid this in next year tax and what to put in Turbo Tax?

[adkosmos]

Hi
Someone that know the tax can help me with this question please.
Thank you in advance

In 2023 , I did a backdoor Roth $6500 (after-tax IRA#2-->Roth IRA), and I have an existing IRA#1 (pretax) with $3000 at Dec 31,2023. Turbotax did form 8086 and calculated that I need to pay tax on $2081 from the pretax IRA due to the IRA Pro-Rata Rule.

Now , in 2024, I am trying to avoid the pro-rata issue again. So I plan to get rid of the IRA#1 (which I understand now contained $2081 after-tax and $919 (pre-tax) <<  2023 Tax File.

Do I need to do the following:
-- Roll the IRA#1 --$919 (pre-tax) into my company 401K
-- Then roll the $2081 (now after-tax) into my Roth IRA ?
-- I do want to do backdoor Roth IRA again in 2024, $7000
-- When I use TurboTax in 2024-- what do I put for the form 8086 when ask?

or
Is there a better way to get rid of my IRA#1  for me?

[DanaB27 · Accepted solution]

The only options to get rid of the pre-tax funds are to:

• Roll them over to a company retirement account like the 401(k) or 
• Convert the full amount and pay the taxes on the conversion.

Yes, if you rollover all pre-tax funds into your 401(k) then you are able to convert the after-tax funds into the Roth IRA without any issues.

For your 2024 tax return, you will enter the nondeductible traditional IRA contribution for 2024 and enter the basis from your 2023 Form 8606 line 14 when TurboTax asks about your prior basis. TurboTax will also ask about the value  of all traditional/SEP/SIMPLE IRAs on December 31, 2024.

[adkosmos · Accepted solution]

Hi, thank you for the response. 

Would it easier if I just roll the whole $3k (only $900 pretax) from IRA#1 into Roth IRA instead of a partial to company 401K and the rest (posttax) in to Roth?

Does this rollover effect the $7k limit for 2024 if I plan to do backdoor in 2024? I have not done this before, assuming that TurboTax will handle both rollover and backdoor in the same year?

[DanaB27 · Accepted solution]

Yes, it might be easier to roll the full amount to the Roth IRA and pay the taxes on part of the conversion. Also, you will have the benefit that any gains you earn while the money is in the Roth IRA, you can withdraw tax-free after you are 59 1/2. 

No, it doesn't affect the limit. You can still make a $7,000 (if you are under 50) nondeductible contribution to the traditional IRA for 2024 and then convert it to the Roth IRA. 

Yes, TurboTax can handle a rollover and backdoor at the same time.