Backdoor Roth IRA Contribution

[techie353]

Thank you all for assisting! 

@DanaB27

@dmertz 

@macuser_22 

@Opus 17

All you mentioned from items 1-4 is correct. Now that I have requested recharacterization of my Roth contribution as a traditional IRA, can I convert this as a Roth contribution for 2021 using Backdoor Roth? I am assuming if I can, I incur no additional taxes. If I cannot, it is still nondeductible traditional IRA and will I incur additional taxes?

[Opus 17]

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@techie353 wrote:

Thank you all for assisting! 

@DanaB27

@dmertz 

@macuser_22 

@Opus 17

All you mentioned from items 1-4 is correct. Now that I have requested recharacterization of my Roth contribution as a traditional IRA, can I convert this as a Roth contribution for 2021 using Backdoor Roth? I am assuming if I can, I incur no additional taxes. If I cannot, it is still nondeductible traditional IRA and will I incur additional taxes?

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[See correct answers below]

Assuming you leave the recharacterization as-is, the results are as I already described.  You will have to account for the non-deductible basis in your IRA when you report the rollover.  Remember that with the recharacterization, the rollover happened after the non-deductible contribution but you did not rollover your entire IRA balance (because your IRA balance now includes the recharacterized amount as of the date of the contribution).  Part of your non-deductible basis will go into the rollover and disappear, resulting in some double taxation when you eventually withdraw from the 401(k).  

Then, you will have a regular IRA with a smaller (partial) non-deductible basis.  The non-deductible basis in your IRA at the end of 2021 will be calculated on form 8606.  If you convert it a Roth IRA in 2022, the non-deductible basis will be non-taxed but the rest of the conversion will be taxed like a traditional IRA to Roth conversion.  So it won't really be a "backdoor Roth".  

[techie353]

Ok, it seems this recharacterization to traditional IRA will now mean $5400 will get taxed twice. My initial $6000 Roth contribution was already taxed. So taxed again for 401(k) withdrawals in retirement or when converting from traditional IRA to Roth. Is taxation for conversion of traditional IRA to Roth IRA is just $5400 or $5400 and gains?  If I convert traditional IRA to Roth IRA this year, can I make an additional contribution to Roth IRA for 2022 via the Backdoor Roth?

Otherwise, my other option is to cancel the recharacterization and withdraw the excess Roth contribution plus earnings for 2021. And be able to do a Backdoor Roth for 2022 with no taxation.

@DanaB27
@dmertz
@macuser_22
@Opus 17

[Opus 17]

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@techie353 wrote:

Ok, it seems this recharacterization to traditional IRA will now mean $5400 will get taxed twice. My initial $6000 Roth contribution was already taxed. So taxed again for 401(k) withdrawals in retirement or when converting from traditional IRA to Roth. Is taxation for conversion of traditional IRA to Roth IRA is just $5400 or $5400 and gains?  If I convert traditional IRA to Roth IRA this year, can I make an additional contribution to Roth IRA for 2022 via the Backdoor Roth?

Otherwise, my other option is to cancel the recharacterization and withdraw the excess Roth contribution plus earnings for 2021. And be able to do a Backdoor Roth for 2022 with no taxation.

For an exact estimate of your situation, how much was the April 2021 Roth contribution that you want to recharacterize, and how much did you roll over from the IRA into the 401(k) in December?

[dmertz]

There is no double taxation.  The $6,000 of basis in nondeductible traditional IRA contributions that transfers from line 14 of your 2021 Form 8606 to line 2 of your 2022 Form 1099-R will reduce the taxable amount of the Roth conversion performed in 2022.

A Roth conversion has no bearing on your eligibility to make a nondeductible traditional IRA contribution.

A backdoor Roth is not a Roth IRA contribution.  It's a traditional IRA contribution followed by a Roth conversion.  Each of these transactions is reported separately.

[Opus 17]

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@dmertz wrote:

@techie353 , since you appear to have provided conflicting information in your earlier posts, I'll summarize:

1. You made a Roth IRA contribution in 2021 for 2021
2. Your MAGI in 2021 was too high to permit a Roth IRA contribution
3. You rolled your existing traditional IRA over to your Solo 401(k) in 2021, leaving you with a traditional IRA balance on December 31, 2021 of $0.
4. You have requested a recharacterization of the Roth IRA contribution for 2021 to be a traditional IRA contribution  instead.

Under these circumstances, if the Roth contribution from April 2021 is recharacterized to a non-deductible IRA, then the year ending IRA balance after the rollover to 401(k) is NOT zero, correct?  

For example, the taxpayer contributed $6000 Roth in April, and rolled over $50,000 traditional IRA in December leaving zero balance.  If the Roth contribution is recharacterized to a non-deductible IRA, but only $50,000 was rolled over, there is a remaining IRA balance of $6000.  And because there was a non-deductible basis when the rollover occurred, part of that basis is rolled over into the 401(k) and lost.

What am I getting wrong?

[dmertz]

The 2021 year-end balance does need to be adjusted for the outstanding recharacterization, but that's irrelevant since without any distribution in 2021 it's not used anywhere on the 2021 tax return.

[Opus 17]

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@techie353 wrote:

Ok, it seems this recharacterization to traditional IRA will now mean $5400 will get taxed twice. My initial $6000 Roth contribution was already taxed. So taxed again for 401(k) withdrawals in retirement or when converting from traditional IRA to Roth. Is taxation for conversion of traditional IRA to Roth IRA is just $5400 or $5400 and gains?  If I convert traditional IRA to Roth IRA this year, can I make an additional contribution to Roth IRA for 2022 via the Backdoor Roth?

Otherwise, my other option is to cancel the recharacterization and withdraw the excess Roth contribution plus earnings for 2021. And be able to do a Backdoor Roth for 2022 with no taxation.

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I have to defer to my colleague @dmertz , even though I don't understand the logic, he is correct and I am wrong.

Normally, when you do a partial rollover or conversion of IRA funds that have a non-deductible basis, that basis is split between the various transactions and you can't just say, "I'm only withdrawing the non-deductible  part" or "I'm only withdrawing the after-tax part."

However, working through the instructions for form 8606, this is not what will happen in your case.   After the recharacterization, you will technically have a $6000 non-deductible contribution in the IRA as of December 2021.  But that has no effect on the rollover to the 401(k).  The part you rolled over is all pre-tax, and the part remaining is all after-tax.  After you recharacterize the Roth contribution to a traditional IRA, you will be left with an IRA with the same non-deductible contribution, reported on line 14 of form 8606 as part of your 2021 tax return, and all the pre-tax money that used to be in the IRA will be in the 401(k).

You can then do a Roth conversion in 2022, and it won't be taxed ("backdoor Roth").  You can also do a new backdoor Roth by making a 2022 non-deductible IRA contribution and then converting it.

Sorry for the mistake.  I don't actually know why this situation happens in this way, when non-taxable IRA bases usually cause problems, but you are in the clear.  You can let the recharacterization proceed, file your return, and do your conversion as planned. 

I think.

[techie353]

@Opus 17 

@dmertz 

You mentioned, 

     You can then do a Roth conversion in 2022, and it won't be taxed ("backdoor Roth").  You can also do a new  backdoor Roth by making a 2022 non-deductible IRA contribution and then converting it.

Will I be able to do both in 2022 or only one or the other? And a new backdoor Roth will also be non-taxed?

[Opus 17]

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@techie353 wrote:

@Opus 17 

@dmertz 

You mentioned, 

     You can then do a Roth conversion in 2022, and it won't be taxed ("backdoor Roth").  You can also do a new  backdoor Roth by making a 2022 non-deductible IRA contribution and then converting it.

Will I be able to do both in 2022 or only one or the other? And a new backdoor Roth will also be non-taxed?

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If I have the straight of it now, the situation at the end of 2021 that will be shown on your tax return (after reporting the recharacterization and the rollover to the 401(k)_) is that you have one traditional IRA with a $6000 non-deductible basis.  

In that case, you can do a Roth conversion at any time without paying tax.  You can also make a $6000 (or $7000, if over age 50) non-deductible IRA contribution for the 2022 tax year, and then convert it to a Roth.

There's no point in doing it in 4 steps when it will work just as well in 3 steps.  Make a 2022 non-deductible contribution to the same IRA, then convert all $12,000 to your Roth IRA.  You can do it at any time in 2022 that is convenient for you.  On your 2022 tax return, you would report the non-deductible contribution and the conversion in the normal way and complete the "backdoor" Roth.  

[techie353]

I have contributed $6k to the traditional IRA and plan on doing the $12k conversion to Roth IRA. Is this a conversion (the Backdoor Roth) of all $12k and its earnings, everything in the traditional IRA account? Do you know? Thanks in advance!

[MarilynG1]

Doing a backdoor Roth conversion is a two-step process.

Click this link for steps on Entering a Back Door Roth Conversion.

• Taxable amount should be zero unless you had earnings between the time you contributed to your Traditional IRA and the time you converted it to Roth IRA, then the earnings would be taxable.

[Opus 17]

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@techie353 wrote:

I have contributed $6k to the traditional IRA and plan on doing the $12k conversion to Roth IRA. Is this a conversion (the Backdoor Roth) of all $12k and its earnings, everything in the traditional IRA account? Do you know? Thanks in advance!

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If you have a deductible balance in any traditional IRA, you can't really do a "backdoor" Roth conversion.  The best way to explain is by example.  Suppose you have traditional IRAs with a a balance of $60,000 and you make a $6000 non-deductible contribution.  (All your IRA balances are aggregated for this calculation, it does not help you if you put the non-deductible money in a different account.)

If you then convert $12000 to Roth, your non-deductible balance is pro-rated.  In my example, you have a $6000 non-deductible basis which is 9% of the total, so only 9% of the conversion amount is non-taxable ($1,090) and the other $10,910 is a taxable Roth conversion.  Out of that $6,000 non-deductible contribution, $4910 remains in the traditional IRA.

If you made a $6000 non-deductible traditional IRA contribution, the only way to do a "backdoor Roth conversion" is to convert the entire balance of all your traditional IRAs to Roth, and pay income tax on the deductible portion of the IRA.

Then in the future, a backdoor Roth IRA would be making a non-deductible traditional IRA contribution, then converting the entire amount to a Roth IRA.  That way, the process is non-taxable.  But a backdoor Roth doesn't really work if your traditional IRA balances are mixed of deductible and non-deductible contributions.