Hi, I moved 6500 dollars to my Traditional IRA so that i could do a Roth conversion as I am not eligible for a traditional IRA.

[goyal_raj]

Hi,
I moved 6500 to my Traditional IRA so that i could do a Roth conversion as I am not eligible for a traditional IRA. VAnguard did not allow me to convert the money to Roth till yesterday saying that there is no money to move although there was a balance shown in my IRA. Today morning i see a total amount of 6500.88 in my account, probably with one day's interest added. Now that the limit for Roth is 6500 only, what do i do with this 0.88? System does not allow me to withdraw it as it is less than 1 dollar and i don't think i can move it to Roth because of the yearly limits. How do i avoid any issue with tax or any complication in handling it?
Thanks,

[DanaB27]

To confirm you are doing a conversion (moving money from traditional to Roth IRA) and not a recharacterization (moving money to Roth and pretending it never was contributed to the traditional IRA but only directly to Roth IRA)? In both cases, the $0.88 won't cause an overcontribution because your direct contribution of $6,500 to the traditional IRA was within the limit for 2022 (assuming you are 50 or older).

If you are doing a conversion, you will enter a nondeductible contribution to the traditional IRA on your 2022 tax return (if made for 2022) and the conversion will be reported on your 2023 tax return (the $0.88 would be taxable income in this case).

To enter the nondeductible contribution to the traditional IRA for 2022 on your 2022 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 $6,500
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 made in 2023 on your 2023 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?" since you had any nondeductible contributions in prior years.
7. Answer the questions about the basis from line 14 of your 2022 Form 8606 ($6,500) and the value of all traditional, SEP, and SIMPLE IRAs

If you are doing a recharacterization, you will start with the traditional IRA contribution and tell TurboTax that you changed your mind, please follow these steps:

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 traditional IRA contribution amount of $6,500
7. Answer “Yes” to the recharacterized question on the “Did You Change Your Mind?” screen and enter the contribution amount (no earnings or losses) of $6,500
8. TurboTax will ask for an explanation statement where it should be stated that the original $6,500.00 plus $0.88 earnings were recharacterized.

You will get Form 1099-R  for the recharacterization with code R-Recharacterized IRA contribution made for 2022 and this belongs on the 2022 return. But a Form 1099-R with code R will do nothing to your return. You can only report it as mentioned above. Therefore, you can ignore Form 1099-R with code R when you get it in 2024. The box 1 on the 1099-R will report the total recharacterized amount (contribution plus earnings) but it does not separately report the earnings and box 2a must be zero.

[Edited 2/1/2023 | 11:55 pm PST]

@goyal_raj 

[goyal_raj]

Thanks DanaB. I am doing a backdoor conversion to Roth since I am not eligible to contribute to IRA. And this contribution was for 2023.

So I can simply move that 0.88 too to my Roth without violating the backdoor conversion limits?

Thanks,

Rajesh

[DanaB27]

• Yes, that is correct you can convert the full $6,500.88, it won't violate the contribution limit because you are making a conversion. Since this was a traditional IRA contribution for 2023 and the conversion happened in 2023 you will enter everything on your 2023 tax return when you file next year.

To enter the nondeductible contribution to the traditional IRA on your 2023 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 $6,500
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 2022 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 on your 2023 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

[fanfare]

the Roth contribution limit is 6,500 but you are not making a contribution.

you need to report a non-deductible Traditional IRA contribution of $6,500

[Opus 17]

A conversion is not a contribution, the dollar limits that apply to a contribution do not apply to a conversion.

[Opus 17]

Let’s go back to the beginning.

First, you made a nondeductible contribution to a traditional IRA. This must be reported on the tax return for the year in which the contribution was made, whether 2022 or 2023. The contribution limit is $6000 for a contribution made in 2022 and $6500 for contribution made in 2023, unless you are age 50 or older.  When you report the contribution on your tax return, it will generate a form 8606 that you must file with the rest of your tax return.

Then, you did a conversion (which is a particular type of rollover) from the traditional IRA to a Roth IRA.   There is no specific dollar limit on rollovers or conversions, and conversions do not count against your contribution limit. If your income permitted it, you could still make direct contributions to the Roth IRA of up to $6500 even though you have already done a conversion.  The only limitation on how much of an IRA conversion you can perform in one year is how much tax can you afford to pay (when converting a pretax balance to a Roth).

So there is no difficulty with converting $6501.

In the year that you made the conversion, you will also report that on your tax return, and it will be reported in a separate section of form 8606.

Note that if you had any traditional pretax balance in any IRA account, then your conversion will only be partly tax free. A “back door Roth conversion“ only works correctly if you have no traditional pretax IRA balances. If you have a pretax IRA balance, even if it is in a different account or held with a different broker, then your conversion is not a true back door conversion, and you will pay some income tax. We can explain this further if needed.