Late to convert 2023 Roth IRA from Traditional IRA :(

[VincentSun]

Normally I should have done the conversion from my bank account to my traditional IRA and convert from traditional IRA to Roth IRA early the year but I somehow completely forget it this year. I know I screwed it up. And I need some help

12/22: initiate transfer $6,500 from my checking account to my traditional IRA in fidelity. Until 12/29, the money is still not cleared and I can't initiate the conversion directly online. I called fidelity services to requet conversion by 12/29 and was told they could help but it was best effort. But it didn't work through. 

12/30: seems the money is clear. and the money become $6,505.40

Question:

1. Where the extra $5.40 coming from? Is it taxable or not? 

2. Can I still convert the money to Roth IRA? $6,500 or $6,505.40? Is it counted 2023 or 2024? 

3. What is the tax implication for leave money in traditional IRA? 

Thanks and appreciate if any comments. 

[Anonymous_]

I'll page @dmertz

[dmertz · Accepted solution]

Funds sent to Fidelity generally go into a money market account that presently has about a 5% APR.  $5.40 would be 6 days of interest at that rate.

You can convert as little or as much as you want.

The conversion would be reportable on the tax return for the year in which the distribution from the traditional IRA occurs.  As you said, it's too late for that to happen in 2023.

If you leave the money in the traditional IRA instead of converting to Roth, investment gains will be taxable instead of eventually being nontaxable once the requirements for qualified Roth IRA distributions are met.  The $6,500 traditional IRA contribution for 2023 is reported on your 2023 tax return the same whether or not you convert any of it to Roth.

The only potential downside to not being able to convert until 2024 is that it delays the beginning of the 5-year conversion clock by one year, but if the Roth conversion is entirely nontaxable due to the distribution from the traditional IRA consisting entirely of basis in nondeductible traditional IRA contributions, that really doesn't matter because there is no penalty on a distribution from a Roth IRA consisting entirely of nontaxable conversion basis.

[VincentSun]

Thank you @dmertz for your help.

The traditional IRA has both after tax contribution $6,500 and the interest income $5.40 which is taxable. Can I convert them all to the Roth IRA in 2024? What is the tax implication if I do it? Previously all conversion are for after tax money entirely. Or I should convert $6,500 to Roth IRA and keep the $5.40 still in traditional IRA? Thanks. 

[dmertz · Accepted solution]

Yes, you can convert the whole thing in 2024.  There is no limit on the amount that you are permitted to convert.

You seem to be saying that you have no other funds in traditional IRAs, so if you convert $6,505.40, $6,500 will be a nontaxable conversion and $5.40 will be a taxable conversion.

There is no good reason to convert less than the full balance in the traditional IRA.  You might still end up with a little bit in the traditional IRA if a small amount of interest is credited to the traditional IRA after doing the Roth conversion.

[fanfare]

Tell the custodian to convert "entire amount".

For 2023, you have to file Form 8606 and not take an IRA deduction (Schedule 1 Line 20  = -0- ).

@VincentSun 

[Erich M]

Similiar situation happened to me. I contributed $6500 into my 2023 Trad IRA back in Feb 2023, and two weeks later I completed the Conversion to my Roth IRA. Simple process.....However, my wife didn't listen when I told her to Transfer all $6500 into her 2023 Traditional IRA so that I could Convert it to her 2023 Roth IRA. Instead, she delayed until Dec 30th, and the Conversion wasn't completed until Jan 4, 2024.

So what happens now? 

Can my wife contribute at all this year (2024) to her Trad IRA? $7000.

I've already contributed $7000 to my Trad IRA and will soon start the Conversion process to my Roth IRA this week.  I just don't know if my wife can contribute to any type IRA this year.

Thanks.

[dmertz]

Erich M, if your wife's $6,500 traditional IRA contribution was for 2023, that does not affect how much she can contribute for 2024.

There is no limit on the amount or frequency that one can convert to Roth.

[Erich M]

Appreciate the reply.  That's what I figured.  She had received an email from Victory Capital on Jan 4th stating that "the conversion was complete and will need to be reported in 2024."  I was confused on what they meant when said "will need to be reported in 2024."

[Wyldaisy]

Hello,

Looking for additional clarification on this item.

History:

Due to income limitations, I have been completing 'backdoor' Roth contributions and conversions since the 2020 tax year.  I have no other IRAs other than the "Traditional" IRA I use to contribute funds into which are then immediately converted to my Roth IRA.  I do not show any tax savings on my tax returns for these transactions.

 In February 2021, I contributed and converted my 2020 and 2021 traditional IRA contributions that were immediately converted to a Roth IRA.  In calendar 2022, I contributed and converted my 2022 contribution in calendar 2022.

Issue/Problem:

For the calendar 2023 YR, I contributed to my traditional IRA in 2023 (late December) $7500, but the amounts did not settle into Fidelity until 2024 so I was unable to do the conversion until about a week later in calendar 2024 and this generated about $5 in interest in the traditional IRA account.  What should I expect to see in my 2023 tax form?  Just Form 8606 with Line 14 Populated with a basis of $7,500?

For the 2023 return, I am only able to complete the 'first step' on the tax return: the contribution to the traditional IRA.  I cannot do step two of the conversion since that did not happen until 2024 and those tax forms were not generated by Fidelity for 2023.  I intend to do both the 2024 contribution and conversion for calendar year 2024 well before year end, so I will deal with the contribution for calendar 2024 in the tax year 2024 as well as the conversion of both 2023 and 2024 in tax year 2024.  I assume due to this, my 2024 tax return will show a basis in calendar 2023 of the $7,500 that was not converted in calendar 2023.

The difference between calendar year 2020 and 2023 is that calendar year contribution and conversion occurred in calendar 2021, where as in calendar year 2023 taxes, the 2023 contribution occurred in calendar 2023 and the conversion occurred in 2024...maybe this doesn't make a difference?

As it currently stands, my 2023 taxes did not generate the "Schedule 1"  ,as another expert referenced, in which line 20 should be zero.  Should it have, and if so why didn't it?  The software only generated form 8,606 with $7,500 populated on Line 14.

For calendar year 2024, should my calendar 2024 contribution and conversion be $8,005 - of which $5 will be taxable?  This would include the $5 interest that is still in my traditional IRA (I have no other IRA accounts).  If so, what forms should I expect to see generated related to this to show that there is approx. $5 that is taxable.  Or - should I have converted that $5 in 2023?

Would this transaction reset my '5 year rule' ( I am not concerned if this is the case, but just want to know). 

The main priority I suppose is making sure my Tax Yr 2023 forms are correct:

• Form 8606 
• Line 14 $7,500
• No other lines populated

Thank you

[dmertz]

"What should I expect to see in my 2023 tax form?  Just Form 8606 with Line 14 Populated with a basis of $7,500?"

Correct.  The $7,500 from line 14 of your 2023 Form 8606 will carry forward to line 2 of your 2024 Form 8606.

Whatever Roth conversions you do in 2024 are reportable on your 2024 tax return and will appear on your 2024 Form 8606.  When you do your 2024 traditional IRA contribution followed by a Roth conversion, be sure to convert the entire balance including any slight investment gains to that point.  The investment gains will appear on line 18 of your 2024 Form 8606 as taxable.

A nondeductible traditional IRA contribution doesn't appear on Schedule 1, only on Form 8606.