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Making a Backdoor Roth IRA conversion + consolidating 2 Roth IRAs - can I do this in the same year?

Hello - I am considering doing a backdoor roth IRA conversion this year (contribute and convert 2022 funds) in at Custodian 1.  This custodian already contains a Trad IRA account.  I would be opening a new Roth IRA account at Custodian 1.

 

However, I also have an established Roth IRA account at Custodian 2.

 

Let's say in the future I wish to combine the Roth IRA amounts in custodian 1 AND custodian 2.  Can I effectively do a backdoor Roth + Roth IRA consolidation in the same year?  And how would I document this in TurboTax?

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4 Replies

Making a Backdoor Roth IRA conversion + consolidating 2 Roth IRAs - can I do this in the same year?

A "backdoor Roth" will not work if you have another Traditional IRA account anywhere.

 

The "Backdoor Roth" does not exist in tax law. It is a procedure used by some to take advantage of a quirk in tax law that allows making a non-deductible contribution to a Traditional IRA when one cannot contribute to a Roth IRA, and the immediately converting the Traditional IRA to a Roth IRA, thereby getting the money into the Roth via "backdoor" tax free.

 

That "procedure" can only work of all these requirements are met:
1) No Traditional IRA account whatsoever can exist (that includes any SEP or SIMPLE IRA accounts) at the start. If existing IRA's contain any before-tax money or earnings then it will be partly taxable.
2) The Tradition IRA contributions must be reported on a 8606 form as non-deductible.
3) The conversion to a ROTH must be shortly after the contribution to avoid taxable gains.
4) The entire Traditional IRA value must be zero that the end of the year of conversion.

Otherwise the conversion will be partly taxable.

 

You can NEVER withdraw ONLY the nondeductible part - it must be prorated over the entire value of ALL Traditional IRA accounts which include SEP and SIMPLE IRA's. (For tax purposes you only have ONE Traditional IRA which can be split between as many different accounts as you want, but for tax purposes they are all added together).

For example using rough figures: if you had $60K of nondeductible contributions in an IRA with a total value of $600K (10:1 ratio), then when you take a $60K distribution from any IRA account $6,000 would be nontaxable and $54,000 would be taxable (same 10:1 ratio) , with the remaining $54K of basis staying in the IRA for future distributions. As long as there is any money in the IRA, there will be some basis.

TurboTax will ask for your non-deductible "basis" and then the *Total Value* of *all* Traditional IRA, SEP and SIMPLE accounts as of Dec 31, of the tax year. That is so the prorating of the basis can be properly proportioned between the current years distribution and the remaining IRA value. That is done on the 8606 form.

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**

Making a Backdoor Roth IRA conversion + consolidating 2 Roth IRAs - can I do this in the same year?

"The "Backdoor Roth" does not exist in tax law."

 

But the prohibition against Backdoor Roth will exist in tax law.

 

Oh, wait, BBB plan is dead now.

Making a Backdoor Roth IRA conversion + consolidating 2 Roth IRAs - can I do this in the same year?

In general, you can only make one indirect rollover per year, but you can make more than one direct rollover per year. With an indirect rollover, you receive a check from custodian 1 and must deposit it with custodian 2. With a direct rollover, the money is transferred directly by custodian 1 into your account with custodian 2.

 

Your plan consists of a direct rollover from your traditional IRA to a Roth IRA at custodian 1, then a direct rollover from custodian 1 to custodian 2, so it is permissible to do them both in the same year.

 

However, as pointed out, you would have to convert the entire balance of your traditional IRA to a Roth IRA and pay income tax on the deductible portion of the traditional IRA.   

Hal_Al
Level 15

Making a Backdoor Roth IRA conversion + consolidating 2 Roth IRAs - can I do this in the same year?

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