Recharacterize an ENTIRE traditional IRA to Roth

[jliu]

Hi,

I have a traditional IRA that has multiple years of contributions and gains. After reevaluating my retirement and tax strategy, I'd like to convert the entire traditional IRA to a Roth IRA.

Is it possible to recharacterize my *entire* IRA assets into a Roth IRA? Or is the backdoor roth limited to just the previous year's contributions?

[DavidD66]

You can convert as much of your Traditional IRA to a Roth IRA as you would like.  Any appreciation in your IRA, plus any deductible contributions will be taxable income.  If you made non-deductible contributions, the amount of those contributions will not be taxable.  

[dmertz]

With regard to contributions made for years prior to 2020, you are asking about converting from a traditional IRA to Roth, not recharacterizing.  Recharacterizing is something quite different; as of this moment you can potentially recharacterize only contributions made for 2020 (or for 2021 if you've already made an IRA contribution for 2021), but only if you are eligible to have made the Roth IRA contribution because your modified AGI for the year for which the contribution is made is not too high.

There is no limit on the amount that you are permitted to convert to Roth.  How much you choose to convert in a given year is just a matter of how much taxable income you are willing to incur in a given year from converting.  If you have made nondeductible traditional IRA contributions, your conversions will be at least partially nontaxable, but you'll need to run through a simulated tax return to determine that.  For example, if you want to estimate your increase in tax liability from converting some amount in 2021, you'll need to simulate your 2021 tax return with and without a particular amount of Roth conversion.

[macuser_22]

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@jliu wrote:

Hi,

I have a traditional IRA that has multiple years of contributions and gains. After reevaluating my retirement and tax strategy, I'd like to convert the entire traditional IRA to a Roth IRA.

Is it possible to recharacterize my *entire* IRA assets into a Roth IRA? Or is the backdoor roth limited to just the previous year's contributions?

---

No.   A recharacterization is NOT a conversion.  It only means that you want a NEW CONTRIBUTION to one type of IRA to be applied to the other type of IRA as if the original contribution has never happened - for *that* tax year.  That has nothing whatsoever to do with the so-called backdoor Roth.

=========================

Here is what a backdoor Roth is:

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.

First you must enter your Traditional IRA contributions (if there were 2020 contributions).

IRA contribution
Federal Taxes,
Deductions & Credits,
I’ll choose what I work on (if that screen comes up),,
Retirement & Investments,
Traditional & Roth IRA contribution.

Be SURE to answer the follow up that the are choosing to make this contribution NON-DEDUCTIBLE - if that screen comes up. (DO NOT say that you moved (recharacterized) the money to a Roth) – this is a conversion, not a recharactorazition.

Then enter the 1099-R that shows the distribution.

Federal Taxes,
Wages & Income
I’ll choose what I work on (if that screen comes up),,
Retirement Plans & Social Security,
IRA, 401(k), Pension Plan Withdrawals (1099-R).

Answer the follow-up questions answer the question that you moved the money to another retirement. The screen will open up with choices of where it was moved. Choose you converted it to Roth IRA.

When asked if you have made any non-deductible contributions say " "yes" if you did then enter the non-deductible contributions made for tax years before 2020.     (Usually zero unless you also made a 2019 or earlier non-deductible contribution. If you do have prior year basis then enter the last filed 8606 line 14 value.).

Enter the 2020 year end value of your Traditional IRA a "0" (zero) - if it is in fact zero - this tax free Roth conversion will not work if it is not zero.

[If you had any other Traditional IRA at the end of 2020, then the nondeductible "basis" must be pro-rated over the current distribution and the total IRA value and only a portion of the Roth conversion will be non taxable and part will be taxable, with the remaining non-deductible basis carrying forward for future distributions. You can never only withdrew the nondeductible basis as long as the IRA exists and has a value more than zero.]

The non-deductible amount of your contribution will be subtracted from the taxable amount of the conversion on then 8606 form and enter on line 4a of them 1040 form and a zero taxable amount on line 4b if you did it right.

Also see this TurboTax FAQ:
https://ttlc.intuit.com/questions/4350747-how-do-i-enter-a-backdoor-roth-ira-conversion