Hi,
I plan to open a Roth IRA account and do back-door ROTH. I had a 401k/403b account with my previous employer before 2007. After 2007 my company got bought and I started working for my current company. Since then my previous 401k/403b account got transferred into a roll-over IRA at Wells Fargo Bank. For the purpose of back-door ROTH, I plan to transfer my roll-over IRA into my 403b account with my current employer at Fidelity. Does this process sound ok for tax purpose? Will I incur any tax through this transfer? Thank you!
Step 1: rollover all the IRA into a pre-tax 403b with your current employer and close that IRA.
Step 2: open a new IRA and make a non-deductible contribution of up to $6500 (or $7500 if over age 50).
Step 3: rollover the non-deductible IRA to a Roth IRA.
You will be fine. What you don't want to do is to have pre-tax money in an IRA at the same time as you add after-tax or nondeductible money. (Because all IRAs are considered 1 IRA for tax purposes, having pre-tax money in bank A at the same time as adding after-tax money to a different account at bank B could cause a problem.) As long as you get all the pre-tax money out of your IRA before you add the after-tax money, you will be ok.
If the person is unaware of the procedure you described above and did steps 2 and 3 without completing step 1 for one year (total contribution $6500x2), how much taxes that person needs to pay for this action? Thank you!
@LLC3 wrote:
If the person is unaware of the procedure you described above and did steps 2 and 3 without completing step 1 for one year (total contribution $6500x2), how much taxes that person needs to pay for this action? Thank you!
You will have to provide more details. How do you contribute $6500 x 2, is that for two years of contributions, or IRAs for two different people (such as spouses)? An IRA is an individual account, and each person is considered separately. 401(k) funds that belong to you can only be rolled over to an IRA that you own, and can only be rolled into a 403B at your new employer. That won't have any interaction with your spouse's IRAs.
It is not completely necessary to complete the steps in the order I gave, that's just the easiest way to explain it. The key fact is that for a "backdoor" Roth conversion to work, the combined balance of all your traditional IRA accounts should be zero on December 31 of whatever tax year we are talking about.
What exactly did you do and when? What steps and in what order?
$6500 x 2 was two years contribution. I contributed $6500 for 2021 before 4/15/2022 and another $6500 for 2022. I was totally unware of the IRA rules last year. So at this point, how much taxes will be incurred by those two contributions? How to calculate them? Thank you so much!
Unless you were age 50 or over in 2022, the contribution limit for 2022 is $6,000, not $6,500. If you contribute $6,500 for 2022 and were under age 50, you will have an excess contribution that is subject to penalty.
Those who are age 50 of over in the particular year can contribute an additional $1,000 for each of these years.
@LLC3 wrote:
$6500 x 2 was two years contribution. I contributed $6500 for 2021 before 4/15/2022 and another $6500 for 2022. I was totally unware of the IRA rules last year. So at this point, how much taxes will be incurred by those two contributions? How to calculate them? Thank you so much!
1. Was your contribution for calendar year 2021 intended to be tax deductible or non-deductible. If non-deductible, did you file form 8606 with your 2021 tax return, and do you have a copy of your 2021 form 8606?
2. What date did you rollover your prior IRA balance into the 403B account at your new employer?
3. What date did you make your 2022 contribution to the IRA, and is it your intention that the contribution be deductible or non-deductible?
4. What date did you rollover the traditional IRA to a Roth IRA?
5. What is your combined balance in all traditional IRA accounts as of 12/31/22?
The $6500 might be off. I contributed up to the limited amount based on my age.
1. My contribution for 2021 was after-tax money.
2. I haven't rollovered my prior IRA balance into the 403B account at my new employer. I wasn't aware of the IRA rules. I plan to do this in 2023.
3. I made my 2022 contribution together with my 2021 contribution before 4/15/2022. Both are after-tax money.
4. I rollovered the traditional IRA to a Roth IRA about a week after contribution.
5. Are you asking all traditional IRA accounts as of 1/1/22? Let's say x dollar amount.
Thank you!
Did you report the 2021 contributions on your 2021 tax return? That should generate a form 8606. Was that included with your 2021 tax return?
Because I was unaware of this so I didn't include the contribution with my 2021 tax return.
OK, one more clarification. Is your rollover IRA (containing your former 401(k) funds) in a separate account from your contributions or are they commingled in the same account at the same trustee?
First, you need to correct 2021, and you need to do this before you file your 2022 tax return. You may want to file a request for an extension for your 2022 return, in case you can't finish all the steps in time.
You need to prepare an amended return for 2021 to report the non-deductible IRA contribution. If the contribution was $6000 or less, then it won't change your tax owed, but you will generate a form 8606. You don't actually need to file the entire amended return, you just need to print, sign and mail the form 8606 (it is one of the forms that can sometimes be filed by itself). But the easiest way to prepare the form 8606 is to use the procedure to amend a tax return. Keep a copy for your records.
If you contributed more than $6000, you will owe a penalty for excessive contributions. You will have to check your records with the IRA custodian. It's too late to fix that, so you just have to pay the penalty. In that case, you would need to file the whole amended tax return, because it will include a form 8606 for the non-deductible contribution and a form 5329 for the excess contribution, and you will need to include a payment. You may be able to amend online and pay electronically. If you have to amend by mail, be sure to keep a copy, and use a mail service with tracking and proof of delivery.
Be aware that, if you made contributions in 2022 that were supposed to count for 2021, you had to tell the bank or broker that in advance. You may want to check with the broker to make sure your contributions were properly applied to 2021 and 2022 as you intended.
The next step is to file your 2022 tax return. You need to report the non-deductible IRA contribution. Turbotax will also ask for prior non-deductible amounts, which you get from the 2021 form 8606 (this is why you have to fix the 2021 return first, so you have the 2021 form 8606 when you prepare your 2022 return).
If you had an excess contribution in 2021, that will be penalized again (6%) in 2022 since those excess funds are still in your IRA. There is a way to fix that and avoid paying a duplicate penalty, but that will require an extra step on your part. After you fix your 2021 return, let us know if you had an excess contribution, and whether you want to pay the penalty again or remove it. But it has to be done before April 13 (to allow a few extra days for the bank to process it before April 18.)
By making non-deductible IRA contribution for 2022, your 2022 tax return will contain a new copy of form 8606 with updated information on your non-deductible IRA balances.
The third step is to rollover the IRA that contains the old 401(k) into your new 403B.
The fourth step is to do an IRA to Roth conversion of the non-deductible IRA funds. In this case, you would report this on your 2023 tax return, and you will need to refer to copies of your 2021 and 2022 form 8606's. The conversion will be non-taxable.
If you want to do another backdoor Roth conversion in 2023, you can do that after the conversion of the existing funds or you can do that at the same time.
Thank you so much for your detailed explanation!
One more question: As long as I rollover the IRA that contains the old 401(k) into my new 403B before the end of 2023, it doesn't matter when I do an IRA to Roth conversion of the non-deductible IRA funds in 2023. Correct?
@LLC3 wrote:
Thank you so much for your detailed explanation!
One more question: As long as I rollover the IRA that contains the old 401(k) into my new 403B before the end of 2023, it doesn't matter when I do an IRA to Roth conversion of the non-deductible IRA funds in 2023. Correct?
Yes, if I understand your question correctly. You want to get to a situation where (considering all your IRA accounts as if they were one account) all the funds are non-deductible. (In your case, by moving the deductible funds back to the 403B.) Once you have a situation where all the funds in your traditional IRAs are non-deductible, you can do a successful back door Roth conversion and it doesn't matter when you do it.
I may have misunderstood your question. If you want to do the Roth conversion of the nondeductible funds first, and the rollover back to the 403B second, I believe that will also work as long as it is finished before December 31.
In my mind, it is cleaner to do the rollover back to the 403B first and the Roth conversion after, but I believe that it is not required for you to do it that way.
I'll follow your steps and get this resolved. Thanks again for your help!
I just found out that I actually filed 8606 for my 2021 tax return. So this step is done.
I have one more question: Since I haven't done the third step (to rollover the IRA that contains the old 401(k) into my new 403B) until now. Do I need to pay tax for the backdoor ROTH conversion from non-deductible IRA when I file my 2022 tax return? Thank you!
A back door, Roth IRA conversion should never be taxable if you do it correctly. You make a nondeductible contribution to a traditional IRA, and then convert it to a Roth. The conversion is non-taxable because as long as the original contributions were never deducted, so you don’t have any tax deduction to pay back. Where are you run into trouble is if you have a mixture of deductible and nondeductible money in your IRAs, because all of your conversions are prorated. That’s why you need to get the employer funds out of the IRA and into the 403B before the end of the tax year.
however, you do need to report the 2022 nondeductible contributions so they get added to form 8606. Your 2022 tax return should include a new form 8606 with the updated nondeductible basis.
For 2022, I do have both pre-tax employer IRA and after-tax Roth IRA. How much do I need to pay back? Thanks!
The pro-rata rule will apply to the conversion you made in 2022 since you had pre-tax and after-tax funds in the traditional IRA. This is calculated on Form 8606 or Worksheet 1-1. Figuring the Taxable Part of Your IRA Distribution. You will see the taxable amount on line 18 of Form 8606.
Please be aware, we cannot see your return therefore we cannot tell you how much will be taxable.
As Opus 17 mentioned you should move the pre-tax funds out of the traditional IRA and into the 403B (before the end of December 2023) to avoid this issue in 2023.