Backdoor Roth IRA

[minhtuanta]

If I do a backdoor Roth IRA now (Feb. 2017), do I report it in my 2016 tax or 2017 tax return?

[AnnetteB · Accepted solution]

You would report it in 2017.

Be sure that the non-deductible IRA contribution is made for the 2017 tax year and not 2016.  The second step in the process, changing from the Traditional IRA to the Roth IRA, will generate and Form 1099-R that you will not receive until early 2018.  Therefore, it will be reported on your 2017 tax return.

[minhtuanta]

Sorry, I left out some details. I made the nondeductible contribution to my IRA in 2014. I now want to do a backdoor Roth IRA for that nondeductible contribution. If I do it now, I'll receive Form 1099-R in early 2018 and would report it in 2017, is that correct?

[AnnetteB]

That is correct.  Be aware that it may not be a completely non-taxable transaction.  If the Traditional IRA includes earnings, then the earnings will be taxable.  Also, having any deductible contributions included in the Traditional IRA would complicate the transaction.

[minhtuanta]

Say I put in $5,500 nondeductible and the amount earned some earnings. Now I only want convert $5,500 and don't care about the earnings (I want to avoid the complication of calculating how much was the earnings). Am I going to be taxed on that $5,500?

[fanfare]

You can't avoid it. The custodian will calculate the associated earnings. this is mandatory.
If you make a contribution for 2016 you can convert that too.

Then in May you can make a contribution for 2017 and convert that.

You must convert every thing to bring your IRA balance to zero each time.

[minhtuanta]

Thanks for your answer. I guess I should've had a separate IRA for nondeductible.

[fanfare]

That won't help . All your IRAs are considered as one IRA for this and other purposes.

[fanfare]

If your IRAs all together are mostly non-deductible contributions. then the tax would be minimal to convert.
Unless your IRA has grown significantly, then it would be an issue. But you will pay that tax sooner or later so maybe you want the advantages now of a Roth going forward.
You'll never pay tax again on that money.

[fanfare]

Also if you are willing to pay tax, you do not have to convert the entire IRA at once. You can convert any amount. See Form 8606 to find out how much would be taxed.