Advanced level - Backdoor ROTH IRA conversion timing

The conversion will happen in 2023 and will be reported on your 2023 tax return.   There is no retroactive option for conversions and rollovers, they happen when they happen.  

The tax consequences of the IRA to Roth conversion depends on whether you have any pretax traditional IRA money in any account, even if it is a different account with a different broker.  If you have pretax money, then your conversion is prorated and is not a true “back door“ Roth conversion. If you don’t have pretax money in an IRA, then you can do the back door conversion at any time.  There is no time limit relative to the contribution.

Thanks so much! I'll have this 6k Traditional IRA then for tax year 2022 and if I understand your advise correctly that can impact my conversion from traditional to Roth for 2023 (if I choose to do that). So that make me "stuck" with the traditional IRA option, unless I found someone who can guide me through the prorated process (I suppose it's quite complex). Do you have any options e.g to withdraw since I have not done anything with the traditional IRA money at Fidelity?   

@Tiborone 

I don’t understand your follow up question.  It seems you might be slightly confused by the concept of a backdoor Roth IRA, and so I’m going to go over some background—apologies if you already know this.

 

 

The concept of a “back door” Roth IRA is the following: suppose that your income is too high to allow you to make a deductible pretax IRA contribution and also too high to allow you to make a Roth IRA contribution. You can make a nondeductible contribution to a traditional IRA—which means you don’t take a tax deduction — and then you convert it to a Roth IRA.  That way, you can get money into the Roth IRA even though you are ineligible to make a direct contribution.  

If you want to make a back door Roth IRA conversion, the first thing you have to do is to put nondeductible money into a traditional IRA. Presumably, that is what you did on April 17. If you don’t take a tax deduction for the IRA contribution, then you have to report it as a nondeductible contribution and your 2022 tax return will include a copy of form 8606, which keeps track of your nondeductible IRA basis.

 

Then, at any convenient time, you convert the traditional IRA to a Roth IRA. If the traditional IRA was non-deductible, then the conversion won’t be taxable.

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Now this is in contrast to a regular Roth conversion. Any time that you have pretax money in a traditional IRA, you can convert some or all of it to a Roth IRA and pay the income tax. Because a traditional IRA is taxed when you withdraw it, and a Roth IRA is taxed when you contribute, but not when you withdraw, doing a Roth conversion is a way of paying tax now instead of later. There are many advantages to this, but it also depends on your individual financial situation.
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Hopefully this was a rehash of background information that you already know.

 

Where the backdoor Roth conversion runs into problems, is when you have tax deductible money and nondeductible money mixed in a traditional IRA. 

I don’t understand your conclusion that you are “stuck“ in a traditional IRA.  If all your money in a traditional IRA is tax deductible, then any Roth conversion is a regular taxable conversion and it is not a “back door” conversion.  You can do a Roth conversion any time as long as you are prepared to pay the taxes.

If all of your money in a traditional IRA is nondeductible, then you can convert it to a Roth IRA at any time. Since the money was not deductible in the first place, it is not taxable when you convert it. That is what is meant by a back door conversion.

 

If your traditional IRA contains a mixture of pretax tax (deductible) and after tax (nondeductible) contributions, then the backdoor IRA become slightly more complicated.

 

If you have more than one IRA account at the same or different brokers, they are all considered a single IRA by the IRS.  If you want a bit more details for your situation, you will need to tell us what is your current total balance in traditional, IRA accounts, and how much of that money is nondeductible versus tax deductible.

 

 

It's not really very complex.

See Form 8606.

TurboTax ( or your other tax software ) will fill out the form for you based on the amounts you enter:

basis, converted amount, year end value.

@Tiborone 

 

You have no basis unless you elect to make your 2022 contribution non-deductible on your 2022 tax return.

Thanks again, Opus17. I am very impressed with your patience and diligence trying to explain this to me. I think I understand the principle of backdoor Roth IRA conversion, I was just confused that I couldn't convert by the regular tax filing deadline - looks like I can do it at any time if the contribution was non-deductible.

 

So, to summarize, I have contributed 6k after tax dollars to my Traditional IRA, and I can convert now to Roth, and that will work fine for tax year 2022. I will report the 2022 non-deductible traditional IRA contribution on my return. I have no other IRA contributions. Same situation for my wife, we are married, filing jointly.    

 

I hope I was getting this correctly - appreciate all your help.

Thank you, fanfare, I think I get it now.

I think I know what's my problem now 🙂

 

So I have completed the Traditional IRA  contribution part in Turbotax. Deductions is zero, so I'm good for now. 

 

Then I would go ahead and convert the Traditional to Roth IRA on Fidelity's platform and will receive a 1099-R, and complete Turbotax with conversion details. I suppose I can do this step only in the next year's return as it is after April 18, right?  Also, my traditional IRA already earned 109 dollars, so I wonder how do I pay tax on that income - I suppose in 2023 return.  I hope I didn't say it too many times, but thank you 🙂

it is not required to make your IRA contribution non-deductible.

by not doing that, you won't have to track the remainder basis after conversion for the life of your Traditional IRA.

 

@Tiborone 

@fanfare 

You’re overlooking the fact that the whole point of this conversation is about a back door conversion.

@Tiborone 

If you want the contribution to be recorded for 2022, you must report the nondeductible IRA contribution on your 2022 tax return using form 8606.  And if your spouse also made a 2022 nondeductible contribution, they must have a separate form 8606 in their name as part of your tax return.

Then, you may do the Roth conversion at any time that is convenient for you. The Roth conversion is always reported on the tax return for the day that it happens. Even if you did the conversion on January 2, it must be reported for 2023, because conversions are never retroactive. 

The conversion is not tied in any way to the date of the contribution, it can happen anytime. In fact, if you are planning to make another $6000 nondeductible contribution for 2023, you could make that contribution now and then convert the $12,000 all at once. you don’t have to do it in $6000 increments. 

And yes, if you did the conversion now and you have $109 of earnings, the earnings will be taxable as of the date of the conversion.  (The only reason to try and make the conversion happen soon after the contribution is to minimize the conversion of taxable earnings, but it is not required that you do this as long as you pay the tax.)

If your IRA value is no more than your basis, a conversion is tax-free.

If your IRA has value because it's been around for a while and you took deductions. a conversion will not be tax-free.

 

If your Traditional IRA grew by earning $109 dollars while you delayed, then your conversion cannot be tax-free.

 

In the situation given, the tax is nominal so it is effectively a backdoor Roth.

Just a quick note for clarity @Tiborone , the deadline for completing a Backdoor Roth is December 31 of the tax year, as opposed to the filing deadline used for Roth and Traditional contributions.  As you've realized, to make it a clean Backdoor for 2022, it should have been completed by 12/31/22.  What you are doing now is a conversion (which is totally fine), but spans more than one tax year.  

Sounds good. So the steps if I understand well will be:

- add another 6,5k nondeductible contribution per person today (increased amount for 2023. It is an optional step now, but I would elect to do this)

- convert 12,5k to Roth as soon as possible, when the additional 6.5k settles in the Fidelity account

- report 6k non-deductible traditional IRA contribution for 2022 through 8606 (the amount I did on April 17)

- report the additional 6,5k non-deductible contribution I make today on 2023 return through 8606

- report the 12,5k Roth conversion on the 2023 tax return.

 

How do I pay taxes on the remaining 109$? And after indicating it as taxable, can I convert that to Roth as well? Thanks again. 

" if I understand well "

 

The way to pay tax on the 109 is to convert the entire Traditional IRA to a Roth IRA.

@Tiborone 

Thanks fanfare! So I Turbotax will generate the tax when I report the conversion in my 2023 returns, right?

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@Tiborone wrote:

Sounds good. So the steps if I understand well will be:

- add another 6,5k nondeductible contribution per person today (increased amount for 2023. It is an optional step now, but I would elect to do this)

- convert 12,5k to Roth as soon as possible, when the additional 6.5k settles in the Fidelity account

- report 6k non-deductible traditional IRA contribution for 2022 through 8606 (the amount I did on April 17)

- report the additional 6,5k non-deductible contribution I make today on 2023 return through 8606

- report the 12,5k Roth conversion on the 2023 tax return.

 

How do I pay taxes on the remaining 109$? And after indicating it as taxable, can I convert that to Roth as well? Thanks again. 

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Just for my sake, I'm going to repeat this in chronological order.

 

1. File your 2022 return reporting the non-deductible contributions to traditional IRAs (you and your spouse, I think.)

2. Make a non-deductible 2023 contribution.  Wait for it to settle.

3. Rollover/convert the entire balance of the traditional IRA to a Roth IRA.

4. In January 2024, the plan trustee will send a 1099-R reporting the conversion.  It should have the entire amount converted listed in box 1 (gross distribution) and in box 2a (taxable amount) with box 2b checked ("taxable amount not determined").  There should be a code 2 in box 12.

5. Prepare your 2023 tax return.  You will list the non-deductible contribution and the 1099-R for the conversion.  Turbotax will prepare a form 8606 which will calculate that only $109 of the conversion is taxable. 

Please refer to Form 8606 Part II Lines 16,17, and 18.

Perfect, now everything is clear. Thank you Opus 17, fanfare and BarbL, great community here.