Backdoor Roth Conversion question

[VAer]

If John(single) is government employee and is covered by employer sponsored pension plan, his salary is $130k. He is not sure about 2023 stock market capital gain or loss. And he makes $6500 traditional IRA contribution for year 2023, traditional IRA balance was $0 before making contribution. John makes $6500 backdoor Roth Conversion immediately after contribution. Since he is covered by pension plan and his traditional IRA contribution is not deductible.

If John(single) is not covered by any employer sponsored pension plan, his salary is only $50k. He is not sure about 2023 stock market capital gain or loss. And he makes $6500 traditional IRA contribution for year 2023, traditional IRA balance was $0 before making contribution. John makes $6500 backdoor Roth Conversion immediately after contribution, without tax withhold. Later on, his stock capital gain is $200k(all is short term) for year 2023, now his total income is $250k, and his traditional IRA contribution is not deductible, correct? In this case, he will need to pay tax on $6500 contribution when filing tax return. I am a little confused here, in this case, John ends up putting $6500 into Roth IRA, then pay tax with additional money. If John chooses to withhold tax when doing Backdoor Roth Conversion, then it will end up less than than $6500 moving to Roth IRA, correct? So there is difference, in one case, you end up putting $6500 into Roth IRA ; in another case, you end up putting less than $6500 into Roth IRA. Am I correct? It seems that we should not withhold tax when doing Backdoor Roth Conversion, otherwise we may not be able to "move" $6500 into Roth IRA.

[DanaB27]

Yes, you should not have tax withheld for a backdoor Roth conversion. Otherwise, you will need to replace the tax withheld (use your other funds to put in the Roth) to avoid the early withdrawal penalty.

 If your traditional IRA account was empty then a backdoor Roth conversion will only be taxable on the earnings in the traditional IRA before moving it to the Roth IRA. If entered correctly TurboTax will create Form 8606 to show the basis in the traditional IRA and calculate the taxable amount (in some cases TurboTax will use a worksheet to calculate this).

Please use the following instructions to enter a "Backdoor IRA" to ensure it is calculated correctly in TurboTax.

To enter the nondeductible contribution to the traditional IRA:

1. Login to your TurboTax Account 
2. Click on "Search" on the top right and type “IRA contributions” 
3. Click on “Jump to IRA contributions"
4. Select “traditional IRA”
5. Answer “No” to “Is This a Repayment of a Retirement Distribution?”
6. Enter the amount you contributed
7. Answer “No” to the recharacterized question on the “Did You Change Your Mind?” screen
8. Answer the next questions until you get to “Any Nondeductible Contributions to Your IRA?” and select “Yes” if you had a nondeductible contribution before this tax year.
9. Enter your basis in the Traditional IRA from your 2021 Form 8606 line 14 (if you had a basis in the prior year)
10. On the “Choose Not to Deduct IRA Contributions” screen choose “Yes, make part of my IRA contribution nondeductible” and enter the amount (if you have a retirement plan at work and are over the income limit it will be nondeductible automatically and you only get a warning and then a screen saying $0 is deductible).

To enter the 1099-R conversion: 

1. Click on "Search" on the top right and type “1099-R”  
2. Click on “Jump to 1099-R”
3. Click "Continue" and enter the information from your 1099-R
4. Answer questions until you get to “Tell us if you moved the money through a rollover or conversion” and choose “I converted some or all of it to a Roth IRA”
5. On the "Review your 1099-R info" screen click "Continue"
6. Answer "yes" to "Any nondeductible Contributions to your IRA?" if you had any nondeductible contributions in prior years.
7. Answer the questions about the basis from line 14 of your 2021 Form 8606 and the value of all traditional, SEP, and SIMPLE IRAs