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panacea6565
Level 2

Backdoor Roth IRA when tIRA already has profit (and no tax deduction benefit initially)

What all one should do to perform backdoor conversion to Roth IRA of one's already invested 6k (2 years back) in tIRA, and the current amount is 7k (after profit in $AAPL)

And one has not got any tax deduction benefit at that time as the adjusted gross income(AGI) did not allow for IRA deductions.


If the conversation is done now, one has to pay the income tax on the total $7k, or only on $1k as tax on $6k is already paid?


Note: No tIRA deduction is available for incomes greater than $208,000 for 2021

13 Replies
Critter-3
Level 15

Backdoor Roth IRA when tIRA already has profit (and no tax deduction benefit initially)

In the program things are entered a bit backwards ... you must enter this in the deductions & credits section FIRST and then go back to the Income tab...

1)Enter IRA contribution making it non deductible ... this will be on the form 8606

2)Enter the 1099-R for the conversion

 

If your conversion was more than the contribution (earnings) then only the earnings is taxed. 

Opus 17
Level 15

Backdoor Roth IRA when tIRA already has profit (and no tax deduction benefit initially)

To do a real "back door" Roth conversion, you have to convert all your traditional IRA balances.  For example, suppose you make a $6000 non-deductible contribution this year.  If you convert the entire amount ($13,000), then 53% of the balance is taxable.  That's the $7000 that was never previously taxed, because it was a deductible contribution or tax-free growth.  Then in the future, you can make a $6000 non-deductible contribution and immediately convert it tax-free.

 

However, if you make a $6000 non-deductible contribution this year, and only convert $6000, you will still pay tax on 53% of the conversion, because when you do a conversion, the taxable part is determined by your combined balance of all traditional IRAs.  And that would leave you with a $7000 balance that was partly taxes and partly tax-free, and you have to keep track of your basis on form 8606.

 

So really, convert all you traditional IRA balances or it isn't really a back door Roth. 

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*
panacea6565
Level 2

Backdoor Roth IRA when tIRA already has profit (and no tax deduction benefit initially)

Thnak you Critter-3.

 

one more q: as the tIRA contribution is done in 2020 (tax filed with IRS in April 2021), does one have to file any amendment to this 2020-21 tax filing? 

Critter-3
Level 15

Backdoor Roth IRA when tIRA already has profit (and no tax deduction benefit initially)

If you did the original contribution in 2020 then you should have reported it on the 2020 return and it would be on the form 8606.  If you then made the conversion in 2021 when you enter the 1099-R read the screens carefully to indicate you had prior year basis from form 8606.  Step 1 is only done in the years contributions are made ... step 2 is for the years conversions are done.   You could use one or both steps in a single tax year. 

 

If you failed to file an 8606 on the 2020 return an amendment is needed. 

panacea6565
Level 2

Backdoor Roth IRA when tIRA already has profit (and no tax deduction benefit initially)

thnx @Opus 17 

Yes, I am going to do quick conversion going forward from tIRA to rIRA right away.
And as you mentioned, this year its going to be $7000 (till now the current balance in tIRA + $6000(this yr).

But want to mention(as I have not clarified it earlier) that out of this $7000, on the $6000 I put in tIRA, it was counted as non-deductible contribution (as my income bracket did not allowed to get tax benefit, which I was not aware when I put the money in tIRA for 2020 tax yr, and the reason I put the money in tIRA is to get tax benefit - pure lack of knowledge and laziness).

Q: now if I convert $13000 ($7000 now, and $6000 after a month as I have time to do tIRA contribution for this yr), I have to pay tax on $1000 only, or on $7000

Opus 17
Level 15

Backdoor Roth IRA when tIRA already has profit (and no tax deduction benefit initially)


@panacea6565 wrote:

Thnak you Critter-3.

 

one more q: as the tIRA contribution is done in 2020 (tax filed with IRS in April 2021), does one have to file any amendment to this 2020-21 tax filing? 


If you made a non-deductible contribution at any time, that should be reported on form 8606.  If you made a non-deductible contribution in 2020 and not in 2021, you would not have a new form 8606, but you rely on the most recent 8606 you filed (which is why you need to keep your tax papers for longer than usual when you have a non-deductible basis in a traditional IRA.)

 

If you did not report the non-deductible contribution in 2020, you need to report that now.  Because form 8606 has its own signature space, and because reporting a non-deductible contribution will not change your overall tax, you can file form 8606 by itself.  Be sure to use the 2020 version of the form, not the current (2021 or 2022) version.  The 2020 version is on the IRS web site but you have to look for it.

 

If your 2020 contribution was also non-deductible, and you make a 2022 non-deductible contribution, and you convert the entire amount, your non-deductible basis is $12,000 and your total balance is $13,000 so $1000 would be taxable income as a Roth conversion. 

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*
panacea6565
Level 2

Backdoor Roth IRA when tIRA already has profit (and no tax deduction benefit initially)

@Opus 17 @Critter-3 Thank you for helping me.

from where I can figure out if I have filed to 8060 form. my bad, that I lost the 2020 tax filing docs. And can access docs(including 1040) from the IRS website
https://sa.www4.irs.gov/icce-core/load/gettrans/pages/availableTranscripts.xhtml

though in one of the transcripts on IRS, I see form 5498 and it mentions:
IRA Contributions:...................................................$6,000.00

But I am not able to find form 8060.

IRS website mentions these type docs available:

Return Transcript

Record of Account Transcript

Account Transcript

Wage & Income Transcript

Note: I have not done any IRA contribution in 2021 tax yr

Critter-3
Level 15

Backdoor Roth IRA when tIRA already has profit (and no tax deduction benefit initially)

Opus 17
Level 15

Backdoor Roth IRA when tIRA already has profit (and no tax deduction benefit initially)

@panacea6565 

Form 5498 is used by the IRA trustee to report your IRA contributions to the IRS. It does not tell the IRS if your contribution was deductible or nondeductible.

 

If you included form 8606 with your 2020 tax return, it should be included as part of your 2020 tax return transcript.

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*
panacea6565
Level 2

Backdoor Roth IRA when tIRA already has profit (and no tax deduction benefit initially)

thnx @Opus 17 for sharing this :
"If you included form 8606 with your 2020 tax return, it should be included as part of your 2020 tax return transcript."

 

I read it "because reporting a non-deductible contribution will not change your overall tax, you can file form 8606 by itself"

is it fine if I file 8606 form only? and I need to file https://www.irs.gov/forms-pubs/about-form-1040x also?

Still I don't know how I missed to fill form 8606 in first place itself. its miss from my side or from HR Block software side :(


panacea6565
Level 2

Backdoor Roth IRA when tIRA already has profit (and no tax deduction benefit initially)

thnx for spoon feeding 🙂

Hal_Al
Level 15

Backdoor Roth IRA when tIRA already has profit (and no tax deduction benefit initially)

Q. If the conversation is done now, does one has to pay the income tax on the total $7k, or only on $1k as tax on $6k is already paid (non-deductible contributions)?

A.  Only on the $1000 "earnings".

 

The TurboTax interview can handle this. Read and answer carefully.  Review form 8606, part II, to verify the calculations. 

 

Opus 17
Level 15

Backdoor Roth IRA when tIRA already has profit (and no tax deduction benefit initially)

@panacea6565 

If you did not use TurboTax to file your 2020 tax return, it will be easier to file form 8606 alone. You don’t need a form 1040-X.  Just make sure to get the 2020 version of form 8606 and it’s instructions, do an Internet search for “IRS form 8606 for 2020“ and you should locate them.  Fill out the form to report your nondeductible IRA contribution, sign and date the form, and mail it to the IRS.  (You may have to locate the instructions for form 1040 X to find the address where you should mail the form 8606, unless the address is in the instructions to form 8606 itself.).  If 2020 was the first year you made a nondeductible IRA contribution, the form should be fairly easy.

 

Filing an entire amended return is tricky if you did not originally used TurboTax, and you will have to buy the program. You would start by purchasing a copy of TurboTax deluxe for 2020 to download and install on your own computer, from the list for “products for prior tax years“ at the bottom of this page.  Next, create an original tax return exactly as you filed it for 2020 including any errors, and omitting the nondeductible contribution. You will then “file“ this return by telling TurboTax you will file by mail and print a copy. This will mark the tax return as “filed“. Then quit the program, restart, and re-open your tax file, and click “amend“ from the options available. You then add the nondeductible contribution.  This should generate a form 8606. TurboTax may tell you that you have nothing to amend, because adding the form 8606 doesn’t actually change the tax you owe or claim a refund.  At this point, you will print just a copy of form 8606, which you can do from the forms selection menu. Sign and mail the form 8606.

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*
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