Can I do Backdoor Roth for 2022 in 2023?

[gulsheenk]

Recently, I learned about Backdoor Roth and I would like to a.) contribute $6K for 2022 in my traditional IRA account and then move to Roth IRA account , b.) contribute 6,500 for traditional IRA account and then move to Roth IRA account.  Is that fine?

I have already moved funds from traditional IRA account to my current employer's 401K account. So the traditional IRA account is empty. 

[MinhT1]

Yes. 

You can contribute to a nondeductible Traditional IRA and do a backdoor Roth conversion for 2022 ($6,000) and 2023 ($6,500). As your Traditional IRA balance is 0, the pro-rata rule would not apply and the conversion will be tax-free.

Please read this TurboTax Help article on how to report these transactions.

[gulsheenk]

@MinhT1 : thanks a bunch!  I have the following follow up questions:

1.) Good to know.  Can I transfer funds from my personal account to the Traditional IRA account? Or I have to wire funds from my bank to Fidelity's Traditional IRA account?

I plan to do two separate transactions (6K for 2022 and $6.5K for 2023) to keep it clean. 

2.) Where I can learn more about "nondeductible" Traditional IRA ? I am not sure about the "nondeductible" part

Best, 

Gulsheen

[MinhT1]

10 To contribute to your nondeductible IRA, you can send funds to a new Traditional IRA or to your existing IRA account with 0 balance.

For tax year 2020, make sure that you contribute $6000 by April 18, 2023 and that you do the Roth conversion before you contribute for 2023, so that the pro-rata rule does not apply.

2) People make nondeductible IRA contributions then do a backdoor conversion to a Roth IRA when their MAGI is too high to allow them to contribute directly to a Roth IRA.

This TurboTax article will give you some more information on nondeductible IRA contributions.

[gulsheenk]

@MinhT1 : thanks for your help. I  have follow up questions as I am filling Turbo tax following the instructions from https://ttlc.intuit.com/turbotax-support/en-us/help-article/retirement-benefits/enter-backdoor-roth-... . I understand that entering a backdoor Roth IRA conversion is a two-step process, as below: 

Step 1: Enter the Non-Deductible Contribution to a Traditional IRA

a.) Federal Taxes --> Deductions & Credits ---> Retirement and Investments --> Traditional and Roth IRA Contributions 

b.) I entered  $6,000 towards 2022 Traditional IRA;  entire amount in the date range of Jan 1, 2023 - April 18, 2023. 

c.) Entered "0" for Amount Switched from a Traditional IRA Contribution to a Roth IRA contribution

Question : I am not being prompted for points 9 and 10 in the  Step 1 of the link above.  What am I missing ? 

Step 2: Enter the Conversion from a Traditional IRA to a Roth IRA

It's basically outlines to enter information from the "received" 1099-R form. 

Question:  However, I have not received that form as I recently (a  day ago) converted funds from Traditional IRA to Roth IRA. What needs to be done?

Thanks! 

[DanaB27]

Yes, entering the backdoor Roth is a two-step process and you will enter the nondeductible traditional IRA contribution for 2022 on your 2022 tax return with the instructions you mentioned. This will create Form 8606 with a $6,000 basis on line 14 and TurboTax will carry over this basis from your 2022 return to your 2023 return since you did not converted the funds in 2022.

You answered step 9 already with "c.) Entered "0" for Amount Switched from a Traditional IRA Contribution to a Roth IRA contribution"

In regards to step 10, if you have a retirement plan at work and are over the income limit your contribution will be nondeductible automatically and you only get a warning and then a screen saying $0 is deductible. Therefore, you won't get Choose Not to Deduct IRA Contributions screen.

If you haven't converted funds in 2022 then you will not enter it on your 2022 tax return. You converted the funds in 2023 and you will receive a 2023 Form 1099-R and then enter this next year on your 2023 tax return:

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 2022 Form 8606 (should be $6,000) and the value of all traditional, SEP, and SIMPLE IRAs.

Please don't forget next year to enter your $6,500 traditional IRA contribution for 2023 on your 2023 tax return (and make it nondeductible if it isn't automatically nondeductible). 

[gulsheenk]

@DanaB27  thanks a bunch! In that case, I will change the amount of Traditional IRA 2022 contribution from $6K to $0 (It's not letting me delete the entire transaction). 

Yes, in the next year's 2023 tax return, I won't forget to enter $6K for 2022 and $6.5K for 2023 traditional IRA contribution.  🙂 

Can you please elaborate on "make it nondeductible if it isn't automatically nondeductible".  

Thanks, 

Gulsheen 

[AmyC]

You are misreading what DanaB  is saying.  

First paragraph: You want to enter the traditional IRA. You made the contribution.  As DanaB says, you should have an 8606 with $6,000 showing as your basis in the IRA. Dana said you should have $0 deductible. This is just to make sure you have properly entered the $6,000 to be taxable. A visual confirmation.

Second paragraph: Then she says, if you have not converted it... but you did convert so you do need to follow the steps for the conversion as Minh stated. When you do the conversion, it will use the $6,000 basis from the 8606 and you will no longer have a basis in your traditional IRA, no more 8606 which is important as Minh said so that you don't have a pro-rata issue.

Third paragraph: Even if you do qualify for a traditional IRA deduction, you can choose to make it nondeductible. The program will ask you. When you choose to make it nondeductible, you are paying tax on the full amount so that your basis in the IRA is the full amount. That way, when you  turn in into a ROTH, the money has already been fully taxed and there is no further tax consequence beyond earnings. You will file the 8606 each year to show your basis in the  traditional IRA.

The IRS states:

Contributions you make to a traditional IRA may be fully or partially deductible, depending on your filing status and income.

IRS Contributions  states:

Your traditional IRA contributions may be tax-deductible. The deduction may be limited if you or your spouse is covered by a retirement plan at work and your income exceeds certain levels.

• IRA deduction limits

The IRA deduction limits page has the rule for each year and situation.

[gulsheenk]

@AmyC : I am confused now.  @DanaB27 had mentioned "If you haven't converted funds in 2022 then you will not enter it on your 2022 tax return. You converted the funds in 2023 and you will receive a 2023 Form 1099-R and then enter this next year on your 2023 tax return:"  

I had contributed 2022 $6000 in traditional IRA account in March 2023. So based on the above statement from Dana, I am inferring, I need to wait for 1099-R next year and enter this next year on my 2023 tax return, right ?  If yes, then I will change the amount of Traditional IRA 2022 contribution from $6K to $0 (It's not letting me delete the entire transaction) on my 2022 tax return.  

Best, 

Gulsheen

[AmyC]

Ok. Got it. The traditional IRA will go on your 2022 return since it was made for the year 2022. Enter $6,000 as nondeductible.

You will get the 1099-R for the money taken out of the traditional IRA with the 2023 paperwork since it happened in 2023.

You can follow the steps in this article to complete your return.

[gulsheenk]

Thanks! @AmyC  I will keep the traditional IRA on my 2022 return and complete both steps next year. 

I checked in 2022 return, form 8606-T has "Enter your nondeductible contributions to traditional IRA for 2022, including those made for 2022 from Jan 1, 2023 through April 1, 2023. as $6,000.  So, I think, we should be good, right ? 

[DanaB27]

Yes, you will keep the $6,000 nondeductible traditional IRA contribution you made for 2022 on your 2022 tax return. You should have a 2022 Form 8606 with a $6,000 on line 1, line 3, and as the total basis on line 14.

@gulsheenk

[gulsheenk]

yes, confirming that my 2022 Form 8606 has $6,000 on line 1, line 3, and as the total basis on line 14.

Thanks! 

[gulsheenk]

Hi, @DanaB27, @AmyC @MinhT1 :  here's an update. 

As I was working with Fidelity to transfer funds from Traditional IRA to Roth IRA (backdoor Roth), they warned me that it would be a high tax transaction because of funds in my Rollover IRA account, which usually has pre-tax funds and prorata rule applies across all pre-tax accounts.  So, I have decided not to perform back door Roth and now am working with Fidelity to move $6K 2022 contribution from my Traditional IRA account back to my personal non-retirement account.  It will take 3 more business days.  

Good that I had not submitted my 2022 taxes.  I will now remove $6K 2022 Traditional IRA contribution from my 2022 fax filing.  Please let me know if anything else needs to be done as well. 

Thanks!

Gulsheen

[DanaB27]

Yes, if you had pre-tax funds in your traditional IRA then the pro-rata rule applies. This means that with each distribution/ conversion, you will have a taxable and nontaxable part. 

The Backdoor Roth only works if your traditional/SEP/SIMPLE IRAs are empty.  If you plan to use this strategy in the future you might want to think about a reverse rollover where you rollover IRA money to a company plan, like a 401(k). Only pre-tax funds can be rolled from an IRA to a company plan. Therefore, you would isolate the basis and could start the Backdoor Roth procedure fresh. But it only works if your employer allows it, not all plans do.

Yes, if you are getting your contribution returned then please remove the contribution from your return. You will get a 2023 Form 1099-R next year. If you had earnings returned these will be taxable and subject to the 10% early withdrawal penalty if you are under 59 ½. 

@gulsheenk