How to report backdoor Roth conversion if also had rollover in same 2021 year?

[dhuynh44]

Hi all,

So this is interesting and thank you for the information.  Basically, my wife has about $14,000 rolled over deductible pretax from a  previous employer into traditional IRA for 2021.  We have been putting in $5000 for year 2021 into the SAME traditional IRA and converted this SAME after-tax dollars into a Roth, as per recommended by fidelity we could do.  Are we actually are NOT allowed to do this backdoor roth bc we have an existing amount of $14,000 pre-tax dollars?  Will we then be taxed on the $5000 we converted? We had this same $14000 ($16000 or so with gains) basis remaining at end of year 2021. How does this affect our reporting on TurboTax?

We were told we could do this by our financial institution.  If this is true that we could not do this, Going forward how can my wife do a backdoor conversion if she has existing money in her traditional IRA?

Thank you!

[JulieS]

Yes, if you have other traditional IRA amounts in addition to the amounts that are being converted using the back door Roth strategy, your Roth conversion will not be entirely tax free. 

The IRS pools all of your IRA accounts into one figure and uses a pro-rata rule to determine how much can be converted tax free. 

For example, if you have $20000 in a traditional IRA, with $5000 being non-deductible, and you are converting $5000 this year using the back door Roth strategy, 25% will be tax free.

$5000 / $20000 (total IRA amount) = .25 or 25%.

Your financial institution did not lie to you unless they guaranteed it would be 100% tax free regardless of other IRA accounts you may have. 

As far as the future, the backdoor Roth loophole may be closed soon. Legislation has passed the House, but not the Senate to do that. 

[dhuynh44]

Thank you,  how would this leftover basis be reported on TurboTax and how do they determine only the $5000 converted to Roth should be taxed?

Also, would it make a difference if I rolled the pretax traditional of $14,000 to a different financial institution so i can take advantage of a backdoor Roth ensuring my traditional balance for this financial Institution is $0?   Thank you 

[FangxiaL]

No, it won't make a difference even if you roll the pre-tax $14k to another financial institution. All the IRA accounts are aggregated no matter where they are housed. 

But there is one thing you can try: If your wife's current employer has a 401(k) plan and accepts rollovers from other retirement plans, she can roll the pre-tax rollovers to the current 401(k) plan. This is the only way that I know of. 

@dhuynh44