Here is the scenario:
- I've had a Traditional IRA with Vanguard since 2016 that started out as a Rollover from an employer-sponsored retirement plan. I've been making regular contributions to that throughout the years such that it grew to ~$40K and contains some combination of deductible and non-deductible contributions + earnings. This total includes ~$1.5K in non-deductible contributions for 2022 (meaning I still have $4500 I can contribute towards the $6K limit)
- In July 2022 I decided to convert the entire balance to a Roth IRA knowing that I will have to pay taxes on that when I file next year. The impetus for this move was to gain the ability to perform backdoor conversions in the future since every year the initial balance of the Traditional IRA will be $0
- I would now like to open a new Traditional IRA this year (2022), fund it with the remaining $4500 using post-tax money, then convert all of it to the Roth IRA, i.e. the backdoor conversion.
My question is this: will the two conversions described in steps 2 and 3 be combined in the eyes of the IRS such that the pro-rated tax applicable to step 2 will also apply to the $4500 in step 3? Or does that somehow get handled differently at tax time from the first conversion (step 2) such that the $4500 in step 3 is not subject to any tax?
Everything you doing is fine I just don't understand why you'd have to open up a different ira to put in the rest of the 2022 contribution. You can leave and use the IRA you already have open for all contributions and conversions. All this will be combined on the tax return and the non deductible contributions you've made will be reflected in the form 8606 so you don't pay taxes on the money twice. In the TurboTax program, you'll need to enter in the non deductible traditional IRA contribution first, then go back and enter the 1099-r for the distribution/conversions that are reported to the IRS. By doing these entries out of order in the program you will have the correct information on the form 8606 when needed.
As always, before you file the return, you should review the entire return carefully. Especially pay attention to the form 8606 and make any corrections needed before you file instead of finding the mistake after you file and having to amend the return.
You have to end the year with a zero balance in ALL your traditional (pre-tax) IRA accounts for the backdoor to work. Otherwise, all your IRA balances are aggregated, and you would be left with a partial conversion and a partial taxable basis left behind in the traditional IRA.
if you convert the entire IRA (twice) your entire basis will move to the Roth IRA untaxed.
There are rare situations where the Traditional IRA retains a prior years basis for future use.
Fill out Form 8606 to see the results of your two actions and answer your question.
Your Line 1 will be $6,000, not $1,500.
The entries on Form 8606 for these transactions will be combined and are date-independent, so as fanfare said, as long as your year end balance in traditional IRAs at the end of 2022 is zero, all of your basis in nondeductible traditional IRA contributions resulting from the contribution in 2022 will be applied to the combined conversions.
Thank you @dmertz and @fanfare for the answers. I think I follow but want to make sure I understand it right so I'll use this as an example. I found a very useful article which gave this formula: Taxable amount = [total pre-tax dollars in all your traditional IRAs] / [total dollars in all your traditional IRAs] * [converted amount]
So, I believe that what you are both telling me is that if the balance in the Traditional is 0 at the end of this year, that must mean that the [total dollars in all your traditional IRAs] equals the [converted amount] and therefore the actual $$$ values that go in those fields do not matter, and that is why it also doesn't matter how many conversions I do this year (so long as the contributions don't exceed $6K). In other words, by converting the entire balance in a Traditional in a given year, the amount of taxes owed solely depend on [total pre-tax dollars in all your traditional IRAs] + any gains on that amount. Do I have that right?