IRA Rollover to Roth Question

[umato]

Hello - my question is about a traditional IRA rollover to a Roth.  I have 2 parts to the question.

In 2021, my spouse and I opened 2 traditional IRAs and contributed $6000 in to each.

When filing our return in April 2022, we realized we were not eligible for the full deduction amount. We were limited to $7,620.

In April 2022, we converted one of these traditional IRAs in to a Roth. For the tax on the rollover, how would I determine which part of this account is taxable?  Could we claim the first $6000  contributed in 2021 was for the traditional IRA we did not convert to a Roth, and only the remaining $1620 would be taxed with the rollover?

The second part is, we contributed to the traditional IRA we rolled over for the first 4 months of 2022 for a total of $2000.  I have not claimed any deductions for this 2022 contribution.  Since this account has now been converted to a Roth, do I need to pay tax on any of these 2022 contributions or can we just not claim them on our 2022 return?

Thank you.

[K M W]

In general, anyone can contribute to a Traditional IRA - the sticking point is whether you can claim a deduction on your tax return for a contribution to a Traditional IRA. if you cannot (or do not) claim a deduction for the contribution, then you have after-tax dollars in your Traditional IRA account.

In your case, you and your spouse contributed $12,000 total to your Traditional IRA, but only were able to deduct $7,620. Therefore, your Traditional IRA has a mix of pre-tax and after-tax monies in it. 

Your tax return for the year you made the non-deductible contributions should include Form 8606.  If you did not include Form 8606 on your original return, there is no statute of limitations on the filing of Form 8606 however a $50 penalty may apply for failure to file. If the taxpayer is not required to file an income tax return, Form 8606 can be filed on its own.

In the year that you move monies from your IRA accounts to a Roth IRA accounts, you cannot pick and choose "which" contributions are rolled over - instead, you are considered to be moving part of the pre-tax dollars and part of the after-tax dollars that you have in your IRA accounts on a pro-rata basis.  

Regarding the 2022 contribution made in the first four months of 2022 - was that contribution designated as a 2021 contribution (you can contribute to an IRA until the filing deadline of the tax return), or was it designated as a 2022 contribution?  If it were designated as a 2021 contribution, then your 2021 tax return should report the contribution, either as a deduction, or on Form 8606 as a Non-Deductible contribution to your Traditional IRA.  

If the 2022 contribution was designated as a 2022 contribution, You may be able to treat a contribution made to one type of IRA as having been made to a different type of IRA. You can do this through a Recharacterization.

 To recharacterize a contribution, you must generally have the contribution transferred from the first IRA (the one to which it was made) to the second IRA in a trustee-to-trustee transfer. If the transfer is made by the due date (including extensions) for your tax return for the tax year for which the contribution was made, you can elect to treat the contribution as having been originally made to the second IRA instead of to the first IRA. If you recharacterize your contribution, you must do all three of the following.

• Include in the transfer any net income allocable to the contribution. If there was a loss, the net income you must transfer may be a negative amount.
• Report the recharacterization on your tax return for the year during which the contribution was made.
• Treat the contribution as having been made to the second IRA on the date that it was actually made to the first IRA.

See IRS Publication 590-A  for more details.  IRS Publication 590-A