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Level 3
posted Feb 22, 2021 6:10:24 PM

Pre-tax Rollover IRA conversion to Roth followed by backdoor Roth

I contributed $6000 to my Roth IRA for 2020 that I now have to remove because I exceeded the income limit last year. My plan is to recharacterize it and then do a backdoor Roth conversion for 2021, but I have some money already in a pre-tax rollover IRA from previous employers (around $20k). My plan is to:

 

1. Convert the pre-tax 20k in the rollover account to a Roth IRA

2. Recharacterize the 2020 excess Roth ($6000 + earnings) into the now-empty rollover IRA and then convert it to a Roth (the backdoor conversion)

 

My understanding is that the 20k plus the earnings from the excess Roth will count as income for 2021 which I will pay taxes on next year.  However, I will not have to pay any further taxes on the $6000 originally from the excess Roth because it is non-deductible. Is this correct? 

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1 Best answer
Expert Alumni
Feb 23, 2021 6:46:07 AM

Yes, the pre-tax 20k plus the earnings converted to the Roth from the trad. IRA will count as income for 2021.

 

Yes, the $6,000 nondeductible contribution to the trad. IRA converted to the Roth IRA won't be taxable.

 

You will enter the recharacterization when you enter the contribution to the Roth IRA

  1. Login to your TurboTax Account 
  2. Click on the Search box on the top and type “IRA contributions”
  3. Click on “Jump to IRA contributions"
  4. Select “Roth IRA”
  5. Answer “No” to “Is This a Repayment of a Retirement Distribution
  6. Enter the Roth contribution amount 
  7. Answer “Yes” to the recharacterized question on the “Did You Change Your Mind?” screen and enter the contribution amount (no earnings or losses)
  8. TurboTax will ask for an explanation statement where it should be stated that the original $xxx.xx plus $xxx.xx earnings (or loss) were recharacterized.
  9. On the screen "Choose Not to Deduct IRA Contributions" answer "Yes"

3 Replies
Expert Alumni
Feb 23, 2021 6:46:07 AM

Yes, the pre-tax 20k plus the earnings converted to the Roth from the trad. IRA will count as income for 2021.

 

Yes, the $6,000 nondeductible contribution to the trad. IRA converted to the Roth IRA won't be taxable.

 

You will enter the recharacterization when you enter the contribution to the Roth IRA

  1. Login to your TurboTax Account 
  2. Click on the Search box on the top and type “IRA contributions”
  3. Click on “Jump to IRA contributions"
  4. Select “Roth IRA”
  5. Answer “No” to “Is This a Repayment of a Retirement Distribution
  6. Enter the Roth contribution amount 
  7. Answer “Yes” to the recharacterized question on the “Did You Change Your Mind?” screen and enter the contribution amount (no earnings or losses)
  8. TurboTax will ask for an explanation statement where it should be stated that the original $xxx.xx plus $xxx.xx earnings (or loss) were recharacterized.
  9. On the screen "Choose Not to Deduct IRA Contributions" answer "Yes"

Level 3
Feb 23, 2021 7:11:17 PM

Thanks @DanaB27 , it's good to confirm this. And for tax purposes, it doesn't actually matter whether I recharacterize the 6k or convert the 20k first, right? I could even spread out this process over multiple years if I was getting close to a higher tax bracket, and the end result is that $6,000 would not be taxed?

Expert Alumni
Feb 24, 2021 5:00:47 AM

Yes, it doesn't matter as long as you recharacterize your $6,000 by the April 15th.

 

Yes, you could spread it out. Then each distribution/conversion would have some part allocated to the tax-free $6,000 and rest would be allocated to the taxable part of the $20k.