Advanced level - Backdoor ROTH IRA conversion timing

Forum|Forum|3 years ago
May 9, 2023
1 reply
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Hi all, I had a very specific situation on handling Backdoor IRA transition to Roth. I've found this option last minute and contributed 6k to my traditional IRA on April 17, one day before the 2022 tax submission deadline. The money was posted on my Fidelity account but not settled, so I could not convert to Roth IRA before the tax day. Am I still good to convert now, considering the funding happened on April 17 or it should have been funded and converted by April 18? Or shall I just leave it where it is in Traditional IRA to be safe?

I have also received a form 5498 about the 6k traditional IRA contribution from Fidelity. Will they change it to Roth if I am even able to convert?

My 2022 tax filing deadline was automatically extended to October, so I had a bit of time to figure this out.

Thanks in advance.

Opus 17

Level 15

The conversion will happen in 2023 and will be reported on your 2023 tax return. There is no retroactive option for conversions and rollovers, they happen when they happen.

The tax consequences of the IRA to Roth conversion depends on whether you have any pretax traditional IRA money in any account, even if it is a different account with a different broker. If you have pretax money, then your conversion is prorated and is not a true “back door“ Roth conversion. If you don’t have pretax money in an IRA, then you can do the back door conversion at any time. There is no time limit relative to the contribution.

TiboroneAuthor

Level 2

Thanks so much! I'll have this 6k Traditional IRA then for tax year 2022 and if I understand your advise correctly that can impact my conversion from traditional to Roth for 2023 (if I choose to do that). So that make me "stuck" with the traditional IRA option, unless I found someone who can guide me through the prorated process (I suppose it's quite complex). Do you have any options e.g to withdraw since I have not done anything with the traditional IRA money at Fidelity?

fanfare

Level 15

@Tiborone

If you want the contribution to be recorded for 2022, you must report the nondeductible IRA contribution on your 2022 tax return using form 8606. And if your spouse also made a 2022 nondeductible contribution, they must have a separate form 8606 in their name as part of your tax return.

Then, you may do the Roth conversion at any time that is convenient for you. The Roth conversion is always reported on the tax return for the day that it happens. Even if you did the conversion on January 2, it must be reported for 2023, because conversions are never retroactive.

The conversion is not tied in any way to the date of the contribution, it can happen anytime. In fact, if you are planning to make another $6000 nondeductible contribution for 2023, you could make that contribution now and then convert the $12,000 all at once. you don’t have to do it in $6000 increments.

And yes, if you did the conversion now and you have $109 of earnings, the earnings will be taxable as of the date of the conversion. (The only reason to try and make the conversion happen soon after the contribution is to minimize the conversion of taxable earnings, but it is not required that you do this as long as you pay the tax.)

If your IRA value is no more than your basis, a conversion is tax-free.

If your IRA has value because it's been around for a while and you took deductions. a conversion will not be tax-free.

If your Traditional IRA grew by earning $109 dollars while you delayed, then your conversion cannot be tax-free.

In the situation given, the tax is nominal so it is effectively a backdoor Roth.