Limit on Back door Roth IRA conversion

[ccthealias]

I am trying to understand the limit to backdoor IRA conversion. Can contribute 6K against 2022 and 6K against 2023 now and convert both to Roth IRA at the same time or do you need to wait.

Is the 6K limit on the conversion or on the distribution to the traditional IRA?

[DanaB27]

Yes, you could make in 2023 a $6,000 contribution for 2022 and another contribution of $6,500 for 2023 (IRA contribution limits) and then convert the full amount.

If you do this you will enter a nondeductile contribution on your 2022 return and 2023 return. The conversion will be entered on your 2023 return.

 To enter the nondeductible contribution to the traditional IRA on your 2022 return:

1. Login to your TurboTax Account 
2. Click on "Search" on the top right and type “IRA contributions” 
3. Click on “Jump to IRA contributions"
4. Select “traditional IRA”
5. Answer “No” to “Is This a Repayment of a Retirement Distribution?”
6. Enter the amount you contributed
7. Answer “No” to the recharacterized question on the “Did You Change Your Mind?” screen
8. Answer the next questions until you get to “Any Nondeductible Contributions to Your IRA?” and select “Yes” if you had a nondeductible contribution before this tax year.
9. Enter your basis in the Traditional IRA from your 2021 Form 8606 line 14 (if you had a basis in the prior year)
10. On the “Choose Not to Deduct IRA Contributions” screen choose “Yes, make part of my IRA contribution nondeductible” and enter the amount (if you have a retirement plan at work and are over the income limit it will be nondeductible automatically and you only get a warning and then a screen saying $0 is deductible).

On your 2023 tax return

To enter the nondeductible contribution to the traditional IRA:

1. Login to your TurboTax Account 
2. Click on "Search" on the top right and type “IRA contributions” 
3. Click on “Jump to IRA contributions"
4. Select “traditional IRA”
5. Answer “No” to “Is This a Repayment of a Retirement Distribution?”
6. Enter the amount you contributed
7. Answer “No” to the recharacterized question on the “Did You Change Your Mind?” screen
8. Answer the next questions until you get to “Any Nondeductible Contributions to Your IRA?” and select “Yes” since you had a nondeductible contribution before this tax year.
9. Enter your basis in the Traditional IRA from your 2022 Form 8606 line 14 ($6,000 assuming you didn't have a basis from 2021 or earlier)
10. On the “Choose Not to Deduct IRA Contributions” screen choose “Yes, make part of my IRA contribution nondeductible” and enter the amount (if you have a retirement plan at work and are over the income limit it will be nondeductible automatically and you only get a warning and then a screen saying $0 is deductible).

To enter the 1099-R conversion: 

1. Click on "Search" on the top right and type “1099-R”  
2. Click on “Jump to 1099-R”
3. Click "Continue" and enter the information from your 1099-R
4. Answer questions until you get to “Tell us if you moved the money through a rollover or conversion” and choose “I converted some or all of it to a Roth IRA”
5. On the "Review your 1099-R info" screen click "Continue"
6. Answer "yes" to "Any nondeductible Contributions to your IRA?" since you had any nondeductible contributions in prior years.
7. Answer the questions about the basis from line 14 of your 2022 Form 8606 ($6,000 assuming you didn't have a basis from 2021 or earlier) and the value of all traditional, SEP, and SIMPLE IRAs

Please be aware the Backdoor Roth only works if your traditional/SEP/SIMPLE IRAs don't have any pre-tax funds left in them. Otherwise, the pro-rata rule would apply.

[ccthealias]

If you have a employer sponsored 401k, does that exclude you from Backdoor Roth?

[DanaB27]

No, having a 401k doesn’t exclude you from performing a backdoor Roth. The only thing you want to avoid is rolling the 401k to your traditional IRA when you plan to use the backdoor Roth strategy. Because it won’t work if you have pre-tax funds in the traditional IRA and each distribution/conversion will have taxable and nontaxable parts (pro-rata rule).

@ccthealias

[ccthealias]

Does the prorata rule still apply for converting to Roth  if you have a rollover IRA (money that was rollover from employer 401k).

[dmertz · Accepted solution]

The pro-rata calculation involves all funds in your traditional IRAs at year end no matter how the funds got into your traditional IRAs; all of your traditional IRAs are treated in aggregate a if they were one large traditional IRA.  A large pre-tax amount rolled over to a traditional IRA from a 401(k) (the money in your rollover IRA) will greatly reduce the non-taxable amount and greatly increase the taxable amount of any Roth conversion performed during the year, leaving a large portion of your basis in nondeductible traditional IRA contributions in your traditional IRAs to be applied to future traditional IRA distributions.

[ccthealias]

If I transfer my rollover IRA to my employer’s 401k. Would I be able to Backdoor IRA then?

Specially I m looking to roll my IRA into my employer 401k in Jan 2024 and do I Backdoor IRA  for tax year 2023? Would prorate still apply here for tax year 2023?

[DanaB27]

Yes, if you wait until 2024 to reverse rollover the pre-tax funds from your traditional IRA to your employer 401k, then the pro-rata rule still applies for the tax year 2023, since you still have pre-taxed funds in your traditional IRA on December 31, 2023.

The Backdoor Roth for the tax year 2023 only works if all your traditional/SEP/SIMPLE IRAs don' have a pre-tax fund balance on December 31, 2023. Otherwise the pro-rata rule will apply.

But, if you roll over your pre-tax funds from your traditional IRA to your employer 401k in January 2024 then you will be able to perform a Backdoor Roth starting in 2024.

@ccthealias

[ccthealias]

How would the basis of pro-rata apply if I was midway in the reverse rollover of the pre-tax funds from traditional IRA to employer 401k process?

As of Dec 31st, the check was issued from my traditional IRA and the balance from my IRA statement reflects $0  but the check has not been sent /cashed by the employee 401K until Jan 2024.  

[dmertz · Accepted solution]

Your Form 5498 from the traditional IRA should show the same year-end balance as your year-end statement from the traditional IRA.  If that amount is zero, that's the amount that is used during the pro rata calculation for that year.  The distribution being rolled over to the 401(k) still occurred on December 31 and is reportable on that year's tax return no matter when the check is deposited into the 401(k).

[ccthealias]

Just to clarify since my question is around back door IRA.

 
I have pre tax  in rollover IRA which I rollover into to my employer’ 401k. The check was issued Dec 28 2023

Since my rollover from Traditional IRA to 401k was done in dec 2023.  I want to know if I m eligible to do a Backdoor IRA for Tax year 2023.

Also I looked at form 5498 which is not available until May.  How do I make a determination before the April 15 deadline (for backdoor IRA TY 2023)

Also the 5498 shows contributions and conversion. Since I m not contributing to traditional IRA, which line on the form should I be looking at to confirm the balance of the IRA as of Dec 31?

[Opus 17]

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@ccthealias wrote:

Just to clarify since my question is around back door IRA.

 
I have pre tax  in rollover IRA which I rollover into to my employer’ 401k. The check was issued Dec 28 2023

Since my rollover from Traditional IRA to 401k was done in dec 2023.  I want to know if I m eligible to do a Backdoor IRA for Tax year 2023.

Also I looked at form 5498 which is not available until May.  How do I make a determination before the April 15 deadline (for backdoor IRA TY 2023)

Also the 5498 shows contributions and conversion. Since I m not contributing to traditional IRA, which line on the form should I be looking at to confirm the balance of the IRA as of Dec 31?

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"Since my rollover from Traditional IRA to 401k was done in dec 2023.  I want to know if I m eligible to do a Backdoor IRA for Tax year 2023."

A "backdoor Roth" conversion has two steps.  You make a non-deductible contribution to a traditional IRA, and then you convert it to a Roth IRA.  You can make a non-deductible contribution for the 2023 tax year up until April 15, 2024, and it will count for 2023.  But you can't make the conversion in 2023, because conversions are never retroactive.

As long as you removed all the pre-tax money from the traditional IRA before the end of 2023, you can make a new contribution of non-deductible money to a traditional IRA (during January 2024 but for calendar year 2023), and when you prepare form 8606, it will show that your IRA balance is 100% after tax, because it will only contain the non-deductible contribution.  But you can't then convert it in 2023, the conversion will happen in 2024.

You are correct that form 5498 won't be issued until May.  However, if you received a check from the pre-tax IRA dated December 29, then the IRA will count that as a full distribution for 2023 and it will show up as a distribution on your 1099-R and on your 5498.  (When you enter the 1099-R, you will tell Turbotax that you rolled the money over to another qualifying plan, so you won't be taxed on it.)

You can work through form 8606 by hand to see how the math works, here is the form and instructions.

https://www.irs.gov/forms-pubs/about-form-8606

By removing the entire balance from your IRA on December 29, and making your non-deductible contribution  in 2024, you should see zero on line 5 and line 6.  That will make line 7-13 all zero as well, and line 14 (your new basis) equal to the amount of your non-deductible contribution.  That's what makes the "backdoor" conversion work. 

So you can make a contribution in 2024 (retroactive to 2023--make sure the IRA knows this in advance so they don't code it for 2024), direct it to a cash account, wait a few days for it to settle, then convert it to a Roth IRA, and the only taxes you would pay might be on a few dollars of interest.   Then you can do it again for 2024.