Quick question: if recharacterized a Roth contribution, do you still have to report the Roth 1099-R in Turbotax?

[DanaB27]

Yes, she will have to pro-rata rule applied until the traditional IRA is $0. Yes, it wouldn’t make sense to do the rollover if she can avoid it.

She can only get rid of the basis if she converts the full amount and her account is $0 but that would mean an increase in taxable income. She could covert the current balance in the traditional IRA in 2023 and then in 2024 rollover the 401k if you are fine paying taxes on the taxable conversion amount. 

If she rolls over her 401k account, she could convert it each year in small amounts (to lessen the tax impact) or wait until you both are retired and have less taxable income (are in a lower tax bracket) and then take either distributions or convert it. Or she has to keep the 401k.

@dhuynh44

[dhuynh44]

@DanaB27 

Thank you!

So essentially the best option would be for her to do a reverse rollover if allowed and converting the basis.  The only tax burden would be paying taxes on the $4856 basis if converted to Roth, and just reporting on this years return the rollover correct?  I wouldn’t pay any taxes on rolling over.  I could roll her 401k back to her tIRA in 2024?

If she did decide to convert her whole amount in her tIRA, what would the taxes be if her basis is $4856 and her total value is let’s say $16000?

If she ever gets a different job without a 401k, has her old 401k, has this tIRA with basis still, what is the best option for her to contribute to retirement?  She can contribute to the tIRA but elect it as deductible correct?

She also might not be able to convert directly to a roth depending on our combined income?

thanks @DanaB27 

[DanaB27]

Yes, the reverse rollover would be her best option (if allowed).

Yes, if you do a reverse rollover this isn’t taxable but will be reported on your 2023 tax return. This will free up the $4,856 basis which you could then convert tax-free to the Roth IRA in 2023. Then in 2024 she could rollover her 401k back into the traditional IRA.

If she converted the full current amount of $16,000 (with the value of $0 on December 31, 2023) then $11,144 would be taxable income and taxed according to your 2023 tax bracket.

Yes, she could make deductible IRA contributions and keep the basis in the traditional IRA. Later when she takes distribution each distribution will have a taxable and nontaxable part because of the pro-rata rule.

Yes, she doesn’t have to convert to Roth, she can just keep the funds in the traditional IRA and later just take distributions when she reaches the retirement age (each distribution will have a taxable and nontaxable part) or convert it when your combined income is lower (you are in a lower tax bracket).

@dhuynh44 

[dhuynh44]

@DanaB27 

Thank you.  So essentially if there was not a pro-rata rule and I had $0 nondeductible in the tIRA, if I converted the whole $16000 I would pay taxes on the whole $16000?  So the pro-rata is a bad thing bc she will pay slightly more double taxes on a portion of the $4856 basis correct?

And people convert to Roth bc whatever is in there that earns is also tax free upon withdrawal, so would it make more sense to pay taxes on converting her traditional now (with pro-rata) without a job, have it grow tax free with earnings, vs being taxed with earnings if left in traditional at retirement?

thank you

[DanaB27]

Yes, if she had $0 nondeductible in the traditional IRA ($0 basis) and converted the whole $16,000 then the whole $16,000 would be taxable because you convert pre-tax funds into after-tax funds. No, she won’t be double-taxed because of the pro-rata rule. If you converted $16,000 with a $4,856 basis then $4,856 of the conversion wouldn’t be taxable but the rest of $11,144 would be taxable income. The pro-rata rule just prevents you from only taking out the tax-free amount. This article The Pro-Rata Rule Explained – You Are Not Getting Double Taxed explains it pretty well.

Yes, Roth IRAs have the benefit that earning distributions will be tax-free if you take Qualified Distributions vs from traditional IRAs the earnings distributed will be taxable income.

@dhuynh44

[dhuynh44]

@DanaB27 

I see.  So if I wanted to convert the whole $16000 in the tIRA, having the basis in there is actually ok bc i would only pay taxes on $11414, since I’ve already paid taxes on the $4586?

It would make more sense to slowly convert her tIRA through the years to grow tax free, rather than take distributions at retirement and pay taxes on those?   Will her tax bracket be whatever our whole joint income would be?  We obviously would not know our future tax bracket would be.  

[DanaB27]

Yes, that is correct, only $11,414 would be taxable since you have already paid taxes on the $4,586. 

Yes, depending on your income it might be more beneficial to slowly convert the traditional IRA and then have later the earnings tax-free when you can take Qualified Roth Distributions. 

Yes, if you file joint returns then you will have the same tax bracket as married filing jointly.

@dhuynh44 

[dhuynh44]

@DanaB27 

Hope you are well.  We called my wife's 401k plan and unfortunately they do not allow reverse rollovers.  As far as converting her traditional to Roth, the pro-rata rule is actually a burden to those who are doing BACKDOOR roths correct?  In her case since we are not doing backdoor roths, we are not being additionally penalized by pro-rata rule (besides paying taxes) on converting her traditional to roth correct?

It would make sense to convert her tIRA when she stops working as we will possibly be in a lower tax bracket?

Thank you

[DanaB27]

Yes, you will pay some taxes on the conversion because of the pro-rata rule but your wife would have always had to pay taxes on the pre-tax amount distributions. Therefore, you aren’t penalized. You just can’t do the backdoor Roth for her since that strategy only works when there aren’t pre-tax funds in the traditional IRA.

Yes, it would make sense to convert her traditional IRA when you are in a lower tax bracket. 

@dhuynh44 

[dhuynh44]

@DanaB27 

Thank you.  So it would make sense to leave her 401k there until we convert all of her traditional?  She has about $16000 with $4856 basis.

How would we calculate taxes on the conversion amount we want to convert per year?  This would probably change how much we try to convert each year.

Thank you!

[DanaB27]

Yes, it would make sense to leave her 401k there until you convert all of her traditional IRA.

Yes, the amount of taxes you pay would depend on how much you convert and your tax bracket. The taxable amount will be calculated on Form 8606. TurboTax will do all the calculations for you.

@dhuynh44