Roth IRA back door contribution while having more than one traditional IRA account

[baldietax]

your question on whether or not to convert the $M rollover this year at the same time as the $N backdoor, really only depends on when you want to pay the tax on converting $M to Roth.  $N nondeductible contribution will always be untaxed when converted, it just depends on when it gets converted over time, it now becomes the basis in a combined IRA pot of $M+$N.  The larger $M is relative to $N the more tax you will pay on further backdoor conversions until it's fully converted and the basis goes to zero.

simplifying the previous example to just assume no basis in the rollover for $95k and you do $5K backdoor.

if you convert all $100k to Roth in 2024 you will pay tax on $95k

if you just do backdoor Roth conversion in 2024 and leave the $95k in the IRA, the backdoor will be taxed on (95/100)*5k =$4750, only $250 will be tax free, and you will be left with a $95K IRA with $4,750 basis.  If you convert the rest in 2025 you will pay tax on $90,250.  Overall you're still getting taxed on $95k it's just split between 2 years.

you can also do the backdoor non-deductible contribution to the IRA either way, and then decide to convert 50k to Roth and 50k next year etc, thinking of the overall tax effect of the conversion (e.g. if you convert too much and trigger the 3.8% NIIT), you don't have to think of these as separate things to decide on converting, it's a combined balance with a basis.

Remember to allow for estimated tax on the Roth conversion if it's significant to not meet the safe harbor amount (smaller of 90% of 2025 or 100% of 2024 [110% if AGI > 150k] etc).  If you've not being paying quarterly ES you may get a penalty for Q1 if you've not already estimated for it and start in Q2, or you can make a one-off ES payment to line up with the Roth conversion but you would then you have to file Form 2210 Annualized Income method to show the timing and eliminate the penalty.  If you pay quarterly ES based on 2024 tax method then it doesn't matter when or how much you convert in 2025 you will not get a penalty and owe the balance when you file in 2026.

Not a CPA, hope this helps.

[rk38]

Thank you for all of that info!! I have to digest the paying quarterly ES info.  When I do the conversion to roth, I was going to have taxes taken out during the conversion process and maybe incorrectly assumed that would adequately pay for taxes on time without penalty. 

[baldietax]

no problem - if you have desktop turbotax I find mocking up 2025 return in 2024 software will get you in the ballpark on tax with some allowance for different deduction limits and tax tables between 2024/5 etc, and will generate Form 8606 if you mock up 1099-R for the rollovers/conversions.  I don't think TT online version has equivalent to do a separate dummy return and get into the form details, but there are probably other online tax calculators you can use.

Re withholding yes this is treated as "timely" by the IRS regardless of when it occurs thru the year, which would remove the need to pay estimated tax assuming the withholding is sufficient to meet that 'safe harbor' amount.  Beware the big downside with it is that IRA money is then being used to pay tax, so you are getting less money converted into your Roth, which can generally be disadvantageous given all the hoops we go thru to get money into these accounts to begin with, it's better to pay the tax with 'outside' funds if able (why do a backdoor Roth if you're then sending IRA money back out as withholding).

Another option depending your situation and the amount of tax, you can make additional withholding from W2 income if applicable, which will also be considered "timely" even if it happens after the conversion, but you only have 6 months left to make up that amount and it take a couple of payroll cycles to adjust.

[rk38]

GREAT info and THANK YOU!  I did think of that, rather not use the conversion funds to pay taxes (right/agreed). So I'll have to consider my other options if I decide to try to keep all the funds to the conversion!

Thanks again!!

[rk38]

I'm researching updating my W4 to include additional federal withholdings.  I'm wondering of I should do the same for state withholding since my state taxes retirement income?

[baldietax]

yes you should check your state situation also for significant income events, depends on your state but they likely follow similar requirements as Fed for estimated tax / withholding / underpayment penalty etc.

[rk38]

Thank you to everyone for all your guidance to help me navigate this road!!!