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

[rk38]

Looking for guidance on a back door roth contribution from one traditional IRA account while holding another/second traditional IRA account with a balance. 

If you have a second traditional IRA acount with a balance and do a back door roth contribution conversion from another traditional IRA account which ends up at $0 after the back door roth conversion, and later in the same tax year fully convert that second traditional IRA that had a balance to the roth IRA, will you still  end up paying double tax on the attempted back door roth contribution conversion?

[fanfare]

Regardless of the number of Traditional accounts, IRS says you have one Traditional IRA with one "prior years basis" and you must report it that way.

@rk38 

[rk38]

So since it is considered 1 traditional IRA, will the back door roth contribuition be taxed twice then, even though all traditional IRAs were fully converted to a $0 balance in the same tax year?

[fanfare]

Generally speaking , you are not taxed twice aka double taxed.

If you convert N dollars two times,  you will pay income tax on a conversion of 2 x N dollars.

@rk38 

[rk38]

So if the back door roth contribution was made with after tax dollars should the tax form 8606 limit double taxation, even though there was additional funds in the traditional IRA from a 401k rollover?

[fanfare]

You have to study Form 8606 to understand how the non-taxable part of a conversion to Roth is calculated.

@rk38 

[fanfare]

Generally if you did a rollover of a 401k in the same year, that messes up the tax-free nature of a backdoor Roth IRA  contribution.

@rk38 

[rk38]

The roll over was done some time in the distant past and the traditional IRA was left alone until the tax year of the back door roth at which point the roll over IRA was shortly after fully roth converted.  So, will that still create a double tax on that back door roth attempt?

[fanfare]

If you convert N dollars from one account and M dollars from a second account,  you will have a conversion of  N+M dollars.

The non-taxable part, if any, depends on how much of your IRA has been designated as non-deductible.

See Form 8606 Lines 1,2.

@rk38 

[rk38]

Would it be better to only convert N dollars, the post tax dollars in one tax year and wait for the next tax year to convert the M dollars,  the non-deductible dollars, or does that not matter in the end?

[fanfare]

I thought you said you already did it.

Conversion cannot be undone.

--

converting at a slower rate means less chance of getting bumped up into the higher tax bracket on converted dollars.

some calculation will tell you where the bracket boundary is.

@rk38 

[dmertz]

Roth conversions are always a proportionate mix of your basis in nondeductible traditional IRA contributions and the sum of your year-end balance in traditional IRAs, the amount converted and any other amounts distributed from your traditional IRAs that are reportable on Form 8606.  Whatever amount of your basis that is not applied to your Roth conversions and other distributions is carried forward to be applied to future distributions, so you never pay taxes twice on money in your traditional IRAs.

You will always have some basis remaining in your traditional IRAs until you have a zero balance in all of your traditional IRAs at year-end.

[rk38]

Sorry, I am in the process of converting M dollars.  I rolled over a roll over IRA to a traditional IRA and am waiting for the funds to clear. So since I haven't actually covered M dollars yet, would it be best to do that in a year that I am not using the back door roth feature for N dollars?

[Hal_Al]

 It may be best explained by example. Let's say you have a $95,000 balance in all your existing traditional IRAs and that balance consist of $45,000 in deductible contributions, $10,000 in previous non-deductible contributions and $40,000 in earnings (interest, dividends & capital gains). This year you make a $5000 non-deductible contribution and convert $5000 to a Roth. Only 15% of the $5000 conversion ($750) will be tax free. Your basis, in all your IRAs, is $15,000 (the previous $10,000 of non-deductible contributions plus this year's $5000 contribution). TurboTax will divide that $15,000 basis by the $100,000 balance ($95K+5K) to arrive at the 15% tax free ratio. This is the way the IRS requires it to be done. The calculations will be shown on form 8606.

[rk38]

• Thank you for the example.  Very helpful. I will spend some time to understand form 8606.  Going forward I will not carry any balances in any Traditional IRAs, other than future back door roth's of putting funds into a zero balance  traditional IRA and immediately converting to roth IRA. This seems like the way to go to take full advantage of back door roth and have the entire after tax contribution remain 100% tax free.