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Long-time lurker, first-time poster here asking for advice:
Been using the "backdoor Roth" strategy for years, even before I discovered this site. In 2016 I made my usually TIRA contribution in January (non-deductible) and immediately converted it to Roth as I have been doing for years. Unfortunately, late in the calendar year I ran afoul of the "pro-rata rule" when 2 retirement plans in my practice were terminated as part of a practice-sale which resulted in a large amount of my 401k & DBP funds being rolled into my previously zero-balance TIRA. I really didn't have any better options and yes I did check into it. Since the TIRA balance on 12/31/16 is what the IRS looks at I realized than my backdoor Roth strategy was now compromised and I would be taxed (again) on the already-taxed non-deductible contribution from January 2016.
To avoid this I recently re-characterized the Roth conversion, returning the funds back to the TIRA account, along with about $650 in earnings/gains that had resulted over the last 14 months. I could just leave the funds there but see little reason to, in effect, make a non-deductible TIRA contribution for 2016 and would prefer to avoid co-mingling post-tax and pre-tax money in that account for simplicity's sake. However, if I reverse the non-deductible contribution altogether (putting the money in my taxable brokerage account for example), it appears from my reading that I have to take out the gains/earnings as well. From what I can tell, that amount will apparently be taxed as ordinary income and is also subject to a 10% penalty since I'm under 59 1/2 yo.
Do I have this understood correctly?
Do I have any other options to reverse the non-deductible TIRA contribution altogether without triggering taxes and penalties on the earnings?
Thank you very much for your advice.
Been using the "backdoor Roth" strategy for years, even before I discovered this site. In 2016 I made my usually TIRA contribution in January (non-deductible) and immediately converted it to Roth as I have been doing for years. Unfortunately, late in the calendar year I ran afoul of the "pro-rata rule" when 2 retirement plans in my practice were terminated as part of a practice-sale which resulted in a large amount of my 401k & DBP funds being rolled into my previously zero-balance TIRA. I really didn't have any better options and yes I did check into it. Since the TIRA balance on 12/31/16 is what the IRS looks at I realized than my backdoor Roth strategy was now compromised and I would be taxed (again) on the already-taxed non-deductible contribution from January 2016.
To avoid this I recently re-characterized the Roth conversion, returning the funds back to the TIRA account, along with about $650 in earnings/gains that had resulted over the last 14 months. I could just leave the funds there but see little reason to, in effect, make a non-deductible TIRA contribution for 2016 and would prefer to avoid co-mingling post-tax and pre-tax money in that account for simplicity's sake. However, if I reverse the non-deductible contribution altogether (putting the money in my taxable brokerage account for example), it appears from my reading that I have to take out the gains/earnings as well. From what I can tell, that amount will apparently be taxed as ordinary income and is also subject to a 10% penalty since I'm under 59 1/2 yo.
Do I have this understood correctly?
Do I have any other options to reverse the non-deductible TIRA contribution altogether without triggering taxes and penalties on the earnings?
Thank you very much for your advice.
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