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Yet Another Backdoor Roth Question

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  • Yet Another Backdoor Roth Question

    Hello,

    I set up backdoor Roths for myself and my spouse in 2016. However due to circumstances beyond my control, a small (less than $100) amount of money was present in a traditional IRA account on 12/31/2016. What are the potential tax consequences of this?

    Thank you

  • #2
    Just for clarification our combined income is greater than $194000.

    Comment


    • #3
      I'm not sure exactly what you're asking.

      So did you contribute to a traditional IRA in 2016 and convert to a Roth in 2016?  But left $100.00 in the traditional IRA?

      Comment


      • #4

        OneSizeFitsAll wrote:I set up backdoor Roths for myself and my spouse in 2016. However due to circumstances beyond my control, a small (less than $100) amount of money was present in a traditional IRA account on 12/31/2016. What are the potential tax consequences of this?

        What really matters is the balance in your after-tax IRA accounts. Yes, you will be subject to the pro-rata rule, but if you have been doing Roth contributions/conversions for several years, the taxes will be minimal. Otoh, if I read between the lines correctly, this is your first back-door Roth conversion, which would mean taxes on the full amount for you. If your spouse has no pre-tax IRA balance, that conversion would be tax free.

        If I were you, I'd ask for the conversion to the Roth to be reversed recharacterized, clean up the TIRA balance in 2017, and then convert.
        Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

        Comment


        • #5
          Johanna,

          Thank you for the reply. Yes this is the first backdoor Roth conversion for myself. My spouse has done one for 2015 and 2016. We both discovered that we had small balances in our traditional IRA accounts at the end of 2016, that we were not expecting (something like $85 in her account and $0.15 in mine). So you would suggest reversing/recharacterizing our Roth conversions for 2016, and later in 2017 convert the traditional IRA account balances back into a Roth (this time making sure the balances in the traditional IRA accounts are $0 before the end of 2017)?

          Also I assume this Roth reversal should be done before the filing of our 2016 taxes?

          Comment


          • #6
            So there is no limitation for income for backdoor Roth ?

            Comment


            • #7




              Johanna,

              Thank you for the reply. Yes this is the first backdoor Roth conversion for myself. My spouse has done one for 2015 and 2016. We both discovered that we had small balances in our traditional IRA accounts at the end of 2016, that we were not expecting (something like $85 in her account and $0.15 in mine). So you would suggest reversing/recharacterizing our Roth conversions for 2016, and later in 2017 convert the traditional IRA account balances back into a Roth (this time making sure the balances in the traditional IRA accounts are $0 before the end of 2017)?

              Also I assume this Roth reversal should be done before the filing of our 2016 taxes?
              Click to expand...


              That is an interesting situation. I would almost certainly ignore the 15 cent balance. The reversal should be done for the calendar year 2016 and by 4/18/17. The recharacterization should be done for the calendar year 2016 and by 10/15/17.
              Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

              Comment


              • #8




                So there is no limitation for income for backdoor Roth ?
                Click to expand...


                Nope. That's why it's called, "backdoor". I try to get my investments in as many useful buckets as possible, and this is one way to keep funding the Roth IRA. ;-)

                Comment


                • #9
                  So I should recharacterize my spouse's Roth conversion for 2016 (only)? Previous years contributions would not need to be recharacterized as well would they? (I don't know if that is even possible).

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                  • #10




                    So I should recharacterize my spouse’s Roth conversion for 2016 (only)? Previous years contributions would not need to be recharacterized as well would they? (I don’t know if that is even possible).
                    Click to expand...


                    Yes, recharacterize your spouse's Roth conversion. This would be a true recharacterization, not the "reversal" I mentioned earlier, as you so gently reminded me. And you would have until 10/15/17 to do so, not the 4/15/17 I mentioned earlier. Sorry, don't know what I was thinking, but a conversion is a conversion and can be recharacterized ("undone") up to the due date including extensions for that year's tax return. I would recommend doing asap, however, so you are not stuck with gains or a loss. And i'll clean up my mistake above.

                    re: previous year's contributions - do you mean your spouse's 2015 conversion? Was it done in 2015 or 2016 along with the 2nd TIRA contribution? And did she have a balance in a pre-tax TIRA if and when she converted in 2015? IF SO (converted to Roth in 2015 and had a pre-tax TIRA balance on 12/31/15), you will have to report the conversion amount as income for 2015 and pay the related tax, interest, and penalties. The door is shut on recharacterization for prior years.

                    If, otoh, she converted both 2015 and 2016 at the same time in 2016, all you have to do is recharacterize.

                    Whew - a lot of "stuff" for an "inconsequential" $85 TIRA balance.
                    Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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                    • #11
                      I believe her contribution/Roth conversion for tax year 2015 was handled properly (no Trad IRA balance on 12/31/2015). Thank you for you assistance.

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