2023 Backdoor Roth IRA Home Base

[racetoretire]

Can someone help me understand how much tax I will owe due to this stupid mistake, and if there's any way around this? I have been doing backdoor Roths for years for me and husband, no problems at all. This year I did our contributions for 2021 and 2022 in January 2022, and then rolled the $13k in each of our accounts to our Roths a few days later. However in December 2022, when trying to terminate our pension/ pooled account before the end of the year, Vanguard wouldn't do an in-kind transfer to our 401Ks but would do it into our trad IRAs so our money made a pit stop there and then we did an in-kind transfer to our 401Ks this week. However, this resulted in a significant amount of money in each of our trad iras on dec 31, 2022. In the chaos of trying to empty the pension in 2022, I completely forgot about the backdoor Roth. Can I just explain to the nice people at the irs that this was an oops. Help me understand how much I will pay in stupid tax on this. thx

[jfoxcpacfp]

Can someone help me understand how much tax I will owe due to this stupid mistake, and if there's any way around this? I have been doing backdoor Roths for years for me and husband, no problems at all. This year I did our contributions for 2021 and 2022 in January 2022, and then rolled the $13k in each of our accounts to our Roths a few days later. However in December 2022, when trying to terminate our pension/ pooled account before the end of the year, Vanguard wouldn't do an in-kind transfer to our 401Ks but would do it into our trad IRAs so our money made a pit stop there and then we did an in-kind transfer to our 401Ks this week. However, this resulted in a significant amount of money in each of our trad iras on dec 31, 2022. In the chaos of trying to empty the pension in 2022, I completely forgot about the backdoor Roth. Can I just explain to the nice people at the irs that this was an oops. Help me understand how much I will pay in stupid tax on this. thx

Not stupid, just unlucky timing (per your POV). I c/n tell you how much your tax will be on this, but please remember that the prorata tax is not a “penalty” tax that you wouldn’t have otherwise owed at some point. The way it is discussed all over the internet as if it is some disease to be avoided kind of steams me. You are merely paying tax on part of that IRA now instead of in the future when you distribute the conversions PLUS their growth. Given the down market, it’s not stupid to me at all. In fact, I think it may have ended up being rather lucky timing.

[racetoretire]

Not stupid, just unlucky timing (per your POV). I c/n tell you how much your tax will be on this, but please remember that the prorata tax is not a “penalty” tax that you wouldn’t have otherwise owed at some point. The way it is discussed all over the internet as if it is some disease to be avoided kind of steams me. You are merely paying tax on part of that IRA now instead of in the future when you distribute the conversions PLUS their growth. Given the down market, it’s not stupid to me at all. In fact, I think it may have ended up being rather lucky timing.

Thanks for the reply. I'm confused about what you said about paying tax when I distribute the conversions? The $26k went into our Roths as post-tax money so wouldn't it have grown tax free to be taken out tax free? If our IRAs had been empty on Dec 31 like it has been every other year we've done backdoor Roths, we would not be paying any tax on the contribution, growth, or future withdrawals, correct?

[jacoavlu]

Can someone help me understand how much tax I will owe due to this stupid mistake, and if there's any way around this? I have been doing backdoor Roths for years for me and husband, no problems at all. This year I did our contributions for 2021 and 2022 in January 2022, and then rolled the $13k in each of our accounts to our Roths a few days later. However in December 2022, when trying to terminate our pension/ pooled account before the end of the year, Vanguard wouldn't do an in-kind transfer to our 401Ks but would do it into our trad IRAs so our money made a pit stop there and then we did an in-kind transfer to our 401Ks this week. However, this resulted in a significant amount of money in each of our trad iras on dec 31, 2022. In the chaos of trying to empty the pension in 2022, I completely forgot about the backdoor Roth. Can I just explain to the nice people at the irs that this was an oops. Help me understand how much I will pay in stupid tax on this. thx

easiest way to get an idea is just work through Form 8606 with your actual numbers.

the greater the size of the traditional IRA, the more of the Roth conversation that will be taxable

[jfoxcpacfp]

Thanks for the reply. I'm confused about what you said about paying tax when I distribute the conversions? The $26k went into our Roths as post-tax money so wouldn't it have grown tax free to be taken out tax free? If our IRAs had been empty on Dec 31 like it has been every other year we've done backdoor Roths, we would not be paying any tax on the contribution, growth, or future withdrawals, correct?

What I am referring to is that you will “pay” the tax now (similar to a backdoor Roth, which gives you no tax deduction) or later (when you remove the pre-tax IRA + all related earnings). The prorata taxes you pay now mean that you will pay the tax on the amount you convert in the present before the conversion amount has had the opportunity to grow rather than in the future, when you (or an heir) distribute the money along with all related growth. It’s kind of the same as a plain ole Roth conversion. Iow, you are not paying any taxes you wouldn’t have paid at some point, you’re just paying them in the present and avoiding taxes on all the growth on the related amount.

[Jim90220]

My spouse has a Rollover IRA through Vanguard with just over $7000 in it...

1) If she converts this all into a Roth IRA, do we just owe taxes on the ~$500 over the 2023 Roth limit?
2) When will the tax be owed on this $500, now or at tax time next year?
3) Once the rollover IRA balance becomes $0, do we then need to open a traditional IRA for her for future backdoor contributions?

Thank you in advance

[GasFIRE]

My spouse has a Rollover IRA through Vanguard with just over $7000 in it...

1) If she converts this all into a Roth IRA, do we just owe taxes on the ~$500 over the 2023 Roth limit?
2) When will the tax be owed on this $500, now or at tax time next year?
3) Once the rollover IRA balance becomes $0, do we then need to open a traditional IRA for her for future backdoor contributions?

Thank you in advance

1) conversions are completely separate from contributions. She can convert the entire $7K to Roth but will owe 2023 tax for $7K. The $6.5K 2023 IRA contribution limit is unused so far. I would do the BDR for the full amount in 2023.
2) the tax can be trued up when you file. If you can reasonably predict your 2023 tax bill, I would adjust any W-2 withholdings or estimated quarterly payments accordingly. You can always aim for the safe harbor payment, especially if your income is rising.
3) A rollover IRA is a traditional IRA funded by rolling over pre-tax funds from other retirement accounts like a 401k or 403b. Not familiar with VG rules but Fidelity let’s you use former rollover account as your tIRA. Ask VG directly as this would be a VG specific requirement if necessary.

[Jim90220]

1) conversions are completely separate from contributions. She can convert the entire $7K to Roth but will owe 2023 tax for $7K. The $6.5K 2023 IRA contribution limit is unused so far. I would do the BDR for the full amount in 2023.
2) the tax can be trued up when you file. If you can reasonably predict your 2023 tax bill, I would adjust any W-2 withholdings or estimated quarterly payments accordingly. You can always aim for the safe harbor payment, especially if your income is rising.
3) A rollover IRA is a traditional IRA funded by rolling over pre-tax funds from other retirement accounts like a 401k or 403b. Not familiar with VG rules but Fidelity let’s you use former rollover account as your tIRA. Ask VG directly as this would be a VG specific requirement if necessary.

Thanks. Yes I wasn't thinking when I said only $500 would be taxed...obviously the entire rollover would be taxed when going from tIRA to Roth. Should I have done the conversion prior to Jan 1st since we will be in a higher tax bracket this year? Finishing training and starting attending job this summer. Is there any way I can rollover now and count this towards last years taxes?

[GasFIRE]

Conversions are attributed to the calendar year so unfortunately the opportunity for a 2022 Roth conversion has passed.

[gingerlau]

Please help... I first heard of backdoor IRA in 2022 and opened a traditional IRA account with Vanguard with 6k in it. Long story short, I made multiple mistakes and am looking for a way to fix it:
- In 2022, I contributed 6k to a traditional IRA for 2022 tax year in Vanguard, invested it and gained a few hundreds...
- Later on, I realized I will need to empty my SEP IRA in Vanguard. I have a 403b with Fidelity, so my plan was to roll my SEP IRA to my 403b, but Fidelity gave me uncertain answers regarding the rollover, so nothing was done in 2022.
- I have spent several days reading the articles and forums and would like to confirm whether the following is what I should do:
- roll over the SEP IRA to 403b now
- contribute $6.5k to the same traditional IRA account for 2023 tax year
- convert the entire tIRA account (will then be around $13k) to backdoor ROTH IRA
- for 2022 tax year, report the $6k contribution and pay the tax on the few hundreds (but do not report the conversion)
- for 2023 tax year, report the $6.5k contribution and the $13k conversion

Am I understanding my situation correctly? Thanks a lot in advance.

[jfoxcpacfp]

Please help... I first heard of backdoor IRA in 2022 and opened a traditional IRA account with Vanguard with 6k in it. Long story short, I made multiple mistakes and am looking for a way to fix it:
- In 2022, I contributed 6k to a traditional IRA for 2022 tax year in Vanguard, invested it and gained a few hundreds...
- Later on, I realized I will need to empty my SEP IRA in Vanguard. I have a 403b with Fidelity, so my plan was to roll my SEP IRA to my 403b, but Fidelity gave me uncertain answers regarding the rollover, so nothing was done in 2022.
- I have spent several days reading the articles and forums and would like to confirm whether the following is what I should do:
- roll over the SEP IRA to 403b now
- contribute $6.5k to the same traditional IRA account for 2023 tax year
- convert the entire tIRA account (will then be around $13k) to backdoor ROTH IRA
- for 2022 tax year, report the $6k contribution and pay the tax on the few hundreds (but do not report the conversion)
- for 2023 tax year, report the $6.5k contribution and the $13k conversion

Am I understanding my situation correctly? Thanks a lot in advance.

Yes, you’re on the right track and your mistakes have been a good learning tool, as you seem to be pretty well versed now. You don’t need to turn to Fido about the SEP r/o, you need to review your SPD (Summary Plan Document) to find out if your 403b accepts r/o’s from other plans. Or, if you’re desperate, talk to HR at your employer, which clients have typically found to be frustrating, but I have only a small sample of the universe, so maybe will be easier for you.

Next will be completing the 8606 correctly, but there is plenty of info around here if you have q’s. I think you’re going to be just fine.

Welcome to the forum!

[gingerlau]

Yes, you’re on the right track and your mistakes have been a good learning tool, as you seem to be pretty well versed now. You don’t need to turn to Fido about the SEP r/o, you need to review your SPD (Summary Plan Document) to find out if your 403b accepts r/o’s from other plans. Or, if you’re desperate, talk to HR at your employer, which clients have typically found to be frustrating, but I have only a small sample of the universe, so maybe will be easier for you.

Next will be completing the 8606 correctly, but there is plenty of info around here if you have q’s. I think you’re going to be just fine.

Welcome to the forum!

Thank you very much! I was desperate after talking to two or three different Fidelity rep, so I talked to HR, and the HR lady told me that I should ask Fidelity. Urgh. I will review the SPD then. I did roll over my 401k to this 403b before, so I am guessing this 403b will accept my SEP IRA as well. I hope I don't mess up the 8606

Again. Thanks!

[Bmac]

Please help... I first heard of backdoor IRA in 2022 and opened a traditional IRA account with Vanguard with 6k in it. Long story short, I made multiple mistakes and am looking for a way to fix it:
- In 2022, I contributed 6k to a traditional IRA for 2022 tax year in Vanguard, invested it and gained a few hundreds...
- Later on, I realized I will need to empty my SEP IRA in Vanguard. I have a 403b with Fidelity, so my plan was to roll my SEP IRA to my 403b, but Fidelity gave me uncertain answers regarding the rollover, so nothing was done in 2022.
- I have spent several days reading the articles and forums and would like to confirm whether the following is what I should do:
- roll over the SEP IRA to 403b now
- contribute $6.5k to the same traditional IRA account for 2023 tax year
- convert the entire tIRA account (will then be around $13k) to backdoor ROTH IRA
- for 2022 tax year, report the $6k contribution and pay the tax on the few hundreds (but do not report the conversion)
- for 2023 tax year, report the $6.5k contribution and the $13k conversion

Am I understanding my situation correctly? Thanks a lot in advance.

For 2022 taxes you will file form 8606 to report the nondeductible IRA contribution (part I). There will be no taxable event since no conversion in 2022. For 2023, if you proceed with your plan, you will file form 8606 with part I showing 2022 basis of $6000 and 2023 contribution of $6500. Part Ii will be for the conversion of both year’s contributions and any gains. The gains will be taxable on 2023 return.

[jfoxcpacfp]

Thank you very much! I was desperate after talking to two or three different Fidelity rep, so I talked to HR, and the HR lady told me that I should ask Fidelity. Urgh. I will review the SPD then. I did roll over my 401k to this 403b before, so I am guessing this 403b will accept my SEP IRA as well. I hope I don't mess up the 8606

Again. Thanks!

Well, if you’ve already done one rollover into your 403b, you have confirmation that it accepts r/o’s, so you’re good to go. However, always a good idea to be familiar with your SPD.

[allaboutthebones]

Hi everyone,

I have been doing the backdoor Roth IRA for the past several years with no issues. This year I put $6500 into my Fidelity traditional IRA account (this was post-tax money transferred from my bank account), got way too busy with call, and when I went to roll into the Roth IRA a few weeks later saw it had made a little over $9 sitting in the IRA account. I rolled everything into the Roth IRA account because I don't think I can have money sitting in both the Roth IRA and traditional IRA. What should I do with this extra $9 sitting in the Roth IRA now to avoid penalties/pro-rata? The contribution was already post-tax so I don't want to trigger a tax bill on the $9 (although its so minimal it wouldn't be a big deal if it did). The articles I've read online are all for pennies sitting in the Roth so I appreciate any info on this extra $9.

Thanks in advance.