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Roth IRA backdoor question

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  • Roth IRA backdoor question

    In 2018, I over-invested in my Roth IRA because my salary changed putting me into the partial contribution position. I was able to recharacterize that money into a Traditional Roth before I submitted my taxes in 2019 but never did the backdoor conversion to move the money back to the Roth IRA. The amount I recharacterized from the Roth to Traditional IRA per form 5498 was $4,410.27. At present the account total is at $4,442.95. From reading this site and others, its seems that I will need to pay taxes (though in current year 2021) on the earnings above the original basis ($4,410.27) if I want to do the backdoor contribution for 2020 or 2021 if one is easier than the other. Is there someone that has been in a similar situation that could please confirm? Once I pay taxes, then I can move the money to the Roth, since it will all be post tax money, correct?

  • #2
    Contributions, whether traditional or Roth, are based on tax year. Conversions are taxed based on the calendar year. So far, you only have a 2018 tIRA contribution that you will owe taxes on its earnings when you convert. I would make both 2020 AND 2021 tIRA contributions and convert everything ASAP. This minimizes the Roth conversion transactions to just one. If you can only afford one, do the 2020 contribution and save the 2021 one for later. You don't have to convert the 2018 contribution/earnings before the other transactions, you just have to make sure your tIRA balance is 0 on 12/31 to avoid being subject to the pro-rata tax. Also, did you file Form 8606 for 2018 to establish your IRA basis? Did you make any contributions in 2019?


    • #3
      Thank you so much for taking the time to reply. I did not file an 8606 in 2018 or make any contributions in 2019. I am planning to contribute $12,000 before submitting my taxes this year for 2020 and 2021. Would I just end up paying taxes on the $32 when I do the 8606 for 2021? Just want to make sure I don’t need to to anything to pay the taxes before I covert it to the Roth. Thanks!


      • #4
        If you convert everything in your tIRA such that the balance is $0 on 12/31 you will only owe tax on the earnings from the contributions, $32 in your case. To do this correctly you do need to file Form 8606 for every year you make a non-deductible tIRA contribution so you’ll need to send it in to the IRS for 2018 (it can be filed separately, no amended return necessary). Basis information from this form will be entered on the 2020 form. Here is an excellent overview: