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When do you "find out" if you've messed up the Backdoor IRA

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  • When do you "find out" if you've messed up the Backdoor IRA

    Hello everyone,

    Newbie question. I might just be paranoid and overthinking it...I've been following this forum for a few years now and its been great.

    I've been utilizing the backdoor IRA for the better part of the last decade. I feel like at least the past 5 years or so I've gotten it down like clock work. January 2nd of the New year I deposit the max amount I can into a traditional IRA and then by January 5th or so I have converted it into a Roth IRA. It has grown quite nicely.


    I'm worried about the first few years that I did this though. Before I knew about the Backdoor IRA, I was contributing to a Traditional IRA however I never took a deduction since my W2 wage was over the threshold. When I found out about the back door IRA a few years ago...I'm pretty sure I converted all of my traditional IRA (contributions and gains) over to a Roth. I remember taking a big tax hit (going from usually getting ~ 3K back for my refund to owing like 5K).

    My question is how do I know if I messed up? (I'm not even sure what I could have messed up on, but maybe I didn't pay enough taxes on the conversion to Roth?)

    Will the federal government let me know? and if so when? When I retire and start drawing down from the account? I'm in my early 40's
    Should I hire an account to look everything over? If so, how much do you think it would cost me? (My income is super straight fwd, just a standard w2 job with a few years making some extra money as a 1099 employee on the side)


    Thanks in advance!



  • #2
    Have you been filing Form 8606 from the beginning of your tIRA contributions, even before doing the BDR? When you converted your entire tIRA to Roth did you pay taxes on the entire conversion or just the gains over your basis (from Form 8606)? If you haven't been filing the 8606 my guess would be that you paid too much in tax rather than not enough with the first conversion since you need the basis to determine how much is subject to taxation.

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    • #3
      Originally posted by GasFIRE View Post
      Have you been filing Form 8606 from the beginning of your tIRA contributions, even before doing the BDR? When you converted your entire tIRA to Roth did you pay taxes on the entire conversion or just the gains over your basis (from Form 8606)? If you haven't been filing the 8606 my guess would be that you paid too much in tax rather than not enough with the first conversion since you need the basis to determine how much is subject to taxation.
      I'm not sure that I have until the last few years, unless Turbotax automatically prompted me to fill it out. I'm okay if I overpaid a little. For me I just want the peace of mind that the gains/growth that I'm seeing in my Roth accounts will actually be money I can count on when I decide to retire. Is there like a statute of limitations where after a certain number of years I can breath easy if I have not been contacted by the IRA that everything is okay?




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      • #4
        Go back and look at your tax returns for the years that you contributed a non-deductible amount into your TIRA.

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        • #5
          TurboTax is notoriously fussy when it comes to the BDR:
          https://www.whitecoatinvestor.com/ho...a-on-turbotax/
          If the TT return didn’t generate an 8606 it probably wasn’t entered correctly. Same thing applies to non-deductible tIRA contribution made without converting to Roth, entering the contribution correctly should generate an 8606.

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          • #6
            I have a question that is similar to OP's

            Let's say you contributed too much to an IRA. Is there a statue of limitations for the government to come back to you and say, "Hey you overcontributed, you need to do this and pay these penalties"?

            Also if they do catch it in a timely manner what would they make you do and what is the penalty?

            Comment


            • #7
              Originally posted by AR View Post
              I have a question that is similar to OP's

              Let's say you contributed too much to an IRA. Is there a statue of limitations for the government to come back to you and say, "Hey you overcontributed, you need to do this and pay these penalties"?

              Also if they do catch it in a timely manner what would they make you do and what is the penalty?
              Here is a Vanguard summary: Removing excess contributions from your IRA | Vanguard

              Short version - 6% penalty a year until the excess is rectified. IRS might catch an overcontribution. I have had them incorrectly dun me based on records matching, so I infer this is a standard review item. (In my case I was able to provide the records to show them that they were wrong.) They tend to work at least a year and sometimes two years behind. But it is also true that not everyone is checked. Regardless, you should have good records of your various IRA/Roth/401k contributions each year, with appropriate 8606 forms for the IRAs. If so, easy to check. I'm also guessing a CPA would do this review for you, especially if you asked for it outside of tax season. If you did overcontribute at some point, fix it. Otherwise the penalty keeps building. Besides, who wants something like this hanging around?

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              • #8
                Originally posted by ENT Doc View Post
                Go back and look at your tax returns for the years that you contributed a non-deductible amount into your TIRA.
                Yeah I feel like at this point its all a bit of a blur. Even when I go on my vanguard website the records are not super clear. When looking a the records for my Roth IRA it just shows that at some point I transferred TIRA $ into the Roth account.

                My worry is that I might have "transferred the money from my TIRA into my Roth IRA" instead of "converting" it. All I remember if getting hit with a large tax bill that year. Even if I went back and looked at my tax returns I'm not sure I would be able to make sense of it.

                I guess what I want to know is if I don't/can't go back and make sure everything was correct...if how long do I have to worry about it? For the rest of my life? Until I decide to retire and start taking money out of the account? When does the IRS let you know if you "messed up"



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                • #9
                  Originally posted by Badxmojo View Post

                  Yeah I feel like at this point its all a bit of a blur. Even when I go on my vanguard website the records are not super clear. When looking a the records for my Roth IRA it just shows that at some point I transferred TIRA $ into the Roth account.

                  My worry is that I might have "transferred the money from my TIRA into my Roth IRA" instead of "converting" it. All I remember if getting hit with a large tax bill that year. Even if I went back and looked at my tax returns I'm not sure I would be able to make sense of it.

                  I guess what I want to know is if I don't/can't go back and make sure everything was correct...if how long do I have to worry about it? For the rest of my life? Until I decide to retire and start taking money out of the account? When does the IRS let you know if you "messed up"


                  At the very least, determine if the 8606 was filed for each tax year you contributed to your tIRA. If you didn’t you can file them separately with a short letter of explanation. TRANSFER is just website terminology when you move $. CONVERSION is tax regulation terminology. Your transfer was a conversion. To reconstruct the history look at the VG tax records, not the statements. You want the associated 1099s and 5498s that were sent

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                  • #10
                    Originally posted by Badxmojo View Post

                    Yeah I feel like at this point its all a bit of a blur. Even when I go on my vanguard website the records are not super clear. When looking a the records for my Roth IRA it just shows that at some point I transferred TIRA $ into the Roth account.

                    My worry is that I might have "transferred the money from my TIRA into my Roth IRA" instead of "converting" it. All I remember if getting hit with a large tax bill that year. Even if I went back and looked at my tax returns I'm not sure I would be able to make sense of it.

                    I guess what I want to know is if I don't/can't go back and make sure everything was correct...if how long do I have to worry about it? For the rest of my life? Until I decide to retire and start taking money out of the account? When does the IRS let you know if you "messed up"


                    You need to do the work here and not let it be a blur. Look for 5498’s from Vanguard. Look at your previous tax filing for 8606’s. Do this for each year.

                    Comment


                    • #11
                      You said for most of ten years. Short version is the last three years tax returns are subject to audit. If they audit 2020, they have every right to also audit 2019 and 2018.
                      From a process standpoint, the automated kick outs would be you incorrectly claimed a pretax deduction that you were not entitled to due to the limits.
                      Filling Form 8606 is the documentation of an after tax contribution, establishing the basis for which taxes have already been paid. That carries forward and reduces the taxes on the eventual conversion. Part 1 is the non-deductible contribution filed for each tax year a non deductible contribution was made. Part 2 is the conversion in the fiscal calendar year the conversion was completed. You would have paid tax in the year of conversion. The only way to claim the basis, is Form 8606 Part 1.

                      The result is you already over paid taxes by not claiming a basis. The IRS will not penalize you for over payment, your Roth account is safe if the last three years are correct. The error would be that you over paid. YOU represented that this was reported on your return as a non-deductible contribution. They will not go back more than 3 years.
                      Note: If you overpaid, an amended return would be needed as well as the Forms 8606. Three years is the max! Look at your returns for 2018, 2019, 2020.
                      "When I found out about the back door IRA a few years ago...I'm pretty sure I converted all of my traditional IRA (contributions and gains) over to a Roth."
                      What year did you do the conversion? Answer that and you will know if you might need to file the Form 8606's to claim basis for the prior years that need to be filed. Those are not amended returns. Do this before the 2018 window closes. You need Form 8606 for 2018, 2019 and 2020 at a minimum. It is enough coin to look at the three years.
                      In any case, your roth is safe.

                      https://www.irs.gov/businesses/small...i-keep-records

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