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  • Backdoor Roth Issue

    Hi Everyone - Question for all of you regarding the 8606 form and a backdoor Roth: I had my wife do a $2500 traditional IRA (non-deductible) contribution in Dec. 2020. When I did my $6000 IRA trad. IRA contribution and subsequent Roth conversion in 2020, I stupidly forgot to do her $2500 Roth conversion. I do recall that this $2500 IRA contribution would've been reported on my wife's 8606 for 2020 but I'll have to double-check that.

    So, in 2021 I had my wife do the standard $6000 non-deductible traditional IRA contribution and later in the year we rolled over her entire $8500 traditional non-deductible IRA balance to the Roth IRA. This week, my tax advisor is working on the 8606 form for my wife's part of our 2021 tax return and the $2500 is causing some confusion. There would've been a balance of $2500 in my wife's traditional IRA as of the end of 2020 since we didn't convert that amount in 2020. However, her entire balance would've been non-deductible/after-tax. There would have been no portion of her traditional IRA that was pre-tax as of the end of 2020. My question is are we now stuck with a pro-rata $8500 Roth conversion? I didn't think so but please let me know your thoughts.

    Also, does anyone have an example of a completed 8606 form where someone had a similar scenario (a non-deductible IRA contribution from a prior year and in the non-deductible trad. IRA as of the prior year and that's included in that tax return year's total Roth conversion amount)? If so, would you mind PMing it to me with just the dollar amounts entered and obviously no identifying information?

    Thank you.

  • #2
    Yes, if I follow you, you are stuck with the $8500 basis for the Roth conversion, but I can't imagine this will entail any great tax burden. If the $2500 was after tax, your only tax will be for gain on the $2500 in the interim between contribution and conversion. Not much, right? For the 8606 she had reportable prior year basis ($2500) on line 2, and a current year contribution ($6000) on line 3.

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    • #3
      Larry - There was no gain on the $2500. It was in a money market account the entire time. So you're saying the pro-rata issue wouldn't be an issue? It's just a matter of taxes on the investment gains on the $2500?

      Comment


      • #4
        Right. Well, there will be pro rata, but it will not matter much. I'm no expert, but the whole point of the 8606 is to track basis and then tell you tax due if funds (basis and gain) are converted or withdrawn. The preparer's software will do this for you.

        There is another path. Does she have a 401k or 403b you can roll her $2500 into? If so, that also clears out the basis and gain. Regardless, if you did not do so, and I suspect not since you forgot to complete the Backdoor Roth transaction, you should also submit a 8606 for her IRA in 2020. No need to amend 2020 taxes. The 8606 can be submitted as standalone.

        But if you just want to convert it all to the individual Roth, this year when you do your taxes also do an 8606 to show the conversion of the whole $8500. Have the preparer run it that way and see what you get. Or you could do it yourself in TurboTax just to play with the numbers.

        Either way, do it this year to clean out the IRA and set yourself up for smooth backdoor Roth transactions in the future.

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        • #5
          Everything is OK. Her 2020 basis of $2500 from the 8606 is transferred to the 2021 8606. This basis plus the 2021 contribution of $6K all converted to Roth leaves a 2021 basis of 0. As long as there’s no pre-tax at the end of 2021 no tax is due except on any earnings from the $8500. Pro-rata only applies in the year of a conversion and since the pre-tax value was 0 at the end of 2021 no tax is due.

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          • #6
            If you haven't, read this whole post. There are only two references to your situation. You may have old contributions to enter on line 2 of the 8606. Take your lumps and pay your tax. But you will understand the whole process better. May be worthwhile sharing with your preparer as well. How To Do A Backdoor Roth IRA [Step-by-Step Guide] | White Coat Investor

            Comment


            • #7
              Originally posted by Larry Ragman View Post
              Well, there is another path. Does she have a 401k or 403b you can roll her $2500 into? If so, that also clears out the basis and gain.
              I think you just misspoke here. You can only rollover pre-tax IRA balances to a 401k, 403b or 457b.

              With the likely small amount of pre-tax earnings, it probably would be better to do a Roth conversion of the entire traditional IRA balance and pay the small amount of taxes on the pre-tax balance.

              Comment


              • #8
                Just to clarify, the $2500 non-deductible trad. IRA contribution from 2020 was already converted to the Roth in 2021. It was included as part of the $8500 Roth conversion in 2021. The 2021 $8500 Roth conversion included a $6000 non-deductible trad. IRA contribution for 2021 and the $2500 non-deductible trad. IRA contribution from 2020. The $2500 was never pre-tax money. We intended to convert it over to a Roth in 2020 but inadvertently delayed, so we converted it to the Roth in 2021.

                GasFire - Are you saying that because the basis in the trad. IRA as of the end of 2021 was $0, there will be no taxes due on the $8500 Roth conversion and the pro-rata concept is N/A?

                Thank you.

                Comment


                • #9
                  Originally posted by spiritrider View Post
                  I think you just misspoke here. You can only rollover pre-tax IRA balances to a 401k, 403b or 457b.

                  With the likely small amount of pre-tax earnings, it probably would be better to do a Roth conversion of the entire traditional IRA balance and pay the small amount of taxes on the pre-tax balance.
                  I did, but thank you for the clarification.

                  Comment


                  • #10
                    Originally posted by Larry Ragman View Post
                    I did, but thank you for the clarification.
                    spiritrider is a very gifted fact-checker. His corrections are very factual. Until someone attempts to deceive. Then the soapbox comes out for a minute and gets put away.

                    Comment


                    • #11
                      Originally posted by CaptainMarvel View Post
                      GasFire - Are you saying that because the basis in the trad. IRA as of the end of 2021 was $0, there will be no taxes due on the $8500 Roth conversion and the pro-rata concept is N/A.
                      I thought GasFIRE was very clear.

                      You are never taxed on non-deductible basis. Only on pre-tax balances. Unless there was absolutely no pre-tax earnings. Which seems unlikely at least on the 2020 $2500 non-deductible traditional IRA contribution.

                      You will have 2021 pro-rata taxation of the $8500 non-deductible basis and whatever the 2021 year-end pre-tax balance reported on Form 8086 Line 6.

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