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Best way to do late backdoor roth conversion and avoid pro-rata

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  • Best way to do late backdoor roth conversion and avoid pro-rata

    Looking to make sure I have this planned properly:
    • Currently have a traditional IRA from TY 2021 with $6000 sitting in cash
    • No current traditional IRA contribution for TY 2022
    • Jan 2, 2023, plan to fully fund 2022 traditional IRA with $6000 and let sit in cash
    • Jan 2-3, 2023, plan to convert both 2021 and 2022 traditional IRA's to roth accounts
    I think I am following this correctly from the WCI late contribution guide, but want to make sure this won't trigger pro-rata taxation.

    Naturally, easier to do this in single step in the future but this was basically a mistake that I made in forgetting about the traditional account value. Once TY 2022 is done, the plan will be to make single conversions in January for the preceding TY.

    Any advice or tips are appreciated!

  • #2
    not sure we have all the facts

    is the $6000 from 2021 a 21 contribution that just sat there the last two years? was it deductible at that time? did you file a form 8606 in tax year 21 if it was not deductible?

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    • #3
      Originally posted by FIREshrink View Post
      not sure we have all the facts

      is the $6000 from 2021 a 21 contribution that just sat there the last two years? was it deductible at that time? did you file a form 8606 in tax year 21 if it was not deductible?
      It was a 2021 contribution that just sat there. It was not deductible at that time. A file 8606 was filed in TY 2021 with the $6000 amt reported on lines 1, 3, and 14 (no other amounts on any other lines).

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      • #4
        Depending on if there are substantial earnings, you are in a high marginal tax rate and personal choice. You could rollover any pre-tax balances in all traditional SEP and SIMPLE IRA accounts to a 401k, 403b, or 457b plan that accepts such rollovers. Before performing the Roth conversion.

        If the earnings are negligible or you accept any tax liability for convenience or choice. Just go ahead with your stated plan. Depending on the source of the contributions and the IRA custodian(s). It may take a few days for the contributions to settle. Before the Roth conversion can take place.

        In all circumstances, be sure to do a Roth conversion of all contributions and earnings. This will make things easier this year and next.

        Comment


        • #5
          Originally posted by spiritrider View Post
          Depending on if there are substantial earnings, you are in a high marginal tax rate and personal choice. You could rollover any pre-tax balances in all traditional SEP and SIMPLE IRA accounts to a 401k, 403b, or 457b plan that accepts such rollovers. Before performing the Roth conversion.

          If the earnings are negligible or you accept any tax liability for convenience or choice. Just go ahead with your stated plan. Depending on the source of the contributions and the IRA custodian(s). It may take a few days for the contributions to settle. Before the Roth conversion can take place.

          In all circumstances, be sure to do a Roth conversion of all contributions and earnings. This will make things easier this year and next.
          Thank you for your response. Since the balances are/will be both in cash and without any earnings, I was under the assumption that, provided I followed the late contribution guidelines, I would be able to avoid any taxes? I don't have any other IRA accounts with balances aside from those listed above (which I believe eliminates any pro-rata issues?).

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          • #6
            if the 6000 was not deductible and you filed 8606 at the time, now you owe no taxes on that money when you convert 2022 and/or 2023 contributions to a Roth. You will have basis equal to the total amount converted.

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            • #7
              Want to circle back to this as I'm having some trouble getting my 8606 to look correct, despite following instructions .

              As of 12/31/22:
              tIRA had the $6000 in it from TY 2021 (reported on TY 2021 8606, lines 1, 3, 14)
              No roth conversion was performed during the calendar years 2021 or 2022.

              On 1/3/23:
              Converted the $6000 above to roth IRA account
              Contributed $6000 to TY 2022 tIRA and then converted that the next day to roth account

              When submitting form 8606, I am putting $6000 in Line 6 (reflecting the TY 2021 balance from above)
              And I am leaving Line 8 blank (since both conversions were in 2023 calendar year)

              Would this be correct?



              Comment


              • #8
                Originally posted by satyr View Post
                Want to circle back to this as I'm having some trouble getting my 8606 to look correct, despite following instructions .

                As of 12/31/22:
                tIRA had the $6000 in it from TY 2021 (reported on TY 2021 8606, lines 1, 3, 14)
                No roth conversion was performed during the calendar years 2021 or 2022.

                On 1/3/23:
                Converted the $6000 above to roth IRA account
                Contributed $6000 to TY 2022 tIRA and then converted that the next day to roth account

                When submitting form 8606, I am putting $6000 in Line 6 (reflecting the TY 2021 balance from above)
                And I am leaving Line 8 blank (since both conversions were in 2023 calendar year)

                Would this be correct?


                To elaborate, this is what I'm getting together for the 2022 8606, by line:
                1. 6000
                2. 6000
                3. 12000
                4. 4000
                5. 6000
                6. 6000
                7. 0
                8. 0
                9. 6000
                10. 1.00
                11. 0
                12. 0
                13. 0
                14. 12000
                15. (a, b, c) 0
                16. 0
                17. 0
                18. 0
                This seems to come out fine in terms of taxable amount, but then when I am looking into the 2023 8606, I am left with either 12,000 of taxable (if my tIRA contribution is made in the Q1 of 2024) or 6,000 (if tIRA contribution is in the account at 12/31/23. Not sure where I've gone wrong, but it definitely appears that it's somewhere.

                Comment


                • #9
                  Both conversions will be reported on your 2023 8606. The 2022 contribution will be on your 2022 8606 (along with 2021 contribution, on the basis line). No conversions will be on 2022 8606.

                  Comment


                  • #10
                    Originally posted by Bmac View Post
                    Both conversions will be reported on your 2023 8606. The 2022 contribution will be on your 2022 8606 (along with 2021 contribution, on the basis line). No conversions will be on 2022 8606.
                    Believe that's what I've got right now. Seems to work out for TY 2022 but the 12000 in conversions appear problematic for upcoming TY 2023. Unless I'm missing a step.

                    Comment


                    • #11
                      The 12000 will be basis on 2023 8606. If you do back door for 2023 contribution this year as well. You will have the 2023 contribution in line 1, basis of 12000 on line 2 and the total of all 3 will end up on line 16 and 17 of part II.

                      Note, I find it a little odd that a 2021 contribution, even in “cash,” has had zero earnings. Usually the contribution is in a settlement fund that receives some, albeit meager, interest. Those gains, if present, will be taxable when converted.

                      Comment


                      • #12
                        “ (if my tIRA contribution is made in the Q1 of 2024)​”
                        This is where you lose me.
                        Page 1 is for after tax contributions by your tax year. They accumulate as basis in the tIRA.

                        Page 2 is for converting a balance. This shows conversion in the calendar year.

                        Comment


                        • #13
                          Originally posted by Tim View Post
                          “ (if my tIRA contribution is made in the Q1 of 2024)​”
                          This is where you lose me.
                          Page 1 is for after tax contributions by your tax year. They accumulate as basis in the tIRA.

                          Page 2 is for converting a balance. This shows conversion in the calendar year.
                          Tim is correct, but meant to say Part I and Part II, not Page 1 and Page 2.

                          Comment


                          • #14
                            Originally posted by Bmac View Post
                            The 12000 will be basis on 2023 8606. If you do back door for 2023 contribution this year as well. You will have the 2023 contribution in line 1, basis of 12000 on line 2 and the total of all 3 will end up on line 16 and 17 of part II.

                            Note, I find it a little odd that a 2021 contribution, even in “cash,” has had zero earnings. Usually the contribution is in a settlement fund that receives some, albeit meager, interest. Those gains, if present, will be taxable when converted.
                            Thank you, I appreciate your thorough response. I was missing the cost basis of $12,000 on line 2 of the 2023 8606 portion; I overlooked this part, despite reading the forum instructions.

                            Additionally, you are correct that there was a slight gain in the account, but I believe I understand how to identify those earnings in lines 6-12 of my 2022 and am aware that I will be responsible for taxes on them since I converted the tIRA account in its totality.

                            Comment


                            • #15
                              Originally posted by Tim View Post
                              “ (if my tIRA contribution is made in the Q1 of 2024)​”
                              This is where you lose me.
                              Page 1 is for after tax contributions by your tax year. They accumulate as basis in the tIRA.

                              Page 2 is for converting a balance. This shows conversion in the calendar year.
                              You are right to be lost, because I did not understand the forms correctly and I was also lost.
                              I appreciate the help.

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