Question of back door roth

[M&M]

I am planning to roll over my IRA to 401K in 2023 so that I make zero dollar in my IRA and start doing back door Roth contribution.

Should I do back door Roth contrition in 2023 or wait till 2024 when IRA will be completely zero dollar for entire 2024?

[JB14]

You can actually do 2022 & a 2023 here, you have until April 18th this year to do 2022, and until next April 15th 2024 to do 2023's. You just need to have your IRA rolled into your 401k before the end of 2023. You can do the actual conversion as soon as you want, you don't need to wait until the IRA is rolled into your 401k. I'd get it done ASAP, just so you don't have any year end issues. It sometimes takes a few weeks depending on your 401k plan, where your IRA is, etc.

[Jefe]

Hi, to avoid the pro-rata rule for years that I do backdoor Roth contributions (all years!), I make sure that all* of my IRA account balances are $0 on the last day of the year. If I had rolled all* of my IRAs into my 401(k) in on 2/7/23 so that the balance in all* of them is $0 on 12/31/23, I would do a backdoor Roth contribution anytime before the end of 2023 (sooner rather than later, but I would probably do the IRA to 401(k) rollover first to ensure that I don't run into plan rollover rule complications).

*Obviously not my Roth IRA; I believe inherited IRAs are also excluded but have no personal experience with these.

See here.

[Jefe]

Hi, following up on JB14, I correct my statement. You have until tax day of the year after the tax year of the backdoor Roth contribution to complete the contribution:

If I had rolled all* of my IRAs into my 401(k) on 2/7/23 so that the balance in all* of them is $0 on 12/31/23, I would do a backdoor Roth contribution for tax year 2023 anytime before tax day 2024.

Regarding JB14 statement about a 2022 contribution: I would be wary of doing a tax year 2022 backdoor Roth contribution if I had a non-$0 (really anything more than a trivial balance) in all* my IRAs on the last day of 2022. I would expect that this will almost certainly result in a tax liability surprise. My understanding of the pro-rata rules is that you have to have $0 in all* of your IRAs on the last day of the year of your backdoor Roth contribution to avoid incurring a tax, although you have until tax day of the following year to actually complete the contribution.

[JB14]

Hi, following up on JB14, I correct my statement. You have until tax day of the year after the tax year of the backdoor Roth contribution to complete the contribution:

If I had rolled all* of my IRAs into my 401(k) on 2/7/23 so that the balance in all* of them is $0 on 12/31/23, I would do a backdoor Roth contribution for tax year 2023 anytime before tax day 2024.

Regarding JB14 statement about a 2022 contribution: I would be wary of doing a tax year 2022 backdoor Roth contribution if I had a non-$0 (really anything more than a trivial balance) in all* my IRAs on the last day of 2022. I would expect that this will almost certainly result in a tax liability surprise. My understanding of the pro-rata rules is that you have to have $0 in all* of your IRAs on the last day of the year of your backdoor Roth contribution to avoid incurring a tax, although you have until tax day of the following year to actually complete the contribution.

Ah, you probably are correct on the 2022 contribution! Depending on how large your IRA balance is at the end of 2022, you might want to do one if it is low enough. Not sure what that amount would be, but you could mess around with form 8606 to see.

[PedsCCM]

This seems to be a common misconception. Pro rata applies to the conversion year, not the contribution year. So yes you could roll an old deductible IRA into a 401k, contribute to trad IRA for 2022 before tax day, contribute for 2023 before tax day 2024 and convert whenever this year as long as your Dec 31, 2023 IRA is $0. No tax penalty since you didn’t convert in 2022

[jfoxcpacfp]

Common misconception - prorata taxes are not a tax “penalty” but taxes on income you will eventually pay, either now, before the investment grows, or later including growth and income. Your call and calculation.

Welcome to the forum!

[Jefe]

Thanks for the correction PedsCCM and jfoxcpacfp, I see that I conflated contribution and conversion--it is a two step process.

Looking back...what has this cost me personally?

I could have contributed an additional $5k the first year I became aware of backdoor Roth (for the prior tax year, like M&M but around a decade ago). Instead of backdoor Roth, it was placed in a taxable account. This probably costs me around $15-$20 a year in dividend tax and, if sold today, around $1.5k in capital gains tax. Total cost of mistake as of today: maybe a bit more than $1.8k. Maybe I will get a thank you letter from Uncle Sam.

[PedsCCM]

Common misconception - prorata taxes are not a tax “penalty” but taxes on income you will eventually pay, either now, before the investment grows, or later including growth and income. Your call and calculation.

Welcome to the forum!

Ooh that's interesting. Does that mean that pre-tax IRA contributions where you pay prorata taxes now come out with lower taxes when they're withdrawn during retirement? Thanks!

[jfoxcpacfp]

Ooh that's interesting. Does that mean that pre-tax IRA contributions where you pay prorata taxes now come out with lower taxes when they're withdrawn during retirement? Thanks!

Not at all - there is no way to know that. I was just making the point that this is income you’ll pay tax on now or later (including on earnings + growth). A penalty is assessed in addition to taxes.