Converted 6003.08 to a backdoor roth, did I screw it up?

[Duckworth]

Hi all

I opened a traditional IRA with vanguard.  In the 7d while the account was "frozen" before I could convert it to a backdoor roth IRA, it accrued a $3.08 dividend.  I didnt really think and converted all 6003.08 to a roth IRA with vanguard.  This will all be for tax year 2019.

I know his posts mentions pennies on the dollar, but not whole dollars.

Do I have a tax mess on my hands?  Any advice?

Thanks!

[CordMcNally]

You did everything correct. You'll owe tax on $3 for 2019.

[Duckworth]

And that would be reported on the 8606 ?

 

[ENT Doc]

The taxable amount of $3 will show up on your 8606 and you will put this on your 1040.

[Peds]

Pennies make up dollars.

[southerndoc]

So you only pay taxes on the gains ($3 in this case) only once?  For some reason I thought you had to do a lot more work when this happened.  Gives me more reassurance to do backdoor Roths!

[Peds]

When else would you be taxed?

[southerndoc]

For some reason I thought the gains would be taxed as an excess distribution, early withdrawal, etc.  Not sure why I was making it more complicated.  Granted would still prefer to convert exact same amount as I put in so I don't have to pay any additional taxes.

[Duckworth]

Would that be a 6% excise tax that I pay just once on that $3 for this year? One and done? After that no additional penalties as that extra 3 dollars accumulates returns over time?
I guess if it’s a one time tax what’s to stop people from putting in lots more pay a one time tax then enjoy tax free growth and tax free withdrawals later? Does the math just not work out?
Sorry if this is dumb! Just trying to understand

[Peds]

Duckworth wrote:

what’s to stop people from putting in lots more

Click to expand...

how do you plan to add more than the 6K contribution limit....

[Duckworth]

Didn’t I literally just do that? $3.08 over the limit? If pennies make up dollars then many dollars can make up thousands etc

[Peds]

Duckworth wrote:

I guess if it’s a one time tax what’s to stop people from putting in lots more pay a one time tax then enjoy tax free growth and tax free withdrawals later? Does the math just not work out?

Click to expand...

for backdoor rIRA, no. the goal is to get 6K in, THEN have it grow as much as possible.

otherwise every tax you pay is at your marginal rate which is during your peak earning years.

 

Duckworth wrote:

Would that be a 6% excise tax that I pay just once on that $3 for this year?

Click to expand...

there is no excise tax.

Duckworth wrote:

After that no additional penalties as that extra 3 dollars accumulates returns over time?

Click to expand...

no. you already converted. its no different that doing regular Roth conversions if you were say 55 years old for early retirement.

 

[jhenry]

Hello, I presume the traditional IRA contribution was non deductible IRA contribution?

The only thing to keep in mind is that the funds that were converted to the Roth IRA are considered "converted" funds and not Roth contributions. For those under 59.5 years old because, they are not Roth contributions, but rather converted funds, the money needs to be in the Roth for 5 years before penalty free access to the funds.. Because you are looking to have these as retirement funds, presumably, this will not be an issue.

[Dreamgiver]

You are mixing up the words converting and contributing. They are not interchangeable. You contributed $6k to an IRA, then converted $6003. You can’t contribute more than 6k/yr to an IRA, but can convert more than that. Makes sense? Excise tax means something very different than what you are thinking and has nothing to do with any of this

[Duckworth]

Yes thank you! I stupidly didn’t understand traditional ira also had the same contribution limit since I’ve never even looked at that before. It makes more sense now