Question

Backdoor Roth IRA when tIRA already has profit (and no tax deduction benefit initially)

Forum|Forum|3 years ago
September 6, 2022
3 replies
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What all one should do to perform backdoor conversion to Roth IRA of one's already invested 6k (2 years back) in tIRA, and the current amount is 7k (after profit in $AAPL)

And one has not got any tax deduction benefit at that time as the adjusted gross income(AGI) did not allow for IRA deductions.

If the conversation is done now, one has to pay the income tax on the total $7k, or only on $1k as tax on $6k is already paid?

Note: No tIRA deduction is available for incomes greater than $208,000 for 2021

Not A Product Question

Critter-3

In the program things are entered a bit backwards ... you must enter this in the deductions & credits section FIRST and then go back to the Income tab...

1)Enter IRA contribution making it non deductible ... this will be on the form 8606

2)Enter the 1099-R for the conversion

If your conversion was more than the contribution (earnings) then only the earnings is taxed.

P

panacea6565Author

Thnak you Critter-3.

one more q: as the tIRA contribution is done in 2020 (tax filed with IRS in April 2021), does one have to file any amendment to this 2020-21 tax filing?

Critter-3

If you did the original contribution in 2020 then you should have reported it on the 2020 return and it would be on the form 8606. If you then made the conversion in 2021 when you enter the 1099-R read the screens carefully to indicate you had prior year basis from form 8606. Step 1 is only done in the years contributions are made ... step 2 is for the years conversions are done. You could use one or both steps in a single tax year.

If you failed to file an 8606 on the 2020 return an amendment is needed.

O

Opus 17

Employee

To do a real "back door" Roth conversion, you have to convert all your traditional IRA balances. For example, suppose you make a $6000 non-deductible contribution this year. If you convert the entire amount ($13,000), then 53% of the balance is taxable. That's the $7000 that was never previously taxed, because it was a deductible contribution or tax-free growth. Then in the future, you can make a $6000 non-deductible contribution and immediately convert it tax-free.

However, if you make a $6000 non-deductible contribution this year, and only convert $6000, you will still pay tax on 53% of the conversion, because when you do a conversion, the taxable part is determined by your combined balance of all traditional IRAs. And that would leave you with a $7000 balance that was partly taxes and partly tax-free, and you have to keep track of your basis on form 8606.

So really, convert all you traditional IRA balances or it isn't really a back door Roth.

P

panacea6565Author

thnx @Opus 17

Yes, I am going to do quick conversion going forward from tIRA to rIRA right away.
And as you mentioned, this year its going to be $7000 (till now the current balance in tIRA + $6000(this yr).

But want to mention(as I have not clarified it earlier) that out of this $7000, on the $6000 I put in tIRA, it was counted as non-deductible contribution (as my income bracket did not allowed to get tax benefit, which I was not aware when I put the money in tIRA for 2020 tax yr, and the reason I put the money in tIRA is to get tax benefit - pure lack of knowledge and laziness).

Q: now if I convert $13000 ($7000 now, and $6000 after a month as I have time to do tIRA contribution for this yr), I have to pay tax on $1000 only, or on $7000

Hal_Al

Employee

Q. If the conversation is done now, does one has to pay the income tax on the total $7k, or only on $1k as tax on $6k is already paid (non-deductible contributions)?

A. Only on the $1000 "earnings".

The TurboTax interview can handle this. Read and answer carefully. Review form 8606, part II, to verify the calculations.