Question

Tax implications for Backdoor IRA?

Forum|Forum|3 years ago
September 5, 2022
1 reply
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I currently have a rollover IRA, and no other traditional IRA account.

I'd like to open a new traditional IRA and then roll the contributions to a Roth IRA. Are there any tax implications to having a rollover IRA (that wouldn't be touched) and a separate traditional IRA where the funds would be rolled over to a Roth? Our contributions to the traditional IRA will be non-deductible and will be made with after-tax funds.

Not A Product Question

D

dmertz

Employee

All of your traditional IRAs are treated together as one large IRA for the purpose of determining the taxable amount of any distribution, including a Roth conversion. This means that the balance in the rollover IRA must be included on line 6 of Form 8606 in determining the taxable amount of any Roth conversion. Presumably the rollover IRA has much more than would be in the new traditional IRA, so the Roth conversion would be mostly taxable, which most of your basis in nondeductible traditional IRA contributions remaining with your traditional IRAs to be applied proportionately to future distributions. The fact that the nondeductible contribution is made to a different traditional IRA than the rollover IRA is irrelevant.

P

parisrosariesAuthor

Thank you for your response. I'd love to clarify with an example:

Today I make a non-deductible contribution of $6k to a traditional IRA. The split between pre-tax and post-tax contributions is 70/30.
I convert the $6k to a Roth IRA. 70% of the $6k would be taxed. Would that be correct?

As a follow-up, if I filed married jointly with my husband, we could both contribute $6k (total of $12k) and on line 6 of From 8606 we would have to include the aggregate of both our rollover IRAs? He has very little in his rollover IRA, so my assumption is that it would lower our % of after-tax contributions and balance the ratio between pre and after-tax money in our IRAs.

D

dmertz

Employee

Correct. In your example, you would have a total of $20,000 in traditional IRAs of which $6,000 is basis in nondeductible traditional IRA contributions. A Roth conversion of $6,000 would result in $4,200 being taxable and $1,800 being nontaxable. Afterwards you would have $14,000 in your traditional IRAs of which $4,200 would be basis in nondeductible traditional IRA contributions.

Form 8606 is an individual form, not a joint form even when included with a joint tax return. Each individual has separate IRA totals and basis. If both individuals make nondeductible contributions or do Roth conversions, your joint tax return would include two Forms 8606, one for each spouse.