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Late to convert 2023 Roth IRA from Traditional IRA :(

Forum|Forum|2 years ago
December 30, 2023
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Normally I should have done the conversion from my bank account to my traditional IRA and convert from traditional IRA to Roth IRA early the year but I somehow completely forget it this year. I know I screwed it up. And I need some help

12/22: initiate transfer $6,500 from my checking account to my traditional IRA in fidelity. Until 12/29, the money is still not cleared and I can't initiate the conversion directly online. I called fidelity services to requet conversion by 12/29 and was told they could help but it was best effort. But it didn't work through.

12/30: seems the money is clear. and the money become $6,505.40

Question:

1. Where the extra $5.40 coming from? Is it taxable or not?

2. Can I still convert the money to Roth IRA? $6,500 or $6,505.40? Is it counted 2023 or 2024?

3. What is the tax implication for leave money in traditional IRA?

Thanks and appreciate if any comments.

Best answer by dmertz

Funds sent to Fidelity generally go into a money market account that presently has about a 5% APR. $5.40 would be 6 days of interest at that rate.

You can convert as little or as much as you want.

The conversion would be reportable on the tax return for the year in which the distribution from the traditional IRA occurs. As you said, it's too late for that to happen in 2023.

If you leave the money in the traditional IRA instead of converting to Roth, investment gains will be taxable instead of eventually being nontaxable once the requirements for qualified Roth IRA distributions are met. The $6,500 traditional IRA contribution for 2023 is reported on your 2023 tax return the same whether or not you convert any of it to Roth.

The only potential downside to not being able to convert until 2024 is that it delays the beginning of the 5-year conversion clock by one year, but if the Roth conversion is entirely nontaxable due to the distribution from the traditional IRA consisting entirely of basis in nondeductible traditional IRA contributions, that really doesn't matter because there is no penalty on a distribution from a Roth IRA consisting entirely of nontaxable conversion basis.

A

Anonymous_

Employee

I'll page @dmertz

D

dmertzAnswer

Employee

Funds sent to Fidelity generally go into a money market account that presently has about a 5% APR. $5.40 would be 6 days of interest at that rate.

You can convert as little or as much as you want.

The conversion would be reportable on the tax return for the year in which the distribution from the traditional IRA occurs. As you said, it's too late for that to happen in 2023.

If you leave the money in the traditional IRA instead of converting to Roth, investment gains will be taxable instead of eventually being nontaxable once the requirements for qualified Roth IRA distributions are met. The $6,500 traditional IRA contribution for 2023 is reported on your 2023 tax return the same whether or not you convert any of it to Roth.

The only potential downside to not being able to convert until 2024 is that it delays the beginning of the 5-year conversion clock by one year, but if the Roth conversion is entirely nontaxable due to the distribution from the traditional IRA consisting entirely of basis in nondeductible traditional IRA contributions, that really doesn't matter because there is no penalty on a distribution from a Roth IRA consisting entirely of nontaxable conversion basis.

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VincentSunAuthor

Thank you @dmertz for your help.

The traditional IRA has both after tax contribution $6,500 and the interest income $5.40 which is taxable. Can I convert them all to the Roth IRA in 2024? What is the tax implication if I do it? Previously all conversion are for after tax money entirely. Or I should convert $6,500 to Roth IRA and keep the $5.40 still in traditional IRA? Thanks.

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dmertz

Employee

Yes, you can convert the whole thing in 2024. There is no limit on the amount that you are permitted to convert.

You seem to be saying that you have no other funds in traditional IRAs, so if you convert $6,505.40, $6,500 will be a nontaxable conversion and $5.40 will be a taxable conversion.

There is no good reason to convert less than the full balance in the traditional IRA. You might still end up with a little bit in the traditional IRA if a small amount of interest is credited to the traditional IRA after doing the Roth conversion.

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Erich M

Similiar situation happened to me. I contributed $6500 into my 2023 Trad IRA back in Feb 2023, and two weeks later I completed the Conversion to my Roth IRA. Simple process.....However, my wife didn't listen when I told her to Transfer all $6500 into her 2023 Traditional IRA so that I could Convert it to her 2023 Roth IRA. Instead, she delayed until Dec 30th, and the Conversion wasn't completed until Jan 4, 2024.

So what happens now?

Can my wife contribute at all this year (2024) to her Trad IRA? $7000.

I've already contributed $7000 to my Trad IRA and will soon start the Conversion process to my Roth IRA this week. I just don't know if my wife can contribute to any type IRA this year.

Thanks.

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dmertz

Employee

Erich M, if your wife's $6,500 traditional IRA contribution was for 2023, that does not affect how much she can contribute for 2024.

There is no limit on the amount or frequency that one can convert to Roth.

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Erich M

Appreciate the reply. That's what I figured. She had received an email from Victory Capital on Jan 4th stating that "the conversion was complete and will need to be reported in 2024." I was confused on what they meant when said "will need to be reported in 2024."