Dear Experts, I'm need some clarity on how to deal with income on IRA contribution between rollovers, recharacterization across Roth and Traditional IRA.Background:I maxed out 2023 Roth IRA contribution limit by mid-June (I did more than one transactions from Jan'23 to Jun'23). Later. I switched job and I estimated I will be exceeding the income limit for Roth IRA contributions.So I did a recharacterization (Roth to Traditional), of the entire 2023 contribution and income (let's say income is $A) on it so far. This total amount came out to be $6500 + A.After 6 days, I did Roth conversion and moved this $6500 + A from Traditional to Roth (Backdoor Roth).However, in these 6 days, the total amount gathered an interest, let's say $B, in the Traditional IRA account which was paid next month.So, I did another Rollover from Traditional to Roth of $B.All the above movements were done in within the year 2023.My Questions:I understand that I need to pay taxes on $6500, which was initial contribution. Correct?Do I need to pay taxes on $A, the money that was earned while sitting in Roth IRA account, before the recharacterization happened.Do I need to pay taxes on $B, then money that was earned while sitting in the Traditional IRA account, after the recharacterization and before the first rollover. Please feel free to ask for clarifications. Any help will be appreciated.

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noviceattax

Solved

Taxes on Income in-midst of Rollover and Recharacterization across Roth and Traditional IRA

Forum|Forum|2 years ago
February 5, 2024
1 reply
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Dear Experts,

I'm need some clarity on how to deal with income on IRA contribution between rollovers, recharacterization across Roth and Traditional IRA.

Background:

I maxed out 2023 Roth IRA contribution limit by mid-June (I did more than one transactions from Jan'23 to Jun'23).
Later. I switched job and I estimated I will be exceeding the income limit for Roth IRA contributions.
So I did a recharacterization (Roth to Traditional), of the entire 2023 contribution and income (let's say income is $A) on it so far. This total amount came out to be $6500 + A.
After 6 days, I did Roth conversion and moved this $6500 + A from Traditional to Roth (Backdoor Roth).
However, in these 6 days, the total amount gathered an interest, let's say $B, in the Traditional IRA account which was paid next month.
So, I did another Rollover from Traditional to Roth of $B.
All the above movements were done in within the year 2023.

My Questions:

I understand that I need to pay taxes on $6500, which was initial contribution. Correct?
Do I need to pay taxes on $A, the money that was earned while sitting in Roth IRA account, before the recharacterization happened.
Do I need to pay taxes on $B, then money that was earned while sitting in the Traditional IRA account, after the recharacterization and before the first rollover.

Please feel free to ask for clarifications. Any help will be appreciated.

Not A Product Question

Best answer by dmertz

If the resulting traditional IRA contribution is nondeductible (or you choose to treat it as nondeductible if it would otherwise be deductible), the $6,500 adds to your basis in nondeductible traditional IRA contributions which factors into the calculation of the taxable amount of your Roth conversions. IF you have other money in traditional IRAs, some portion of your basis will be applied to the Roth conversions and the rest will remain in your traditional IRAs to be applied to future traditional IRA distributions. If you have no other money in traditional IRAs, your entire basis will be applied to your Roth conversions to make that amount of the conversions nontaxable.

The calculations are all done on Form 8606. TurboTax prepares Form 8606 automatically when you enter all of the information for the transactions that you have described here.

dmertzAnswer

Employee

The calculations are all done on Form 8606. TurboTax prepares Form 8606 automatically when you enter all of the information for the transactions that you have described here.

noviceattaxAuthor

Okay. Thanks, @dmertz ,for the explanation. This is helpful. I need another help in dealing with the tool.

Turbotax is also asking me if I contributed to IRAs this year and if yes then to which Traditional or Roth? What should I say? Consider the following situations for me and my spouse we did two different things.:

My: Contributed initially max till limit to Roth --> Then recharacterized to Traditional --> Then did Roth conversion for the entire amount
My Spouse: Contributed initially to some things to Roth --> Then recharaterized it to Traditional and added remanining allowable contribution to Traditional directly --> Then did Roth conversion for the entire amount.

fanfare

Employee

recharacterization: the original amount to the first IRA you report as contribution to the second IRA, earnings move but are ignored.
You must use a trustee-to-trustee transfer.
report this on your tax return for the year during which the contribution was made.

@noviceattax