Backdoor Roth tax question

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summit123
Posts: 16
Joined: Tue Jan 05, 2021 2:12 pm

Backdoor Roth tax question

Post by summit123 »

I did my first backdoor Roth this year... specifically, I opened the tIRA in January 2021 with $6k and converted it over to a Roth as soon as I could. When I set it up, I specified that it was for the 2020 tax year. Can someone help me understand when/where this gets reported? We're getting ready to file for 2020, but Fidelity has told me I won't get a 1099-R for 2020.

I also contributed another $6k to my tIRA in March for the 2021 tax year and converted it over to the Roth as well. I just want to make sure that I didn't do something massively wrong by contributing $12k to a Roth in the 2021, since the 2020 cutoff was April 15 (and I believe just got extended anyway)?

Thank you!!
ruud
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Re: Backdoor Roth tax question

Post by ruud »

The "backdoor Roth" is 2 separate transactions:
  • A contribution to a traditional IRA
  • A conversion from traditional IRA to Roth IRA
Contributions can be made for a prior year, but conversions are always reported in the year in which they occur.

So if in 2021, you made 2 contributions, one for 2020 and one for 2021, and also converted both these to Roth, you'll:
  • Report a 6,000 non-deductible contribution on your taxes for 2020
  • Report a 6,000 non-deductible contribution on your taxes for 2021
  • Report a conversion of 12,000 (or slightly more if there was some growth between contribution and conversion) on your taxes for 2021.
.
Topic Author
summit123
Posts: 16
Joined: Tue Jan 05, 2021 2:12 pm

Re: Backdoor Roth tax question

Post by summit123 »

That's so helpful and clear! Thank you!

When reporting the 2020 contribution, will I receive anything from Fidelity, or will the only reporting be the IRS 8606 form?
ruud
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Joined: Sat Mar 03, 2007 12:28 pm
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Re: Backdoor Roth tax question

Post by ruud »

Just the 8606. (To clarify: Fidelity doesn't know whether the contribution is deductible or not, so they won't be able to tell whether you have to file a 8606)

For 2021, you'll get a 1099-R that documents the conversion.
.
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celia
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Re: Backdoor Roth tax question

Post by celia »

summit123 wrote: Mon Apr 19, 2021 10:41 am When reporting the 2020 contribution, will I receive anything from Fidelity, or will the only reporting be the IRS 8606 form?
Next January you will receive a 1099-R showing that in 2021, you withdrew $12,000 from the IRA and you will then report that it was converted. You will also get Form 5498 after May 17, showing how much you contributed for 2020. (Contributions can still be made for 2020 until May 17.) This info is for your records only and should be saved with your 2020 records. It is not used when calculating your taxes.

Right now, you need to report a non-deductible $6000 contribution for 2020 on your 2020 tax return that was made in 2021. If you go to the part of your software that asks for IRA contributions, you enter it there and need to declare it is non-deductible. That will cause Form 8606 to be generated with your 2020 tax return. If you have already filed, you need to manually fill out 2020 Form 8606, sign it, and mail it in by itself.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
Topic Author
summit123
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Joined: Tue Jan 05, 2021 2:12 pm

Re: Backdoor Roth tax question

Post by summit123 »

Thank you!! This is super helpful. We have an accountant who keeps asking for the 1099-R, so I've been trying to explain in depth why there won't be one. And this is the last year with an accountant...

Thanks!
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celia
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Re: Backdoor Roth tax question

Post by celia »

summit123 wrote: Mon Apr 19, 2021 11:56 am We have an accountant who keeps asking for the 1099-R, so I've been trying to explain in depth why there won't be one. And this is the last year with an accountant...
Your accountant is not deficient here, so don't take that out on them. Not many people do Backdoor Roths, so they don't see this very often. They may not have ever heard of the "Backdoor Roth" either as the IRS does not use that term. Instead, refer to this as a "non-deductible contribution to an IRA". Also you did a "Roth conversion". This is how the accountant and IRS will understand what you mean.

YOU are the one who is not typical here (because you are a Boglehead), not them. :D
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
Topic Author
summit123
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Joined: Tue Jan 05, 2021 2:12 pm

Re: Backdoor Roth tax question

Post by summit123 »

:D Now I'm wondering if my expectations of said accountant are way too high.

Earlier this year, the accountant said that our out-of-state 529 contributions would not be tax deductible, so I had to share documentation to show that our state has a parity agreement with out-of-state 529s... A couple years ago, they also counseled my husband to open a SEP IRA instead of a solo 401k for retirement savings from his side hustle, which we ultimately shifted over so we could start to do the backdoor roth.

We've done as much as we think we can to minimize our taxable income, but it would be great to have an accountant who is identifying any other blind spots for us and keeping us sorted on the side LLC. But now I'm realizing that maybe the backdoor roth / LLC / out-of-state 529s likely makes us hard clients. Is it rare for accountants to be well-versed in the investment space as well?
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celia
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Re: Backdoor Roth tax question

Post by celia »

summit123 wrote: Mon Apr 19, 2021 2:30 pm Is it rare for accountants to be well-versed in the investment space as well?
In a way, you're asking about the difference between an accountant, CPA, tax preparer, and financial advisor. All of them can advise you, but are stronger in one area over another. It's a matter of different training and what kind of situations they are most familiar with. Your accountant is probably strong in finances for a business and saw other businesses with a SEP IRA, so suggested one for you.
We've done as much as we think we can to minimize our taxable income, . . .
This is not necessarily the best approach. You are probably minimizing your current income taxes at the expense of paying in higher tax brackets later on. Are you aware that tax brackets are scheduled to revert to 2017 levels in 2026? Do you know we are at historically low tax brackets now? And if you jointly have over a million in tax-deferred accounts, your future RMDs (at age 72) could put you in higher taxes brackets than now or higher than in early retirement? And if you are married, when one spouse dies, the other will then be stuck in Single tax brackets (which have half the space as MFJ)?

Over your lifetimes, you should aim to pay the income taxes in the years your tax bracket is lower. Using today's tax brackets and your projected age 73 incomes, do you think you will be in a lower, higher, or same tax bracket compared to now?
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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