Backdoor Roth Screw up

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raidman
Posts: 24
Joined: Fri Apr 11, 2014 9:24 am

Backdoor Roth Screw up

Post by raidman »

"Asking for a friend" (actually, DW)

Let's say somebody intended to do a Backdoor Roth for tax year 2020. They contributed $6000 to a T-IRA post-tax, in January 2020. Within the T-IRA, that went into VTSAX and made money. Then in May 2021, they realized that they had never done the Backdoor Roth conversion. The money is still in the T-IRA, and has now grown to $7800.

Of course, we can still do the conversion up until next Monday. I'm wondering, what are the ramifications/option for the amount over $6000? It looks like my options are:

1) Convert it all to Roth via backdoor. I assume that the excess amount is taxable? Ie, we get taxed on $1800?
2) Convert only $6000, leaving $1800 in the T-IRA.

What would I then do next year with $1800 left in the T-IRA? Would I only contribute $4200 to the T-IRA post-tax, to make it an even $6000 for tax year 2021?

Is there any way to avoid getting taxed on that excess 1800?

Are there other options I'm not understanding?

THANKS!!!!!!
123
Posts: 10415
Joined: Fri Oct 12, 2012 3:55 pm

Re: Backdoor Roth Screw up

Post by 123 »

That extra $1,800 is taxable, either now with the Roth conversion or later when you take distributions from the traditional IRA.

For my money I'd pay the tax on the $1,800 Roth conversion now and enjoy the ride free of additional taxes as long as it can last.
The closest helping hand is at the end of your own arm.
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FiveK
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Re: Backdoor Roth Screw up

Post by FiveK »

However much you convert in 2021, a Form 8606 must be filed for 2020. If this is the only non-Roth IRA and this is the first contribution, only a few numbers need entry: lines 1, 3, and 14 will have 6000.

1) Your assumption is correct.
2) Assuming the 31-Dec-2021 balance in the tIRA is $1800, you will be taxed on $1385. Give form 8606 a try if you would like to know how that number is derived.

Your annual contribution limit is unaffected by balances in any account.

If there is a 401k/403b/etc. that will accept an incoming rollover from the tIRA, the $1800 can be moved there while the $6000 is converted to Roth, thus avoiding any tax on those amounts for 2021. Eventually the $1800 will be taxed (unless it forms part of a Qualified Charitable Distribution at some future time).

Understand form 8606 is the key to understanding how the backdoor Roth process gets taxed. See the backdoor Roth wiki article, particularly the Using tax software section (or do a draft by hand).
RetiredAL
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Location: SF Bay Area

Re: Backdoor Roth Screw up

Post by RetiredAL »

Raidman - screw-up is too harsh a term. It's just a misstep.

If it were me, I'd convert the whole caboodle and pay the taxes on the $1800 gain. What you have (the $1800) is really no different than an deductible IRA that one decides to convert to a Roth.
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celia
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Location: SoCal

Re: Backdoor Roth Screw up

Post by celia »

Everything done so far looks pretty good. Letting a non-deductible contribution gain some growth in a traditional IRA is expected to happen even if you convert the day after the contribution is made.

It would help if you read our Backdoor Roth wiki page and pay particular attention to the pro rata rule when calculating taxes on the converted amount. Your DW's case is just like Example 1a described there except that the your wife's growth is more than what "Ann" has.

BTW, if your DW's name is "Ann", that page was written just for her! :beer!

Look at it this way: She is lucky to have some growth instead of a loss. Right? Convert it all and then contribute for 2021 (and convert again right after).
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.
lakpr
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Joined: Fri Mar 18, 2011 9:59 am

Re: Backdoor Roth Screw up

Post by lakpr »

One thing to keep in mind, if you convert the entire $7800 to Roth. The tax on that $1800 growth is due on your 2021 tax return, not 2020. When you answer questions in your tax software, don't indicate you made the Roth conversion, you did not.

As mentioned, look at Form 8606. That form asks for balances as of December 31, 2020. In the section where it asks for Roth conversion, be careful -- it is asking if you made a Roth conversion in 2020. In your case that amount is zero, as the Roth conversion will take place in 2021.

If you do the Roth conversion in 2021, make sure that you make and convert 2021 contribution also at the same time. Important to have zero balance in Traditional IRA as if 299q December 31, 2021. If you make the 2021 contribution and forget to convert, you are subject to pro rata rule. If you make the non deductible contribution for 2021 in 2022, even then you are subject to pro rata rule, as that contribution is technically deemed to have been made on 12/31/2021.
nolesrule
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Joined: Thu Feb 26, 2015 9:59 am

Re: Backdoor Roth Screw up

Post by nolesrule »

raidman wrote: Thu May 13, 2021 11:19 pm Of course, we can still do the conversion up until next Monday.
There are no deadlines for Roth conversions. They can be done at anytime.
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