Help with Roth Conversion Basis

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Topic Author
OldSport
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Help with Roth Conversion Basis

Post by OldSport »

In 2022 had $37.5k in a Rollover TIRA that was before tax basis & contributed $6k after tax basis. Roth Converted the $6k and $18k of the Rollover IRA.

Doing taxes, the $18k is a taxable distribution without penalty, as expected. And the $6k conversion is subject to pro-rata, so that would be (19.5/25.5) x $6k in taxable, as expected.

My question becomes what happens in future with 2023 $6k after tax TIRA contribution & subsequent conversion? There is a (19.5/25.5) x $6k that was taxed on the 2022 conversion from pro rata, even though the entire $6k was after tax TIRA contribution.

Also thinking of Roth converting the remaining Rollover IRA, which is now $20k. How does either situation impact 2023 taxes?

How does this get in TurboTax?
MrJedi
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Re: Help with Roth Conversion Basis

Post by MrJedi »

Form 8606 takes care of all the basis tracking. As long as that is getting filled out correctly, you shouldn't be getting taxed twice on any basis. The leftover basis carries forward.
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retiredjg
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Re: Help with Roth Conversion Basis

Post by retiredjg »

See if the instructions here help you figure out how to enter this into TT.

https://thefinancebuff.com/how-to-repor ... botax.html


Doing taxes, the $18k is a taxable distribution without penalty, as expected. And the $6k conversion is subject to pro-rata, so that would be (19.5/25.5) x $6k in taxable, as expected.
I don't think you have this part right. The entire $24k is converted and pro-rated.

My question becomes what happens in future with 2023 $6k after tax TIRA contribution & subsequent conversion? There is a (19.5/25.5) x $6k that was taxed on the 2022 conversion from pro rata, even though the entire $6k was after tax TIRA contribution.
Every time you take money out of IRA to spend or to convert, it will be pro-rated. This will continue until your IRA (all your non-Roth IRAs together) is empty.

Also thinking of Roth converting the remaining Rollover IRA, which is now $20k. How does either situation impact 2023 taxes?
This will add $20k to your taxable income.


There are only two ways to stop the pro-rating.

1. Convert it all.

2. Roll the pre-tax portion of the tIRA into a 401k or similar plan and convert the rest to Roth. Now that you have some basis (already taxed money) left in the IRA, you must be careful to determine what the basis is and not roll that into your 401k.
Topic Author
OldSport
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Re: Help with Roth Conversion Basis

Post by OldSport »

retiredjg wrote: Sat Mar 25, 2023 7:25 am See if the instructions here help you figure out how to enter this into TT.

https://thefinancebuff.com/how-to-repor ... botax.html


Doing taxes, the $18k is a taxable distribution without penalty, as expected. And the $6k conversion is subject to pro-rata, so that would be (19.5/25.5) x $6k in taxable, as expected.
I don't think you have this part right. The entire $24k is converted and pro-rated.

My question becomes what happens in future with 2023 $6k after tax TIRA contribution & subsequent conversion? There is a (19.5/25.5) x $6k that was taxed on the 2022 conversion from pro rata, even though the entire $6k was after tax TIRA contribution.
Every time you take money out of IRA to spend or to convert, it will be pro-rated. This will continue until your IRA (all your non-Roth IRAs together) is empty.

Also thinking of Roth converting the remaining Rollover IRA, which is now $20k. How does either situation impact 2023 taxes?
This will add $20k to your taxable income.


There are only two ways to stop the pro-rating.

1. Convert it all.

2. Roll the pre-tax portion of the tIRA into a 401k or similar plan and convert the rest to Roth. Now that you have some basis (already taxed money) left in the IRA, you must be careful to determine what the basis is and not roll that into your 401k.
Yes entirely $24k gets converted, but the $18k was kept in Fidelity in a new separate Roth IRA and the Vanguard was an existing Roth and after tax traditional I've been using for Backdoor for many years. I've just not had any TIRA basis until this year. Taxes were too high to Roth convert the entire Rollover in 2022, but would have made accounting simpler starting with $0 TIRA basis for 2023.

I think the math works out to be the same whether pro rata 2022 after tax is 6/(6+19.5) plus an additional $18k fully taxable or 6/(6+37.5) after tax ratio applied across the full $24k converted. It just asks me my basis at end of 2021, which is $0 and basis at end of 2022, which remaining non-converted TIRA balance was $19.5k.

Unfortunately my 401k does not allow roll ins. I spend many hours looking into that. Otherwise would have easily done that last year.

I don't see how remaining will add the full $20k to taxable income, as some of that $20k is now after tax from 2022 pro rata.
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retiredjg
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Re: Help with Roth Conversion Basis

Post by retiredjg »

OldSport wrote: Sat Mar 25, 2023 9:22 am I think the math works out to be the same whether pro rata 2022 after tax is 6/(6+19.5) plus an additional $18k fully taxable or 6/(6+37.5) after tax ratio applied across the full $24k converted. It just asks me my basis at end of 2021, which is $0 and basis at end of 2022, which remaining non-converted TIRA balance was $19.5k.
Neither of those is the calculation that the form uses to determine how much of your $24k Roth conversion is taxable. That is because the value of the IRA at the end of the year is part of the calculation - but not included in your thinking above.

I think you are using the term "basis" correctly in some places and incorrectly in some places. When talking about tIRA, basis means "already taxed dollars". To my knowledge, there is no such thing as "pre-tax basis".

Basis at the end of 2021 = $0 makes sense since there was no basis (non-deductible contribution) before the 2022 $6k contribution.

But, the basis at the end of 2022 is not the same thing as the value of your IRA at the end of 2022. Yes, there is some basis in there, but the whole thing is not basis.

I don't see how remaining will add the full $20k to taxable income, as some of that $20k is now after tax from 2022 pro rata.
I mis-spoke - you are correct that there will be some basis in the $20k since the 2022 backdoor Roth left some basis in the IRA.

Try to follow thefinancebuff's instructions about how to enter this into TT. If you want, show us what the 8606 looks like and we can tell you if it looks right or not.
tibbitts
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Re: Help with Roth Conversion Basis

Post by tibbitts »

OldSport wrote: Sat Mar 25, 2023 9:22 am Yes entirely $24k gets converted, but the $18k was kept in Fidelity in a new separate Roth IRA and the Vanguard was an existing Roth and after tax traditional I've been using for Backdoor for many years. I've just not had any TIRA basis until this year. Taxes were too high to Roth convert the entire Rollover in 2022, but would have made accounting simpler starting with $0 TIRA basis for 2023.
What does "taxes were too high" mean in this example?
Topic Author
OldSport
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Re: Help with Roth Conversion Basis

Post by OldSport »

tibbitts wrote: Sat Mar 25, 2023 10:47 am
OldSport wrote: Sat Mar 25, 2023 9:22 am Yes entirely $24k gets converted, but the $18k was kept in Fidelity in a new separate Roth IRA and the Vanguard was an existing Roth and after tax traditional I've been using for Backdoor for many years. I've just not had any TIRA basis until this year. Taxes were too high to Roth convert the entire Rollover in 2022, but would have made accounting simpler starting with $0 TIRA basis for 2023.
What does "taxes were too high" mean in this example?
OK. Will look at that and compare to TT. Taxes were too high, means that instead of just paying 24% plus NIIT on the taxable part of the conversion, would have to pay 32% plus NIIT on most of the rest, plus IRS underpayment penalties so would have to do estimated in 2023, which I wanted to avoid that attention and extra tax. Actually since this is a 1099-R, not sure if the taxable portion gets NIIT like the 1099-Int, Div, and B gets. But would still push into 32%.
tibbitts
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Re: Help with Roth Conversion Basis

Post by tibbitts »

OldSport wrote: Sat Mar 25, 2023 11:08 am
tibbitts wrote: Sat Mar 25, 2023 10:47 am
OldSport wrote: Sat Mar 25, 2023 9:22 am Yes entirely $24k gets converted, but the $18k was kept in Fidelity in a new separate Roth IRA and the Vanguard was an existing Roth and after tax traditional I've been using for Backdoor for many years. I've just not had any TIRA basis until this year. Taxes were too high to Roth convert the entire Rollover in 2022, but would have made accounting simpler starting with $0 TIRA basis for 2023.
What does "taxes were too high" mean in this example?
OK. Will look at that and compare to TT. Taxes were too high, means that instead of just paying 24% plus NIIT on the taxable part of the conversion, would have to pay 32% plus NIIT on most of the rest, plus IRS underpayment penalties so would have to do estimated in 2023, which I wanted to avoid that attention and extra tax. Actually since this is a 1099-R, not sure of that gets NIIT like the 1099-Int, Div, and B gets. But would still push into 32%.
Okay I can see that; you seem to have thought that through. I was hoping it wasn't just pushing into one higher bracket. If it was just that I would have converted the full amount, regardless of bracket, but adding a NIIT threshold and dealing with a penalty would make me avoiding converting the full amount.
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retiredjg
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Re: Help with Roth Conversion Basis

Post by retiredjg »

Do you have an active 401k or similar plan at work that you could roll the pre-tax portion of your IRA into?
Topic Author
OldSport
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Re: Help with Roth Conversion Basis

Post by OldSport »

retiredjg wrote: Sat Mar 25, 2023 11:16 am Do you have an active 401k or similar plan at work that you could roll the pre-tax portion of your IRA into?
No. My plan does not allow this. It's a pain. Spent a lot of time looking into it. They only allow 401k direct rollovers into the plan. They do not permit rollover into the plan from a rollover IRA, pretax or otherwise. Spent A LOT of time trying to do this unsuccessfully last year. Ironically had I been able to do that, lump summing would have lost 20% of value. So I'm not terribly upset about it.
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retiredjg
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Re: Help with Roth Conversion Basis

Post by retiredjg »

OldSport wrote: Sat Mar 25, 2023 11:18 am
retiredjg wrote: Sat Mar 25, 2023 11:16 am Do you have an active 401k or similar plan at work that you could roll the pre-tax portion of your IRA into?
No. My plan does not allow this. It's a pain. Spent a lot of time looking into it. They only allow 401k direct rollovers into the plan. They do not permit rollover into the plan from a rollover IRA, pretax or otherwise. Spent A LOT of time trying to do this unsuccessfully last year.
:oops: Sorry, you already told us that. I just didn't go back and refresh my memory before posting.

Well, you are already "into" the pro-rating quagmire at this point. Apparently it was worth it to you to do that first backdoor. Maybe you can just clean up the rest of this over 2023 and 2024 and move on and not worry much about it.
tibbitts
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Re: Help with Roth Conversion Basis

Post by tibbitts »

OldSport wrote: Sat Mar 25, 2023 11:18 am
retiredjg wrote: Sat Mar 25, 2023 11:16 am Do you have an active 401k or similar plan at work that you could roll the pre-tax portion of your IRA into?
No. My plan does not allow this. It's a pain. Spent a lot of time looking into it. They only allow 401k direct rollovers into the plan. They do not permit rollover into the plan from a rollover IRA, pretax or otherwise. Spent A LOT of time trying to do this unsuccessfully last year. Ironically had I been able to do that, lump summing would have lost 20% of value. So I'm not terribly upset about it.
So you have kept the rollover amount in cash? Just wondering about the 20%.
Topic Author
OldSport
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Re: Help with Roth Conversion Basis

Post by OldSport »

tibbitts wrote: Sat Mar 25, 2023 11:27 am
OldSport wrote: Sat Mar 25, 2023 11:18 am
retiredjg wrote: Sat Mar 25, 2023 11:16 am Do you have an active 401k or similar plan at work that you could roll the pre-tax portion of your IRA into?
No. My plan does not allow this. It's a pain. Spent a lot of time looking into it. They only allow 401k direct rollovers into the plan. They do not permit rollover into the plan from a rollover IRA, pretax or otherwise. Spent A LOT of time trying to do this unsuccessfully last year. Ironically had I been able to do that, lump summing would have lost 20% of value. So I'm not terribly upset about it.
So you have kept the rollover amount in cash? Just wondering about the 20%.
Yes. Well I spent many hours over multiple months trying to roll it in to the active 401k. When I realized that was not going to happen and I had already done what was supposed to be another simple backdoor Roth at the beginning of 2022, I converted a little less than half to Roth in late December, right after Christmas. The market just happened to be down then.

I did invest the Roth post conversion, but kept everything in the Traditional Rollover in cash (MM Fidelity sweep) to avoid paying bigger taxes and to keep funds in a form more likely to be moved elsewhere, either to the 401k or to a Roth.

The remaining pretax Rollover funds are still in cash, until I get 2022 taxes accepted and better understand 2023 basis and documentation. Then I'll convert & invest the remaining.
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