stan1 wrote:It is semantics, but sometimes words do matter. The Backdoor Roth Contribution term that was first used by TFB means one is making a non-deductible annual contribution to a zero balance Traditional IRA then converting it to a Roth (immediately, or after some period of time). It is a way for someone who is otherwise not eligible to make a Roth IRA contribution to do so through a two step process. Converting an existing Traditional IRA balance to a Roth IRA generates a lot of current year tax revenue -- and is likely what Congress intended -- but this is not what the board now refers to as a Backdoor Roth. It is unclear whether Congress intended to create a "back door" for individuals to fund a Roth IRA who are otherwise ineligible to do so.
One individual who posts on this board expressed concern that the IRS might determine that a Traditional IRA contribution immediately converted to a Roth IRA is an unlawful step transaction that violates the intent of the law limiting who can contribute to a Roth IRA. Based on this line of reasoning TFB modified his recommendation to hold the Traditional IRA for a few months instead of converting it to a Roth IRA immediately. To me, the current law is very clear: anyone can make a non-deductible contribution to a Traditional IRA and anyone can convert a Traditional IRA to a Roth IRA. Saying that you were audited for doing a Backdoor Roth would mean that the IRS is questioning whether you can convert a current year Traditional IRA contribution to a Roth IRA as a way to circumvent the income restrictions of a Roth IRA. That is not what is being described. What is being described is that the IRS sent a question about a Roth conversion. It is semantics, but sometimes words do matter.
I'm not persuaded. I think the topic as stated better captures the issues than describing the conversion as a standard one.
I made nondeductible contributions to a Traditional IRA in 2007, 2008, 2009, and 2010, then converted them at a very small gain in 2010. (My wife made similar transactions, but actually had a small loss.) I was not able to make a direct Roth contribution in any of those years. My intention with all of the contributions was to convert to a Roth in 2010, if that option remained available. It's not clear that the OP facts are identical to mine, but I'm guessing they're close.
By your definition, this was maybe a partial backdoor roth contribution and a partial standard conversion. But it was the element that is common to all backdoor roths and only a minority of standard conversions -- the nontaxable basis -- that creates the issue at hand. Describing it as a "standard conversion" would have been less helpful, not more.
(I'm also not convinced that nondeductible IRA contribution in the same year as the conversion is really a necessary part of the definition of backdoor roth, even though it will probably be the more common pattern going forward.)
But as you say, it's just semantics.