Backdoor Roth and Tax Implications

[beccaup]

Hello! I am knew here. I have been googling like crazy to try to figure this out and am still confused. Would love advice.

Here's what I did:

In 2019 I rolled over all of my previous pre-tax IRA money into my companies 401(k) - therefore eliminating any money I had in pre-tax IRAs.

I then (also in 2019) contributed a non-deductible $5500 into a traditional IRA but marked it for 2018.

Then (also in 2019) I converted that money to a Roth.

My understanding is that the pro-rata rule effects the calendar year the conversion was made and not the tax year. So I made the conversion in 2019 and since my old pre-tax IRA was rolled into 401k before Dec 31 of 2019 I believe the tax implications should be negligible but I am getting conflicting information.

Advice?

[FiveK]

beccaup, welcome to the forum.

Your understanding is correct.

You will fill out form 8606 both for 2018 and 2019. You might do those by hand first, so you know how the tax software generated ones should look. The Form8606 tab in the personal finance toolbox spreadsheet might also be useful.

[FiveK]

Then (also in 2019) I converted that money to a Roth also allocated for 2018.

This is the only troublesome part. A conversion is subject to tax in the calendar year: one can't "allocate" the conversion to a previous year.

Also, conversions have no impact on contribution limits.

Speaking of which: the words contribution, conversion, and recharacterization mean specific and very different things in this context. Are you comfortable with the definition of each as they apply here?

[beccaup]

Thank you. So I think I may need a new CPA. When I wrote him what I posted above he responded with this:

What you did will not result in a untaxed rollover to your Roth. The Form 8606 takes the value from the prior year and allocates it and the basis to the distributions made during the year. It does not consider the order of the transactions. So even though you zeroed it out before doing the non-deductible contribution, that does not matter. Ask you IRA custodian if you can undo the Roth conversion, transferring the funds back into your traditional IRA. If you can, then you will be able to complete the backdoor Roth in 2020.

I think it is inaccurate....

[beccaup]

Then (also in 2019) I converted that money to a Roth also allocated for 2018.

This is the only troublesome part. A conversion is subject to tax in the calendar year: one can't "allocate" the conversion to a previous year.

Also, conversions have no impact on contribution limits.

Speaking of which: the words contribution, conversion, and recharacterization mean specific and very different things in this context. Are you comfortable with the definition of each as they apply here?

EDITED: I realized I was reading my fidelity statement wrong - I thought it was saying my roth contributions were for 2018 but it was actually just indicating my total to all IRAs for 2018.

To reiterate I did the conversion in 2019.

[Wiggums]

I’m not a CPA but I don’t believe that this is correct. Let us know what you find out.

[FiveK]

Thank you. So I think I may need a new CPA. When I wrote him what I posted above he responded with this:

What you did will not result in a untaxed rollover to your Roth. The Form 8606 takes the value from the prior year and allocates it and the basis to the distributions made during the year. It does not consider the order of the transactions. So even though you zeroed it out before doing the non-deductible contribution, that does not matter. Ask you IRA custodian if you can undo the Roth conversion, transferring the funds back into your traditional IRA. If you can, then you will be able to complete the backdoor Roth in 2020.

I think it is inaccurate....

Yes, it is inaccurate. Can't say whether that is because he misunderstood what you did and gave a correct answer to what he misunderstood, or he gave an incorrect answer to what you did. Fill out the forms 8606 to remove all doubt.

[beccaup]

Thank you. So I think I may need a new CPA. When I wrote him what I posted above he responded with this:

What you did will not result in a untaxed rollover to your Roth. The Form 8606 takes the value from the prior year and allocates it and the basis to the distributions made during the year. It does not consider the order of the transactions. So even though you zeroed it out before doing the non-deductible contribution, that does not matter. Ask you IRA custodian if you can undo the Roth conversion, transferring the funds back into your traditional IRA. If you can, then you will be able to complete the backdoor Roth in 2020.

I think it is inaccurate....

Yes, it is inaccurate. Can't say whether that is because he misunderstood what you did and gave a correct answer to what he misunderstood, or he gave an incorrect answer to what you did. Fill out the forms 8606 to remove all doubt.

Thank you. That is what I thought as well. I sent him EXACTLY what I posted here and that is how he responded. It troubles me too because I believe that as of 2018 you can't recharacterize the funds once they are in the Roth...which he seemed to think was possible.

[beccaup]

So I have literally been on the phone with like 6 different CPAs and either no one understands how these work or I get completely inconsistent advice :/

Some are saying the pre-tax IRA has no impact or relevance to the backdoor conversion and some are saying i would have had to have moved that money into my 401k in 2018.

What advice do people have for getting a CPA that understands this? Some of these guys even had articles on their website that explained backdoor roths but then when I called could barely fumble through even a basic explanation.

[FiveK]

What advice do people have for getting a CPA that understands this?

Find out how well the CPA fills out form 8606.

Given that you understand this better than the people with whom you spoke, why do you seek a CPA at all?

[Duckie]

My understanding is that the pro-rata rule effects the calendar year the conversion was made and not the tax year. So I made the conversion in 2019 and since my old pre-tax IRA was rolled into 401k before Dec 31 of 2019 I believe the tax implications should be negligible but I am getting conflicting information.

You are correct. You converted in 2019 so as long as all of your non-Roth IRAs have a zero balance as of 12/31/2019, you will not be subject to the pro-rata rule.

What advice do people have for getting a CPA that understands this? Some of these guys even had articles on their website that explained backdoor roths but then when I called could barely fumble through even a basic explanation.

You don't tell your CPA you used the backdoor Roth method. You tell him you made a $5,500 non-deductible contribution to a TIRA In 2019 (this year) for 2018 (last year). That you made no conversions or withdrawals in 2018 (if that's accurate). That you have no previous basis (if that's accurate). Your CPA should file Form 8606 with your 2018 taxes and if the above is accurate it should look like this:

• Part I
  Line 1 -- 5,500 (your 2018 contribution made in 2019)
  Line 2 -- 0 (your previous basis)
  Line 3 -- 5,500
  Line 14 -- 5,500 (your current basis, goes on line 2 next year)

That's it for 2018. The conversion will go on your 2019 taxes next year.

[beccaup]

My understanding is that the pro-rata rule effects the calendar year the conversion was made and not the tax year. So I made the conversion in 2019 and since my old pre-tax IRA was rolled into 401k before Dec 31 of 2019 I believe the tax implications should be negligible but I am getting conflicting information.

You are correct. You converted in 2019 so as long as all of your non-Roth IRAs have a zero balance as of 12/31/2019, you will not be subject to the pro-rata rule.

What advice do people have for getting a CPA that understands this? Some of these guys even had articles on their website that explained backdoor roths but then when I called could barely fumble through even a basic explanation.

You don't tell your CPA you used the backdoor Roth method. You tell him you made a $5,500 non-deductible contribution to a TIRA In 2019 (this year) for 2018 (last year). That you made no conversions or withdrawals in 2018 (if that's accurate). That you have no previous basis (if that's accurate). Your CPA should file Form 8606 with your 2018 taxes and if the above is accurate it should look like this:

• Part I
  Line 1 -- 5,500 (your 2018 contribution made in 2019)
  Line 2 -- 0 (your previous basis)
  Line 3 -- 5,500
  Line 14 -- 5,500 (your current basis, goes on line 2 next year)

That's it for 2018. The conversion will go on your 2019 taxes next year.

THANK YOU this is extremely helpful. So the part that is tripping me up slightly is line 2. Since I had the pre-tax IRA in 2018 would that still be 0? I was looking at tutorials and that is the line item that is most confusing me.

[FiveK]

So the part that is tripping me up slightly is line 2. Since I had the pre-tax IRA in 2018 would that still be 0? I was looking at tutorials and that is the line item that is most confusing me.

Yes.

Assuming your rollover amount was $30K, and the $5500 had grown to $5600 by the time you converted to Roth, see below for the form 8606 entries you would have for the situation you describe:

[Duckie]

So the part that is tripping me up slightly is line 2. Since I had the pre-tax IRA in 2018 would that still be 0? I was looking at tutorials and that is the line item that is most confusing me.

If the pre-tax IRA is 100% pre-tax (meaning no non-deductible contributions) then you have no non-deductible basis in 2018 and line 2 will be 0. That's what basis means: your non-deductible basis from a previous year. Pre-tax doesn't count for line 2.

[beccaup]

Thank you. This group is amazing!

[S_Track]

You are correct. You converted in 2019 so as long as all of your non-Roth IRAs have a zero balance as of 12/31/2019, you will not be subject to the pro-rata rule.

Quick question on this, is it possible to get into trouble if you do a conversion early in the year and then unexpectedly need to roll your 401K out of your employer's plan and into a traditional IRA?

thanks

[Epsilon Delta]

You are correct. You converted in 2019 so as long as all of your non-Roth IRAs have a zero balance as of 12/31/2019, you will not be subject to the pro-rata rule.

Quick question on this, is it possible to get into trouble if you do a conversion early in the year and then unexpectedly need to roll your 401K out of your employer's plan and into a traditional IRA?

thanks

Yes, a tIRA created after the conversion, and before the end of the year, would cause the conversion to be pro-rated.

I'm not sure what would force you to rollover a 401(k). If your 401(k) balance is over $5,000 the employer can't force you to rollover on separation of service. For a larger balance it would have to be something like termination of the plan.

[S_Track]

You are correct. You converted in 2019 so as long as all of your non-Roth IRAs have a zero balance as of 12/31/2019, you will not be subject to the pro-rata rule.

Quick question on this, is it possible to get into trouble if you do a conversion early in the year and then unexpectedly need to roll your 401K out of your employer's plan and into a traditional IRA?

thanks

Yes, a tIRA created after the conversion, and before the end of the year, would cause the conversion to be pro-rated.

I'm not sure what would force you to rollover a 401(k). If your 401(k) balance is over $5,000 the employer can't force you to rollover on separation of service. For a larger balance it would have to be something like termination of the plan.

Ok, but might be a small reason to do your conversions closer to the end of the year rather than the beginning.

[FiveK]

Ok, but might be a small reason to do your conversions closer to the end of the year rather than the beginning.

Yes - balanced against the desire to avoid tax on any gains realized between the beginning and end of the year. Up to each individual to assess the relative probability and impact of a forced 401k rollover vs. market gains.

[S_Track]

Ok, but might be a small reason to do your conversions closer to the end of the year rather than the beginning.

Yes - balanced against the desire to avoid tax on any gains realized between the beginning and end of the year. Up to each individual to assess the relative probability and impact of a forced 401k rollover vs. market gains.

Would this also stick you with extra reporting/complication for the following years since you would have a bit of after tax money left in your TIra. I am thinking of the example where you converted 6K into a roth and then forced to roll over a large amount from your 401K. I know this is an edge example just curious.

[FiveK]

Ok, but might be a small reason to do your conversions closer to the end of the year rather than the beginning.

Yes - balanced against the desire to avoid tax on any gains realized between the beginning and end of the year. Up to each individual to assess the relative probability and impact of a forced 401k rollover vs. market gains.

Would this also stick you with extra reporting/complication for the following years since you would have a bit of after tax money left in your TIra. I am thinking of the example where you converted 6K into a roth and then forced to roll over a large amount from your 401K. I know this is an edge example just curious.

A little. An extra form 8606 when you make another transfer. No form 8606 for years in which you let money sit there.

But the hardest 8606 is the first, so it should be minimal extra at most.