H&R Rep says Backdoor Roth closed/changed..now what?

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Topic Author
Sophia1884
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H&R Rep says Backdoor Roth closed/changed..now what?

Post by Sophia1884 »

Hello all,

We're in a bit of a pickle-please help or explain what we just did and how to move forward.

We have always had fairly straight forward taxes, used the H&R Block tax software provided by the military to file. This year, due to a bonus, our Roth contributions got super complicated.

So, we each contributed $5,000 to the Roths beginning of 2018. Beginning of 2019, we found out: 1. There exists an income level that limits ROTH contributions. 2. The bonus had pushed us slightly over that that level= taxes, penalties ahead.

Once we found that out, we contacted Vanguard to figure out what to do next. Long story made short, we moved the 2018 ROTH contributions from the Roth to Traditional to the Roth again. Vanguard created a new Traditional IRA acct for the husband, and used my Rollover account, with money already in it, for mine.

Now, what is the correct terminology for all of that?

Next, we try to file with the software, there is one page left and we are totally stuck. The question is: Did we contribute for a Roth or a Traditional in 2018? Since we did Roth->Trad->Roth....what is the answer to the question? Which did we "re categorize"? When we try to select, each says "Excess Contributions."

To try to finish this up, husband went to the local H&R shop, and was charged $400...I'm not sure for what yet as the rep said he didn't know in which year the contributions would have been made, 2018 when they were made originally or 2019 when they were moved. Said he'll have to check with the lawyer. He also said that the Backdoor Roth loop hole has been closed?!? Or maybe he meant there were changes to the re categorization?

In any case, we don't know what to do now. We have a follow up appt with the rep, I'll come along this time. I don't know what our choices are or what to do next outside of just hand him our stuff and close my eyes while he writes himself a check....hoping everything gets filed ok and we never have to do this again. HELP?!?
Last edited by Sophia1884 on Tue Mar 05, 2019 1:43 am, edited 3 times in total.
interestediniras
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Re: Tangled & messy...did we just mess up the Backdoor Roth?

Post by interestediniras »

The new tax law does not permit recharacterization of Roth IRA contributions to Traditional IRA contributions in taxable year 2018.

What should have been done is (1) removal of the Roth IRA contributions, (2) non-tax deferred contribution to a Traditional IRA, and (3) conversion of the Traditional IRA to a Roth IRA.

The backdoor Roth has not been closed. It's also not a loophole, which suggests there is something illicit or shady about it.
Topic Author
Sophia1884
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Re: Tangled & messy...did we just mess up the Backdoor Roth?

Post by Sophia1884 »

interestediniras wrote: Tue Mar 05, 2019 12:59 am The new tax law does not permit recharacterization of Roth IRA contributions to Traditional IRA contributions in taxable year 2018.

What should have been done is (1) removal of the Roth IRA contributions, (2) non-tax deferred contribution to a Traditional IRA, and (3) conversion of the Traditional IRA to a Roth IRA.

The backdoor Roth has not been closed. It's also not a loophole, which suggests there is something illicit or shady about it.
For future reference, how is the non-tax deferred contribution to a tIRA done? Does it need to be a new tIRA/with no money in it? If so, what would I do if I already have the Rollover IRA with money in it?

What should we be doing now, being in the current situation?
interestediniras
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Re: Tangled & messy...did we just mess up the Backdoor Roth?

Post by interestediniras »

Sophia1884 wrote: Tue Mar 05, 2019 1:04 am
interestediniras wrote: Tue Mar 05, 2019 12:59 am The new tax law does not permit recharacterization of Roth IRA contributions to Traditional IRA contributions in taxable year 2018.

What should have been done is (1) removal of the Roth IRA contributions, (2) non-tax deferred contribution to a Traditional IRA, and (3) conversion of the Traditional IRA to a Roth IRA.

The backdoor Roth has not been closed. It's also not a loophole, which suggests there is something illicit or shady about it.
For future reference, how is the non-tax deferred contribution to a tIRA done? Does it need to be a new tIRA/with no money in it? If so, what would I do if I already have the Rollover IRA with money in it?

What should we be doing now, being in the current situation?
It does not need to be a new tIRA, but it does need to have no money, because of the IRS aggregation rule. If there are existing tIRA balances, they need to be rolled into a 401(k) plan first, otherwise the backdoor Roth does not work properly (the conversion is treated as being drawn partly from the existing pre-tax balances and partly from the new contributions). So: first, roll existing tIRA into 401(k); second, make a tIRA contribution; third, convert to Roth IRA.
sandramjet
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Re: H&R Rep says Backdoor ROTH closed/changed..now what?

Post by sandramjet »

interestediniras wrote: Tue Mar 05, 2019 12:59 am The new tax law does not permit recharacterization of Roth IRA contributions to Traditional IRA contributions in taxable year 2018.
I don't believe that is true. You can not recharacterize CONVERSIONS, but you should still be able to recharacterize CONTRIBUTIONS if you earned too much
interestediniras
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Re: H&R Rep says Backdoor ROTH closed/changed..now what?

Post by interestediniras »

sandramjet wrote: Tue Mar 05, 2019 1:12 am
interestediniras wrote: Tue Mar 05, 2019 12:59 am The new tax law does not permit recharacterization of Roth IRA contributions to Traditional IRA contributions in taxable year 2018.
I don't believe that is true. You can not recharacterize CONVERSIONS, but you should still be able to recharacterize CONTRIBUTIONS if you earned too much
I think you're right, my mistake.
mhalley
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Re: H&R Rep says Backdoor ROTH closed/changed..now what?

Post by mhalley »

Recharacterization of conversions is still allowed.
https://www.forbes.com/sites/jamiehopki ... on-limits/
The financebuff goes over the backdoor with hr block here
https://thefinancebuff.com/how-to-backd ... tware.html
Topic Author
Sophia1884
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Re: Tangled & messy...did we just mess up the Backdoor Roth?

Post by Sophia1884 »

interestediniras wrote: Tue Mar 05, 2019 1:07 am It does not need to be a new tIRA, but it does need to have no money, because of the IRS aggregation rule. If there are existing tIRA balances, they need to be rolled into a 401(k) plan first, otherwise the backdoor Roth does not work properly (the conversion is treated as being drawn partly from the existing pre-tax balances and partly from the new contributions). So: first, roll existing tIRA into 401(k); second, make a tIRA contribution; third, convert to Roth IRA.
The reason I have the Rollover is because I had rolled over my 401(k) from a previous employer to Vanguard. Now, I don't have a 401(k) acct...is there a different place to place the existing tIRA or how would I create another 401 (k)?
Topic Author
Sophia1884
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Re: H&R Rep says Backdoor ROTH closed/changed..now what?

Post by Sophia1884 »

mhalley wrote: Tue Mar 05, 2019 1:13 am Recharacterization of conversions is still allowed.
https://www.forbes.com/sites/jamiehopki ... on-limits/
The financebuff goes over the backdoor with hr block here
https://thefinancebuff.com/how-to-backd ... tware.html
Mhalley,

That's a great link, thank you! The problem I'm encountering though is that movement of funds from Roth-Trad-Roth....how does that translate on the forms, in taxes? A Backdoor Roth starts off in Traditional and is moved to a ROTH. WE started in the ROTH, moved to Traditional, then back to ROTH. Does it matter that the contributions were made to the ROTH in 2018, then moved to Trad then Roth in 2019?
Topic Author
Sophia1884
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Re: H&R Rep says Backdoor ROTH closed/changed..now what?

Post by Sophia1884 »

sandramjet wrote: Tue Mar 05, 2019 1:12 am
I don't believe that is true. You can not recharacterize CONVERSIONS, but you should still be able to recharacterize CONTRIBUTIONS if you earned too much
Sandramjet, can you please explain what the difference is between re characterizing Conversions vs Contributions?

I think this may apply to our situation...we Contributed to a ROTH, then converted? to a Trad then converted? again to a ROTH. Do I understand the terminology correctly?
bayview
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Re: H&R Rep says Backdoor ROTH closed/changed..now what?

Post by bayview »

Small point: it's Roth, not ROTH. Named for Sen. William Roth, its chief legislative sponsor.

I'll get out of the way for the real responses. :D
The continuous execution of a sound strategy gives you the benefit of the strategy. That's what it's all about. --Rick Ferri
Topic Author
Sophia1884
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Re: H&R Rep says Backdoor ROTH closed/changed..now what?

Post by Sophia1884 »

bayview wrote: Tue Mar 05, 2019 1:35 am Small point: it's Roth, not ROTH. Named for Sen. William Roth, its chief legislative sponsor.

I'll get out of the way for the real responses. :D
Noted and changed :)
Spirit Rider
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Re: H&R Rep says Backdoor ROTH closed/changed..now what?

Post by Spirit Rider »

It is clearer if this presented in a list and the correct terminology is used. This is my understanding of what was done, the current status and what should be done:
  • You both made 2018 Roth IRA contributions in January 2018.
  • You both recharacterized the 2018 Roth IRA contribution to 2018 non-deductible traditional IRA contributions.
  • His to a new tIRA account and yours to a rollover IRA account containing pre-tax balances.
  • You both did 2019 Roth conversions of those accounts.
  • Assuming he will have no pre-tax balances in all traditional, SEP and SIMPLE IRA accounts on 12/31/19, his conversion should have little to no tax liability.
  • In your case you will have a 2019 prorata taxation of the non-deductible traditional IRA balance and the rolled over pre-tax balance, unless you can rollover the pre-tax balances to a 401k, 403b or 457b plan by 12/31/19.
  • If you do not have such a plan that accepts rollovers, one option is to try to find some way to generate some self-employment income. Then you can adopt a one-participant 401k that accepts rollovers (not Vanguard) and rollover the pre-tax IRA balances.
  • The only thing that should be required on your 2018 tax return is to include explanation statements of the recharacterizations and a 2018 Form 8606 for each of you reporting the 2018 non-deductible contributions.
  • The Roth conversions and any 2019 non-deductible contributions will be reported on each of your 2019 Form 8606s.
Correct any errors I have made.
mhalley
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Re: H&R Rep says Backdoor Roth closed/changed..now what?

Post by mhalley »

Here is another post on a 2 different year backdoor roth.
https://www.irahelp.com/IRAUpdates/may10/
The Wizard
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Re: H&R Rep says Backdoor ROTH closed/changed..now what?

Post by The Wizard »

sandramjet wrote: Tue Mar 05, 2019 1:12 am
interestediniras wrote: Tue Mar 05, 2019 12:59 am The new tax law does not permit recharacterization of Roth IRA contributions to Traditional IRA contributions in taxable year 2018.
I don't believe that is true. You can not recharacterize CONVERSIONS, but you should still be able to recharacterize CONTRIBUTIONS if you earned too much
You are correct...
Attempted new signature...
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Duckie
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Re: H&R Rep says Backdoor Roth closed/changed..now what?

Post by Duckie »

Sophia1884 wrote: Long story made short, we moved the 2018 ROTH contributions from the Roth to Traditional
This sounds like a recharacterization.
to the Roth again.
This sounds like a conversion.
Vanguard created a new Traditional IRA acct for the husband, and used my Rollover account, with money already in it, for mine.
It sounds like your husband will have no problem with the tax paperwork for 2019. You will because of your rollover IRA.
Now, what is the correct terminology for all of that?
You contributed, recharacterized and converted.
Next, we try to file with the software, there is one page left and we are totally stuck. The question is: Did we contribute for a Roth or a Traditional in 2018? Since we did Roth->Trad->Roth....what is the answer to the question? Which did we "re categorize"? When we try to select, each says "Excess Contributions."
I've never used the H&R Block software but using TurboTax this is what you tell it for each of you separately:
  1. You made a 2018 contribution to a Roth IRA for $5,000.
  2. You recharacterized the entire $5,000 contribution to a TIRA. Any earnings (or loss) do not count for this question.
  3. This will open a recharacterization statement and you write something like:
    • In January 2018 I contributed $5,000 to a Roth IRA for 2018. In January 2019 I found out my income was over the limit and so recharacterized the $5,000 contribution plus $XX earnings to a TIRA.
  4. The $5,000 contribution is non-deductible
  5. This will trigger Form 8606. Since the conversion happened in 2019 you only need to document the 2018 non-deductible contribution at this time. It'll look like:
    • Form 8606 Part I
      Line 1 -- 5000 (your 2018 non-deductible contribution)
      Line 2 -- 0 (your previous basis, I'm assuming it's 0)
      Line 3 -- 5000
      Line 14 -- 5000 (your current basis, goes on line 2 next year)
That's it for your 2018 taxes.
To try to finish this up, husband went to the local H&R shop, and was charged $400...I'm not sure for what yet as the rep said he didn't know in which year the contributions would have been made, 2018 when they were made originally or 2019 when they were moved.
That's not a good rep. The contributions were made in 2018.
He also said that the Backdoor Roth loop hole has been closed?!? Or maybe he meant there were changes to the re categorization?
You can't recharacterize a conversion anymore. That's the only thing that has changed.
For future reference, how is the non-tax deferred contribution to a tIRA done? Does it need to be a new tIRA/with no money in it? If so, what would I do if I already have the Rollover IRA with money in it?
You do not need to open a new TIRA each time. However your rollover IRA is going to be a problem for your 2019 taxes because of the pro-rata rule. Since you've already converted and can't change that, you either "hide" your rollover IRA or pay taxes on most of your conversion. The date that matters is 12/31/19. If you can empty all your non-Roth IRAs by the end of the year you will have no problem with the pro-rata rule. If you don't have a current employer plan can you create some self-employment income and open a solo 401k?
Last edited by Duckie on Tue Mar 05, 2019 5:58 pm, edited 1 time in total.
jimcrawford01
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Re: H&R Rep says Backdoor Roth closed/changed..now what?

Post by jimcrawford01 »

$400 and the H&R Rep states that the Backdoor Roth is closed? Really?
Time to ask for your $$ back and follow the explanations and directions given here. Really!
JustinR
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Re: H&R Rep says Backdoor Roth closed/changed..now what?

Post by JustinR »

Take a deep breath.

For the purposes of this tax year, all you did was contribute to your Roth IRA, then recharacterize it to traditional. It's very simple and common.

If your tax software doesn't walk you through recharacterizations, enter everything as if you had contributed to the traditional IRA originally. So you contributed 5,500 to the TIRA in 2018 and 0 to the Roth IRA.

Attach a statement (a short letter) explaining the recharacterization: you contributed $5,500 to your Roth IRA on date x and recharacterized $5,500 to traditional IRA on date y. The purpose of the statement is so the IRS understands the conflict of info Vanguard may have sent them.

That's it.

You don't have to mention the conversion you did back to Roth. You'll deal with that next tax season since it happened this year, and you'll get proper forms from Vanguard for it.

---

Demand a refund from H&R, and cite the bad info they gave you. Recharacterizations are still allowed. Conversions are still allowed. Backdoor Roths are still allowed. You didn't even do a backdoor Roth in 2018 so it's irrelevant.
Topic Author
Sophia1884
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Re: H&R Rep says Backdoor Roth closed/changed..now what?

Post by Sophia1884 »

JustinR wrote: Tue Mar 05, 2019 7:51 pm

You don't have to mention the conversion you did back to Roth. You'll deal with that next tax season since it happened this year, and you'll get proper forms from Vanguard for it.
Ok. What if I had already contributed $6,000 for 2019 to the Roths in January of 2019? This contribution was before we found out about the income and did the Roth->Trad->Roth. :shock:
Topic Author
Sophia1884
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Re: H&R Rep says Backdoor Roth closed/changed..now what?

Post by Sophia1884 »

Duckie, thank you. Three questions:
Duckie wrote: Tue Mar 05, 2019 5:25 pm
You can't recharacterize a conversion anymore. That's the only thing that has changed.

If you don't have a current employer plan can you create some self-employment income and open a solo 401k?
1. Can you please explain: "You can't recharacterize a conversion anymore". I don't think I'm clearly grasping the terms and process.
2. Does a TSP count as an employer plan? If so, would I move the Rollover IRA to the TSP?
3. Before we started the 2018 taxes and found out about the higher income, I had already contributed $6,000 to our Roths for 2019. Does that mean that for 2019 we double contributed to the Roth? (the Roth-Trad-Roth conversion for 2018) and then the additional $6,000 contribution for 2019. If so, how would I undo the 2019 contributions?

Thank you again!
deskjockey
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Re: H&R Rep says Backdoor Roth closed/changed..now what?

Post by deskjockey »

Sophia1884 wrote: Wed Mar 06, 2019 11:57 pm Duckie, thank you. Three questions:
Duckie wrote: Tue Mar 05, 2019 5:25 pm
You can't recharacterize a conversion anymore. That's the only thing that has changed.

If you don't have a current employer plan can you create some self-employment income and open a solo 401k?
1. Can you please explain: "You can't recharacterize a conversion anymore". I don't think I'm clearly grasping the terms and process.
2. Does a TSP count as an employer plan? If so, would I move the Rollover IRA to the TSP?
3. Before we started the 2018 taxes and found out about the higher income, I had already contributed $6,000 to our Roths for 2019. Does that mean that for 2019 we double contributed to the Roth? (the Roth-Trad-Roth conversion for 2018) and then the additional $6,000 contribution for 2019. If so, how would I undo the 2019 contributions?

Thank you again!
1. Ignore this issue. It does not apply to you, so you can safely put it aside.
2. Yes, the TSP counts. One issue you may find with your current situation is that you co-mingled after-tax (non-deductible) IRA money with pre-tax (rollover) money. I've never tried to roll over a rollover IRA to the TSP, but I know this type of co-mingling has caused issues for other folks in the past.
3. This should not be an issue IF what happened was that you recharacterized the 2018 IRA contribution from Roth to traditional and then converted the traditional IRA to a Roth. IF that is what you did, then you still have the ability to contribute directly to the Roth in 2019, assuming you are not above the income limits in 2019. If you think you'll be near the limit this year, too, you need to plan ahead and ask questions now.

Focus on SpiritRider's post and check to see what exactly was done to the 2018 money once you found out you were above the income limits earlier this year. Ask for the specific terms. Use only those terms from now on--imprecise language not only confuses the matter, but can actually lead to mistakes piled on mistakes and a world of pain.

As a final piece of advice, please go back and read the Wiki on the backdoor Roth in detail. If there are things you don't understand, come back and ask questions. It will help you quite a bit in the future and, as you're finding out now, lack of knowledge about these issues can leave you in a bind. I know this may sound harsh, but know that it is meant as constructive criticism: your lack of knowledge about Roth contributions, the backdoor Roth, and the terminology was a major factor in creating this problem. Please learn from that mistake.
JustinR
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Re: H&R Rep says Backdoor Roth closed/changed..now what?

Post by JustinR »

Sophia1884 wrote: Wed Mar 06, 2019 11:50 pm
JustinR wrote: Tue Mar 05, 2019 7:51 pm

You don't have to mention the conversion you did back to Roth. You'll deal with that next tax season since it happened this year, and you'll get proper forms from Vanguard for it.
Ok. What if I had already contributed $6,000 for 2019 to the Roths in January of 2019? This contribution was before we found out about the income and did the Roth->Trad->Roth. :shock:
Not sure what you're asking, but you don't have to worry about the 2019 contribution right now, since it has nothing to do with your 2018 taxes.

For your 2019 contribution you have two options:

1) Wait til this time next year to see if your income was low enough to qualify for what you did. If you find out your income was too high you would just repeat what you did for 2018 and recharacterize it.

2) If you're pretty sure your income will be too high again, you can recharacterize it now.

Again, this is for your 2019 taxes so you don't necessarily need to worry about it now.
cherijoh
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Re: Tangled & messy...did we just mess up the Backdoor Roth?

Post by cherijoh »

interestediniras wrote: Tue Mar 05, 2019 12:59 am The new tax law does not permit recharacterization of Roth IRA contributions to Traditional IRA contributions in taxable year 2018.

What should have been done is (1) removal of the Roth IRA contributions, (2) non-tax deferred contribution to a Traditional IRA, and (3) conversion of the Traditional IRA to a Roth IRA.

The backdoor Roth has not been closed. It's also not a loophole, which suggests there is something illicit or shady about it.
Where did you get that idea? The new tax law got rid of the ability to recharactize a Roth CONVERSION - not a Roth CONTRIBUTION for the current tax year! See this FAQ from the IRS for the correct information.
cherijoh
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Re: H&R Rep says Backdoor ROTH closed/changed..now what?

Post by cherijoh »

mhalley wrote: Tue Mar 05, 2019 1:13 am Recharacterization of conversions is still allowed.
https://www.forbes.com/sites/jamiehopki ... on-limits/
The financebuff goes over the backdoor with hr block here
https://thefinancebuff.com/how-to-backd ... tware.html
From the first article you referenced (my emphasis added:
The tax reform bill has removed the ability to recharacterize any Roth IRA conversions done in 2018 and onward. However, you can still recharacterize your 2017 Roth IRA conversions up until October 15, 2018.
So why do you think this article supports your conclusion that "Recharacterization of conversions is still allowed"? :oops:
cherijoh
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Re: H&R Rep says Backdoor Roth closed/changed..now what?

Post by cherijoh »

Sophia1884 wrote: Wed Mar 06, 2019 11:50 pm
JustinR wrote: Tue Mar 05, 2019 7:51 pm

You don't have to mention the conversion you did back to Roth. You'll deal with that next tax season since it happened this year, and you'll get proper forms from Vanguard for it.
Ok. What if I had already contributed $6,000 for 2019 to the Roths in January of 2019? This contribution was before we found out about the income and did the Roth->Trad->Roth. :shock:
If you think you'll have the same ineligibility problem for the 2019 tax year, you can either take back the Roth contribution for 2019 year or recharacterize it to a non-deductible traditional IRA contribution (i.e., like you are doing with the 2018 contribution).

The latter would be even easier to deal with since there won't be any 2019 form 1099s saying you made a Roth contribution. Vangaurd will be able to treat it as though you never put the money in the Roth in the first place. The complicating factor for the 2018 tax year is that you didn't realize you had an issue until after Dec 31, 2018.
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Duckie
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Re: H&R Rep says Backdoor Roth closed/changed..now what?

Post by Duckie »

Sophia1884 wrote:Can you please explain: "You can't recharacterize a conversion anymore". I don't think I'm clearly grasping the terms and process.
Starting in 2018 the law changed and you can no longer convert and then change your mind and un-convert (recharacterize). My comment above was just explaining that this was the only thing affecting the backdoor method that had changed, not that it was personally relevant in your situation. Don't worry about it.
Does a TSP count as an employer plan? If so, would I move the Rollover IRA to the TSP?
The TSP absolutely counts as an employer plan and it's one of the few plans you can roll assets to even when no longer an employee. So yes, I recommend you roll your pre-tax Rollover IRA into the TSP.

It's my understanding that the 2018 $5,000 contribution to your Roth IRA was recharacterized to your Rollover IRA and then converted back to your Roth IRA. I also believe that your 2019 contribution to your Roth IRA is still in your Roth IRA. If that is correct and you expect your joint income to be above the limits again this year then you need to fix that. I recommend you open a TIRA at Vanguard and have them recharacterize the 2019 $6,000 contribution (plus earnings) to the new TIRA instead of the Rollover IRA. Then there should be $0 basis in the Rollover IRA. You can then roll 100% of the Rollover IRA into the TSP. And then convert 100% of the TIRA to your Roth IRA. That will clean up the pro-rata problem.
Before we started the 2018 taxes and found out about the higher income, I had already contributed $6,000 to our Roths for 2019. Does that mean that for 2019 we double contributed to the Roth? (the Roth-Trad-Roth conversion for 2018) and then the additional $6,000 contribution for 2019. If so, how would I undo the 2019 contributions?
You contributed for 2018 in 2018, not 2019. The subsequent recharacterization and conversion are not a contribution. You contributed in 2018 for 2018 and in 2019 for 2019. You're fine.
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