Roth Conversion Timing

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Analgesia
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Joined: Sat Apr 03, 2021 2:28 pm

Roth Conversion Timing

Post by Analgesia »

If I were to proceed with a tIRA to Roth conversion now, would it be considered a conversion that occurred in 2021 or would it count as a 2020 event? The reason I ask is that I did have a tIRA balance as of December 31, 2020. I rolled over all of my tax deferred tIRA accounts to my 401k a month ago and closed the accounts. I opened a new tIRA account on Vanguard 2 weeks ago and deposited $6000 as a 2020 contribution and will deposit an additional $6000 very soon for a 2021 contribution. My plan was to convert the $12000 to a Roth as soon as possible. I'm just worried if I convert it in the coming weeks, it will count as a 2020 event and then I will get taxed per the pro-rata rule. Thanks for any input!
diy60
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Re: Roth Conversion Timing

Post by diy60 »

2021. Conversions are in the calendar tax year they occur.
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retired@50
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Re: Roth Conversion Timing

Post by retired@50 »

Conversions in calendar year 2021 will be reported on your 2021 taxes.

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DSInvestor
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Re: Roth Conversion Timing

Post by DSInvestor »

Make sure you tell your 2020 tax software that you made a Traditional IRA contribution for 2020 tax year. If the contribution is non-deductible, it will enter $6000 IRA basis into form 8606 which will carry forward to the 2021 form 8606 and help reduce the taxable amount of the conversion that happens in 2021.
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Silk McCue
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Re: Roth Conversion Timing

Post by Silk McCue »

You received the correct answer to this question a few days ago in your first post below.

viewtopic.php?f=1&t=345057&p=5922319#p5922319

You have also received correct answers here.

Are the answers clear or do you have a follow-up question or need any clarification?

Cheers
Topic Author
Analgesia
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Joined: Sat Apr 03, 2021 2:28 pm

Re: Roth Conversion Timing

Post by Analgesia »

DSInvestor wrote: Tue Apr 06, 2021 7:33 pm Make sure you tell your 2020 tax software that you made a Traditional IRA contribution for 2020 tax year. If the contribution is non-deductible, it will enter $6000 IRA basis into form 8606 which will carry forward to the 2021 form 8606 and help reduce the taxable amount of the conversion that happens in 2021.
Could you clarify the taxable amount of the conversion? My understanding is the only taxable part would be any gains made from time of contribution to conversion. Thanks
Topic Author
Analgesia
Posts: 7
Joined: Sat Apr 03, 2021 2:28 pm

Re: Roth Conversion Timing

Post by Analgesia »

Silk McCue wrote: Tue Apr 06, 2021 7:42 pm You received the correct answer to this question a few days ago in your first post below.

viewtopic.php?f=1&t=345057&p=5922319#p5922319

You have also received correct answers here.

Are the answers clear or do you have a follow-up question or need any clarification?

Cheers
Yes, I just had a separate question regarding the timing of the conversion. Specifically, I was wondering if it mattered when the conversion occurred. I was worried my question would get lost in my other thread and decided to start a new one. I don't mean to clog up the forum with similar threads and apologize if this violates the forum rules. The members on this forum have been exceptionally helpful and I have much to learn.
Silk McCue
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Re: Roth Conversion Timing

Post by Silk McCue »

Analgesia wrote: Tue Apr 06, 2021 7:44 pm
DSInvestor wrote: Tue Apr 06, 2021 7:33 pm Make sure you tell your 2020 tax software that you made a Traditional IRA contribution for 2020 tax year. If the contribution is non-deductible, it will enter $6000 IRA basis into form 8606 which will carry forward to the 2021 form 8606 and help reduce the taxable amount of the conversion that happens in 2021.
Could you clarify the taxable amount of the conversion? My understanding is the only taxable part would be any gains made from time of contribution to conversion. Thanks
That is correct.

Cheers
Silk McCue
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Re: Roth Conversion Timing

Post by Silk McCue »

Analgesia wrote: Tue Apr 06, 2021 7:49 pm Yes, I just had a separate question regarding the timing of the conversion. Specifically, I was wondering if it mattered when the conversion occurred. I was worried my question would get lost in my other thread and decided to start a new one. I don't mean to clog up the forum with similar threads and apologize if this violates the forum rules. The members on this forum have been exceptionally helpful and I have much to learn.
You certainly didn’t do anything wrong but had you asked the follow-up question in the prior thread those that were already familiar with your details would likely have come back and answered it there. Many times when these follow up posts are noticed they are reported so that the two threads can be merged together.

Welcome to Bogleheads!

Cheers
DSInvestor
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Re: Roth Conversion Timing

Post by DSInvestor »

Analgesia wrote: Tue Apr 06, 2021 7:44 pm
DSInvestor wrote: Tue Apr 06, 2021 7:33 pm Make sure you tell your 2020 tax software that you made a Traditional IRA contribution for 2020 tax year. If the contribution is non-deductible, it will enter $6000 IRA basis into form 8606 which will carry forward to the 2021 form 8606 and help reduce the taxable amount of the conversion that happens in 2021.
Could you clarify the taxable amount of the conversion? My understanding is the only taxable part would be any gains made from time of contribution to conversion. Thanks
The rules for Traditional IRA are tricky. If you took the IRA deduction for your contributions there is no IRA basis and the Roth conversion will be fully taxable. This is not a concern as the taxable conversion essentially offsets the deduction received for the contribution. IRA deduction is possible for those with high income if you and/or your spouse were not covered by an employer sponsored retirement plan.

If you were covered by employer plan and had high income, it is likely that your TIRA contributions were non-deductible (IRA basis). If both the 2020 and 2021 contributions were non-deductible, it is critical that you track the IRA basis from your contributions.
2020: $6000 TIRA contribution. Non deductible IRA basis = $6000 -> 2020 form 8606 needs to track this basis. This carries forward to the next tax year.

2021: $6000 IRA basis from prior year + $6000 IRA basis from 2021 TIRA contribution. IRA basis = 12,000.

If you convert in 2021, the accumulated basis is used to reduce the taxable amount of the conversion. Assuming no IRA basis proration (i.e. all TIRA balances zero on DEC 31, 2021), you convert 100% of the TIRA, say $12,500 to Roth IRA.
Non-Taxable amount = 100% of 12,000 = 12,000 (IRA basis)
Taxable amount = 12,500 - 12,000 = $500

Here is a link to IRS form 8606. It is important to understand how this form works if you are using the backdoor into Roth IRA.
https://www.irs.gov/pub/irs-pdf/f8606.pdf
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Topic Author
Analgesia
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Joined: Sat Apr 03, 2021 2:28 pm

Re: Roth Conversion Timing

Post by Analgesia »

DSInvestor wrote: Tue Apr 06, 2021 9:00 pm
Analgesia wrote: Tue Apr 06, 2021 7:44 pm
DSInvestor wrote: Tue Apr 06, 2021 7:33 pm Make sure you tell your 2020 tax software that you made a Traditional IRA contribution for 2020 tax year. If the contribution is non-deductible, it will enter $6000 IRA basis into form 8606 which will carry forward to the 2021 form 8606 and help reduce the taxable amount of the conversion that happens in 2021.
Could you clarify the taxable amount of the conversion? My understanding is the only taxable part would be any gains made from time of contribution to conversion. Thanks
The rules for Traditional IRA are tricky. If you took the IRA deduction for your contributions there is no IRA basis and the Roth conversion will be fully taxable. This is not a concern as the taxable conversion essentially offsets the deduction received for the contribution. IRA deduction is possible for those with high income if you and/or your spouse were not covered by an employer sponsored retirement plan.

If you were covered by employer plan and had high income, it is likely that your TIRA contributions were non-deductible (IRA basis). If both the 2020 and 2021 contributions were non-deductible, it is critical that you track the IRA basis from your contributions.
2020: $6000 TIRA contribution. Non deductible IRA basis = $6000 -> 2020 form 8606 needs to track this basis. This carries forward to the next tax year.

2021: $6000 IRA basis from prior year + $6000 IRA basis from 2021 TIRA contribution. IRA basis = 12,000.

If you convert in 2021, the accumulated basis is used to reduce the taxable amount of the conversion. Assuming no IRA basis proration (i.e. all TIRA balances zero on DEC 31, 2021), you convert 100% of the TIRA, say $12,500 to Roth IRA.
Non-Taxable amount = 100% of 12,000 = 12,000 (IRA basis)
Taxable amount = 12,500 - 12,000 = $500

Here is a link to IRS form 8606. It is important to understand how this form works if you are using the backdoor into Roth IRA.
https://www.irs.gov/pub/irs-pdf/f8606.pdf
Thank you so much for the detailed explanation! Appreciate your help.
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