Possible error in backdoor Roth IRA conversion

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
gidoc
Posts: 2
Joined: Sun Oct 16, 2016 4:58 pm

Possible error in backdoor Roth IRA conversion

Post by gidoc »

Earlier in March, I decided to do backdoor Roth IRA conversion for me as well as my spouse through vanguard. This was our first time doing this and we were doing this for the tax year 2019.

I think I first transferred $6000 to "my" traditional IRA (not my spouse's traditional IRA - she doesn't have a traditional IRA account) and then transferred that amount next day to my spouse's Roth IRA.

In addition, I transferred another $6000 to my same traditional IRA and then transferred it to my Roth IRA next day (this part I think is not an issue). So, $6000 went from my traditional IRA to spouse's Roth IRA and another $6000 went from my traditional IRA to my own Roth IRA.

How big of an issue is this and how do I rectify this? Any insight will be appreciated.
User avatar
David Jay
Posts: 9409
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: Possible error in backdoor Roth IRA conversion

Post by David Jay »

Welcome to the forum!
gidoc wrote: Sun Sep 27, 2020 11:16 am...and then transferred that amount next day to my spouse's Roth IRA.
This step is clearly not allowed, Individual Retirement Accounts are, as the name states, individual. You cannot co-mingle your IRAs with her IRAs.

I don’t know the precise steps, but you will likely have to correct a minimum of 2 transactions and perhaps more.

Did you have a balance in “your” tIRA at the time of the transfers?
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
Topic Author
gidoc
Posts: 2
Joined: Sun Oct 16, 2016 4:58 pm

Re: Possible error in backdoor Roth IRA conversion

Post by gidoc »

Thanks for the reply. I was afraid of the same. Now I need to figure out how to fix the issue.

There was 0 balance in tIRA at the time of transfer.
User avatar
MP123
Posts: 1672
Joined: Thu Feb 16, 2017 3:32 pm

Re: Possible error in backdoor Roth IRA conversion

Post by MP123 »

I'm surprised that your IRA custodian allowed you to convert from your tIRA directly to your spouse's Roth IRA. As mentioned, that's not allowed.

It sounds like you probably have an excess contribution to your tIRA to clear up (since you contributed twice), as well as the conversion to your spouse's Roth (since she really had nothing to convert). You might be able to resolve this on Form 8606, but maybe some experts here will chime in.
cas
Posts: 917
Joined: Wed Apr 26, 2017 8:41 am

Re: Possible error in backdoor Roth IRA conversion

Post by cas »

gidoc wrote: Sun Sep 27, 2020 11:16 am I think I [...]
Well, first things first. Let's confirm exactly what you did.

(To do part of what you say you did, I'm sure you would have to be an authorized agent on your wife's account. Are you? And it sure seems like lots of warning and complaint pop-ups and perhaps outright refusals would have appeared if you had tried to do (online) some other parts of what you think you did, but who knows.)

Log into your Vanguard account (and probably have your wife log into her account after you finish looking at yours.)
Go to My Accounts -> Retirement Contributions, Distributions, and RMDs

Now fiddle with that page, looking at both 2019 and 2020, and both the Contributions and Distributions tabs.

What IRA-related transactions does *Vanguard* say you did?
User avatar
David Jay
Posts: 9409
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: Possible error in backdoor Roth IRA conversion

Post by David Jay »

1. I think your contributions are OK, if you take one $6000 as a 2019 contribution and the second as a 2020 contribution. This may require amending your 2019 Form 8606.

2. I am not a expert on this, but my guess is that the funds coming out of your tIRA will be seen as a distribution, which is a taxable event with penalty. So you will likely have to pay your marginal tax rate on the $6000 plus pay a 10% early withdrawal penalty.

3. Your Spouse’s contribution is presumably not allowed based on income (otherwise you likely would have simply made a direct contribution to spouse’s Roth) and will have to be withdrawn. As soon as the money left your tIRA it was a distribution (became just another $6000, no longer tax advantaged) so it could not be “converted”.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
cas
Posts: 917
Joined: Wed Apr 26, 2017 8:41 am

Re: Possible error in backdoor Roth IRA conversion

Post by cas »

MP123 wrote: Sun Sep 27, 2020 1:13 pm
It sounds like you probably have an excess contribution to your tIRA to clear up (since you contributed twice)
Unless he actually contributed one of the $6000 for 2019 and the other $6000 for 2020 (and didn't realize it).
User avatar
MP123
Posts: 1672
Joined: Thu Feb 16, 2017 3:32 pm

Re: Possible error in backdoor Roth IRA conversion

Post by MP123 »

David Jay wrote: Sun Sep 27, 2020 1:18 pm 1. I think your contributions are OK, if you take one $6000 as a 2019 contribution and the second as a 2020 contribution. This may require amending your 2019 Form 8606.
This is a good point.

Depending on when you contributed you might be able to treat the contributions as being for two different years, so it wouldn't be an excess contribution.
Katietsu
Posts: 3996
Joined: Sun Sep 22, 2013 1:48 am

Re: Possible error in backdoor Roth IRA conversion

Post by Katietsu »

I agree with the comments that say that you need to figure out what you did. I am bothered by your use of the word “transfer” instead of “convert”. And I would never be able to “convert” directly from my traditional IRA to my husband’s Roth. The custodian/bank/brokerage would not allow it.

Who is the custodian? Did you do this by phone? Online? Did the full $6000 show up in each Roth? How did you make the traditional contributions?
Last edited by Katietsu on Sun Sep 27, 2020 1:34 pm, edited 1 time in total.
HomeStretch
Posts: 4991
Joined: Thu Dec 27, 2018 3:06 pm

Re: Possible error in backdoor Roth IRA conversion

Post by HomeStretch »

Just to be more precise with the transaction descriptions...
- When you say you “transferred to a traditional IRA”, do you mean you made a tax year 2019 contribution?
- When you say “transferred to a Roth IRA”, do you mean that you did a conversion in 2020 to a Roth IRA?

Just to be sure about the transactions you are describing in your OP as I don’t think they transacted as described...
In your Vanguard online account, go to ‘My Accounts’ then ‘Retirement Contributions...RMDs’. Select tax year 2019.
- Do you see $12k of tax year 2019 contributions In the section of the screen called ‘Tax year 2019 contribution summary’? That should be what you see if you did two $6k transfers (contributions?) to your traditional IRA for tax year 2019.
- In the section called ‘Tax year 2019 contribution details” do you see (1) your traditional IRA account with $12k in the ‘contributions’ column?, and (2) (in the tax year 2020 screen) your Roth IRA account with $6k in the ‘Rollover contributions’ column?

In the same screen for your spouse’s account(s), do you see $0 for a traditional IRA 2019 ‘contribution‘ and $6k for a 2020 Roth IRA ‘rollover contribution’?
Post Reply