First Time Roth Questions

[WoodSprite]

First time Roth questions:

2022 was the first year I’ve had any kind of IRA, so I am very new at all of this. My household makes over the ROTH limit, so I created a TIRA in Schwab with the intention of backdooring it to a ROTH.

I finish funding 2022 just last week (Jan 20th 2023) and now I want to backdoor it. (I know I could have & should have transferred it sooner, at least in parts, but my attention was taken up by two seriously ill parents I am caring for in addition to working full time, and I did not keep on top of this like I should have).

Here are my questions:

For 2022:

1. As I understand it, my maximum contribution for 2022 was $6,000 (I am under 50). My investments (overall) went up, so now the money I contributed in 2022 is over $6,000. Can I still only roll $6K of it to the Roth for 2022, or can I roll the whole thing (about $6,200) to the 2022 Roth? I was on the phone to a customer service at Schwab and they did not know the answer.

For 2023:

2. I have now contributed $550 to my 2023 TIRA. Should I go ahead and backdoor this, or wait until I have more in the account to move it to the Roth? What kind of increments can I or should I convert to Roth during the year? I hope to put about $500-ish in my account each month (do I backdoor each little bit as soon as I put it in the TIRA account?)

3. Does dividing up my $6,500 total contribution for 2023 into monthly contributions during the year (versus one lump sum contribution) create extra hassle tax wise? I could possibly do one lump sum in 2023 if it saves aggravation/time on taxes. (I don’t know if it does or not). I understand the benefits of dollar cost averaging, but IRAs are not a particularly large sum of money, so I’m wondering if it is worth it if it creates extra headache come tax time.


Thank you for your time.

[FiveK]

1. You may always convert as much as you want. It is annual contributions that are limited. The $200 will be taxable for 2023 (on the return you do in 2024). No need to think of your Roth IRA as a "2022 Roth".

2. Up to you. The faster you convert each contribution, the less time it has to grow and be taxable when converted, instead of growing tax-free in the Roth.

3. No. You get one 1099-R telling you and the IRS how much you converted (assuming you do convert) regardless of whether the conversion was done piecemeal or all at once.

[WoodSprite]

Thank you @FiveK.

Can you explain your answer to question #1 a little more for me. (Sorry, I'm very new at all this and you're going to need to spell it out for me in very simple terms).

If I convert the whole $6,200 to a Roth, then will the extra $200 (above the $6K limit for last year) still be considered as part of my Roth contributions for last year? Or will it be considered part of this year's contributions?

I also don't understand this part of what you said "The $200 will be taxable for 2023 (on the return you do in 2024)". How do you mean taxable, as in I can't subtract it from my income for last year? I was under the assumption that I wouldn't be able to subtract any of these contributions from my income. (Or do you mean taxable in a different way, such as being considered capital gains?)

Thanks

[Wiggums]

When you make a Roth conversion, you will pay taxes on the conversion amount ($6,200). Additionally, this conversion is taxed at your ordinary income tax rate rather than the more tax-friendly long-term capital gains rate.

[FiveK]

If I convert the whole $6,200 to a Roth, then will the extra $200 (above the $6K limit for last year) still be considered as part of my Roth contributions for last year? Or will it be considered part of this year's contributions?

Two similar words but one has to keep them separate: contributions and conversions. Conversions never count as contributions, and the IRS limits are on contributions. Does that make sense?

I also don't understand this part of what you said "The $200 will be taxable for 2023 (on the return you do in 2024)". How do you mean taxable, as in I can't subtract it from my income for last year?

Taxable as in that amount will be added to your other taxable income on Form 1040, via Form 8606. Have you filled a draft version of 8606 to see how it works?

I was under the assumption that I wouldn't be able to subtract any of these contributions from my income.

Correct, you make too much (per your OP) to subtract your $6K contribution, so when you convert that from traditional to Roth you pay no tax on that amount. You do pay tax on the $200 gains. Again, see Form 8606.

[FiveK]

When you make a Roth conversion, you will pay taxes on the conversion amount ($6,200). Additionally, this conversion is taxed at your ordinary income tax rate rather than the more tax-friendly long-term capital gains rate.

Based on the OP, the $6000 was not deducted, so only $200 of the conversion would be taxable.

[WoodSprite]

Again, many thanks FiveK!

Have you filled a draft version of 8606 to see how it works?

No, but I will find one tomorrow and do a draft. Do you recommend I do this before I begin converting?

[FiveK]

Again, many thanks FiveK!

Have you filled a draft version of 8606 to see how it works?

No, but I will find one tomorrow and do a draft. Do you recommend I do this before I begin converting?

Yes. It's not strictly necessary, but probably a good idea. See Form 8606. Several examples are in the Backdoor Roth wiki article.

[Duckie]

Have you filled a draft version of 8606 to see how it works?

No, but I will find one tomorrow and do a draft.

2022 Form 8606

• Part I
  Line 1 -- 6000 (non-deductible contributions for 2022)
  Line 2 -- 0 (previous basis)
  Line 3 -- 6000
  Line 14 -- 6000 (current basis, goes on line 2 next year)

That's it for 2022. Next year it will be more complicated.

[WoodSprite]

Thanks @Duckie and @FiveK, much appreciated!

I am reading over your answers and also the many pages of IRS instruction documents and have more questions.

1. I'm married, and we file our taxes jointly. Do each of us have to submit a separate 8606 (we are both doing a TIRA to Roth conversion) or do we submit one combined 8606?

2. I don’t make a lot of money, but my spouse does. Combined, we are usually over the Roth limit (our incomes vary year-to-year). I assumed that my contributions to a TIRA would NOT be deductible because our combined income this past year was about $230K and because my spouse contributed about $25,000 to a 401K, (I don’t have a 401K). Am I correct to assume my TIRA contributes are NOT deductible? As I read over the IRA instruction pages, I get more and more confused because the language seems to shift back and forth, and I can’t tell when it is referring to our joint/combined household income (and contributions to my husband’s 401K counting for the household), or when/if it is referring to my income separately (and my lack of 401K).

3. Because both my husband’s and my incomes vary, occasionally we are below the Roth income limit. However, we don’t know until the very end of the year whether we are above or below (unless we’ve had a really good year and cross the threshold early). What should be our strategy be in future years for IRAs? Is it okay to contribute to TIRAs and covert to Roths even for years that we end up not being above the Roth limit and could have just funded them directly? Or should we only contribute to IRAs AFTER the end of the year when we know whether we crossed the threshold or not for the previous year? Are there consequences for doing it one way or the other?

Many thanks to you both and all who are taking the time to help me get my financial ducks in a row.

[Duckie]

1. I'm married, and we file our taxes jointly. Do each of us have to submit a separate 8606 (we are both doing a TIRA to Roth conversion) or do we submit one combined 8606?

You each submit a separate Form 8606. Your IRAs are individual and so are the forms.

2. I don’t make a lot of money, but my spouse does. Combined, we are usually over the Roth limit (our incomes vary year-to-year). I assumed that my contributions to a TIRA would NOT be deductible because our combined income this past year was about $230K and because my spouse contributed about $25,000 to a 401K, (I don’t have a 401K). Am I correct to assume my TIRA contributes are NOT deductible?

Per this, if you are married filing jointly, do not have a work retirement plan but your spouse does, you CAN deduct at least part of your contribution if your joint modified AGI is under $214,000 for 2022. If your joint MAGI is $230,000 you CANNOT.

If you will at least occasionally need to use the backdoor Roth IRA method you should not make deductible contributions. They will mess up things because of the dreaded pro-rata rule.

3. Because both my husband’s and my incomes vary, occasionally we are below the Roth income limit. However, we don’t know until the very end of the year whether we are above or below (unless we’ve had a really good year and cross the threshold early). What should be our strategy be in future years for IRAs? Is it okay to contribute to TIRAs and covert to Roths even for years that we end up not being above the Roth limit and could have just funded them directly?

Yes, it is okay to use the method even if not needed.

Or should we only contribute to IRAs AFTER the end of the year when we know whether we crossed the threshold or not for the previous year?

I wouldn't wait. Using the backdoor Roth IRA method even if not needed is just a little more paperwork.

Are there consequences for doing it one way or the other?

Contributing/converting early means the assets have more time to grow, plus you get both the contribution and conversion on the same Form 8606.

Contributing after the end of the year might mean less paperwork if you find you can contribute to a Roth IRA directly.

[WoodSprite]

Thank you!

If you will at least occasionally need to use the backdoor Roth IRA method you should not make deductible contributions. They will mess up things because of the dreaded pro-rata rule.

I read the link and the language is complicated for a newbie like me, but I think I get the gist. So, because of the rule, and because my husband and I expect to be over the limit for the Roth more years than not, your advice is to NOT deduct any of my contributions to my TIRA, even if I am able to do so? (I'm not sure if I able to do so or not yet because I haven't calculated our MAGI yet, the $230,000 I listed above, is our roughly calculated AGI. I don't know yet how much our MAGI will be different from our AGI since this is the first year I'm doing any of this.)

Thank you!

[FiveK]

...the dreaded pro-rata rule.

I read the link and the language is complicated for a newbie like me, but I think I get the gist -- if I deduct a percentage one year, then I'll always have to do that same percentage, or something like that?

So, because of the rule, and because my husband and I expect to be over the limit for the Roth more years than not, your advice is to NOT deduct any of my contributions to my TIRA even if I am able to do so? (I'm not sure if I able to do so or not yet because I haven't calculated our MAGI yet, the $230,000 I listed above, is our roughly calculated AGI. I have no idea how much our MAGI will be different from our AGI since this is the first year I'm doing any of this.

It is most justifiably dreaded by those with a large traditional IRA balance already. Otherwise, when you have some non-deductible contributions, form 8606 has to be filled out whether you have deductible contributions or not.

You could play with something like the 'Form8606' tab in the personal finance toolbox spreadsheet to see what different choices over several years would do to, or for, you.

[WoodSprite]

One more question.

In the future, can I just convert cash from my TIRA to my Roth? Am I allowed to contribute cash into one and then convert it to the other without having to buy something first? I just read that I could, but wanted to double check because that seems too easy! Gosh I feel so stupid!

[WoodSprite]

You could play with something like the 'Form8606' tab in the personal finance toolbox spreadsheet to see what different choices over several years would do to, or for, you.

Wow, this looks very useful. Thanks for the link!

[FiveK]

One more question.

In the future, can I just convert cash from my TIRA to my Roth? Am I allowed to contribute cash into one and then convert it to the other without having to buy something first? I just read that I could, but wanted to double check because that seems too easy! Gosh I feel so stupid!

Not only can you, but it's the simplest way to proceed.

[placeholder]

I'm not sure your other question was answered but yes convert whatever amount of 2023 that you have made so far to keep its value from changing and to make it easier because you can just convert the entire balance then deal with the rest of 2023 down the line.

[WoodSprite]

One more question.

In the future, can I just convert cash from my TIRA to my Roth? Am I allowed to contribute cash into one and then convert it to the other without having to buy something first? I just read that I could, but wanted to double check because that seems too easy! Gosh I feel so stupid!

Not only can you, but it's the simplest way to proceed.

Thank you! Yes, that is how I will proceed in the future. (Doh! I'm learning!)

[WoodSprite]

I'm not sure your other question was answered but yes convert whatever amount of 2023 that you have made so far to keep its value from changing and to make it easier because you can just convert the entire balance then deal with the rest of 2023 down the line.

Thank you! Yes, thanks to the guidance from all of you on this thread, I did it this morning! (Whew, its a relief having it done, and understanding better what I'm doing for the future.)

Thanks so much to everyone!

[little_star]

Thank you!

If you will at least occasionally need to use the backdoor Roth IRA method you should not make deductible contributions. They will mess up things because of the dreaded pro-rata rule.

I read the link and the language is complicated for a newbie like me, but I think I get the gist. So, because of the rule, and because my husband and I expect to be over the limit for the Roth more years than not, your advice is to NOT deduct any of my contributions to my TIRA, even if I am able to do so? (I'm not sure if I able to do so or not yet because I haven't calculated our MAGI yet, the $230,000 I listed above, is our roughly calculated AGI. I don't know yet how much our MAGI will be different from our AGI since this is the first year I'm doing any of this.)

Thank you!

I concur with @Duckie's advice not to make deductible tIRA contributions if you are planning to use the backdoor Roth process in future years. To provide some context, consider the following situation: you have a low income year so you are eligible to make a deductible contribution. You contribute $6k to a traditional IRA and take a tax deduction when you are in (say) the 12% marginal tax bracket. Hurray! you have saved $720! However, the very next year you have a booming year and make too much to contribute directly to a Roth IRA and choose to use the backdoor Roth process. Now you are subject to the pro-rata rule and whether you convert part or all, you now will be taxed at your current marginal tax rate. If you convert it all and are in the 32% tax bracket, you now owe $1920 on that original $6k. In other words, you would have paid less taxes had you chosen to contribute directly to a Roth IRA in the low income year and skipped the deductible tIRA contribution. Deductible contributions are great if you expect to withdraw/convert in the future when you will be in a lower marginal tax bracket. However, if you need to use the backdoor Roth process, you are, almost by definition, doing the conversion in a year in which you are in a higher marginal tax bracket.

I think it is fine to proceed with the backdoor Roth process if you think you will be close to the MAGI limits. While it is possible to recharacterize a Roth contribution if you exceed the income limits, it is pretty straightforward to do the backdoor Roth process (provided you do not have $$ in a traditional IRA on December 31 of the year in which you do the Roth conversion). There are some minor differences in terms of accessing the Roth funds that were converted rather than contributed, but they only apply if you are trying to withdraw before you are 59.5 years old.

You should fill out a draft version of IRS Form 8606 before you make the Roth conversion so that you can see the potential tax implications if you have $$ in a traditional IRA on Dec 31. The form is not complicated, but it can be difficult to get tax software (and even some human tax preparers) to understand the proper sequence of events. If you fill out a form 8606 by hand yourself, you can check their work.

[WoodSprite]

I'm doing a practice 8606 by hand and have a question.

Line 8 states: "Enter the net amount you converted from traditional, SEP and SIMPLE IRAs to Roth IRAs in 2022. Also, enter this amount on line 16."

I waited until January 2023 to do my tIRA to Roth conversion, even though I made some contributions to my tIRA in 2022. So does that mean I put "0" for Line 8 since I didn't do the conversion in the calendar year of 2022? Or do I put the total amount I converted of in Jan 2023 which includes my 2022 contributions?

Is this what Little Star means above by saying "... it is pretty straightforward to do the backdoor Roth process (provided you do not have $$ in a traditional IRA on December 31 of the year in which you do the Roth conversion)."

Will I need to file additional forms because of this?

[WoodSprite]

Hi Little Star, thank you for taking the time to walk me through this.

I feel the most comfortable doing the tIRA to Roth conversion every year, and keeping my tIRA contributions non-deductible because it seems the most straightforward way to proceed and I need to keep things simple for me to understand what I'm doing.

There is one thing in your response that I'd like you to explain more because I don't quite understand:

it is pretty straightforward to do the backdoor Roth process (provided you do not have $$ in a traditional IRA on December 31 of the year in which you do the Roth conversion).

and

...potential tax implications if you have $$ in a traditional IRA on Dec 31.

See my previous post if you would be so kind -- I converted my tIRA to a Roth in January 2023. I had some 2022 contributions in my tIRA on December 31 (mutual funds). Did I screw up? This is the first year I'm doing any of this and didn't realize that was bad. How do I go from here? I'm filling out a practice 8606 right now and have some questions about what to record on line 8.

Thank you.

[FiveK]

So does that mean I put "0" for Line 8 since I didn't do the conversion in the calendar year of 2022?

Yes.

You will file form 8606 again next year, and that conversion (and any others you do in 2023) will be entered then.

[FiveK]

I converted my tIRA to a Roth in January 2023. I had some 2022 contributions in my tIRA on December 31 (mutual funds). Did I screw up?

Not based on that. "Contributions + a year end balance" does not create an issue. "Withdrawals (or conversions) + a year end balance" may or may not create an issue.

Are you getting the same results by hand as that spreadsheet page does?

[little_star]

Hi Little Star, thank you for taking the time to walk me through this.

I feel the most comfortable doing the tIRA to Roth conversion every year, and keeping my tIRA contributions non-deductible because it seems the most straightforward way to proceed and I need to keep things simple for me to understand what I'm doing.

There is one thing in your response that I'd like you to explain more because I don't quite understand:

it is pretty straightforward to do the backdoor Roth process (provided you do not have $$ in a traditional IRA on December 31 of the year in which you do the Roth conversion).

and

...potential tax implications if you have $$ in a traditional IRA on Dec 31.

See my previous post if you would be so kind -- I converted my tIRA to a Roth in January 2023. I had some 2022 contributions in my tIRA on December 31 (mutual funds). Did I screw up? This is the first year I'm doing any of this and didn't realize that was bad. How do I go from here? I'm filling out a practice 8606 right now and have some questions about what to record on line 8.

Thank you.

Since you did not do a Roth conversion in the calendar year 2022, it does not matter what your tIRA balance was on December 31, 2022. However, *this year* (2023) you have done a Roth conversion. You want to be certain that you convert all of your tIRA so that the balance is zero on December 31, 2023 (a few nuisance pennies is fine). That means that you want to be timely in your conversion of your 2023 non-deductible contribution (i.e., don't wait until the last few weeks of December to contribute and convert and remember to convert 100%, including gains) and do not rollover a 401k into the tIRA. That said, it is not the end-of-the-world to be subject to the pro-rata rule with a small pre-tax tIRA balance, it just makes it mathematically more complicated.

Since you did not Roth convert in the calendar year 2022, your IRS Form 8606 should have minimal entries. Everything flows into your 2023 IRS Form 8606, including your basis (separate entries for your 2023 contributions and your existing basis from your 2022 contributions). You can always check your work by posting your entries here. As I think you will discover, this is a straightforward form if you are simply contributing and converting 100%, and easiest if contributions and conversions are done in the same year.

[WoodSprite]

Okay, I understand now. Thanks for the explanation!

I will make sure to finish contributing to my tIRA and convert to Roth well ahead of Dec 31, 2023.

You can always check your work by posting your entries here. As I think you will discover, this is a straightforward form if you are simply contributing and converting 100%, and easiest if contributions and conversions are done in the same year.

I tried to post an image of the hand filled-in form but was unable to. Is there a simple way to post it without setting up an account with an image sharing site? Seems so clunky that way.

[WoodSprite]

Thank you Five K! Very helpful.

Are you getting the same results by hand as that spreadsheet page does?

I opened the spreadsheet and found the mention of the 8606 form in the instructions page, but I don't know Excel hardly at all, and didn't know how to find the actual page with the form, and it all just looks like jumbled spaghetti to me. So to answer your question, no, I don't know how to work with it.

[WoodSprite]

Is rounding cents to the nearest dollar the same on form 8606 as it is on other tax documents/forms? Round up if it is .5 or over, down if .49 or under?

[FiveK]

Is rounding cents to the nearest dollar the same on form 8606 as it is on other tax documents/forms? Round up if it is .5 or over, down if .49 or under?

Yes.

[WoodSprite]

Thanks everyone, I really appreciate all the help and patience as I learn.

I feel comfortable that I've completed my 8606 form accurately now.

You all have warned me that tax prep software often doesn't understand how to handle these conversions, which is one reason it is good to do the 8606 by hand to help you double check the software or preparer results.

What is the software you recommend to do our taxes with? Are some more understanding of these conversions than others? We've used TurboTax in the past, but I'm not wedded to it. Any tips for getting whichever software we go with to understand and accurately handle the conversion?

[FiveK]

Any tips for getting whichever software we go with to understand and accurately handle the conversion?

See Using tax software and links therein.

[WoodSprite]

Thank you FiveK!

[WoodSprite]

Would someone mind taking a look at my practice 8606. I think I have it right but I'd feel more confident if you all think it's right too.

One question: for line 2, I entered "0" per the instructions because this is my first year with any kind of IRA. However, I'm continually adding $ to my traditional IRA and moving it to my Roth for 2023, so there is some money in the tIRA off and on. I'm assuming this is not counted because its not staying there and because it is for 2023 and not 2022. Correct?

[WoodSprite]

Another question:

I'm now making contributions to my tIRA for 2023 and converting them to my Roth. I'm using Schwab. When I go to make the conversation, the site asks me if I want federal and state taxes withheld (see screenshot below). Is the answer no?

[Duckie]

Would someone mind taking a look at my practice 8606. I think I have it right but I'd feel more confident if you all think it's right too.

Re-read the box at line 3:

• "In 2022, did you take a distribution from traditional, SEP, or SIMPLE IRAs, or make a Roth IRA conversion?"

If the answer is No, and it is No in your case, you are supposed to:

• "Enter the amount from line 3 on line 14. Do not complete the rest of Part I."

Lines 1, 2, 3, and 14 are the only lines filled in for 2022. The amount on line 14 will go on line 2 next year.

One question: for line 2, I entered "0" per the instructions because this is my first year with any kind of IRA. However, I'm continually adding $ to my traditional IRA and moving it to my Roth for 2023, so there is some money in the tIRA off and on. I'm assuming this is not counted because its not staying there and because it is for 2023 and not 2022. Correct?

Line 2 applies to previous basis, meaning from years before 2022. You had none, so 0 is correct.

I'm now making contributions to my tIRA for 2023 and converting them to my Roth. I'm using Schwab. When I go to make the conversation, the site asks me if I want federal and state taxes withheld (see screenshot below). Is the answer no?

The answer is No. Having taxes withheld from your conversion of a non-deductible contribution would mess things up.

[WoodSprite]

Thank you Duckie for your answers and for catching that I didn't need to fill out the page. (Sorry I'm slow with this!)

For the second page, "Part II (Conversions)", I filled in "0" for line 16 where it says:

"If you completed Part 1, enter the amount from line 8. Otherwise, enter the net amount you converted from traditional, SEP, and SIMPLE IRAs to Roth IRAs in 2022."

Was I correct in putting "0" since I did the whole conversion in January 2023 (for my 2022 contributions)? Or should I instead put the whole amount converted (in January) because the conversion was for 2022's contributions?

Thanks

[Duckie]

For the second page, "Part II (Conversions)", I filled in "0" for line 16 where it says:

"If you completed Part 1, enter the amount from line 8. Otherwise, enter the net amount you converted from traditional, SEP, and SIMPLE IRAs to Roth IRAs in 2022."

Was I correct in putting "0" since I did the whole conversion in January 2023 (for my 2022 contributions)? Or should I instead put the whole amount converted (in January) because the conversion was for 2022's contributions?

You did NOT convert in 2022. Therefore you should not fill out Part II of the 2022 Form 8606, just the four lines in Part I.

When you do your taxes for real will it be on paper, using tax-software (which brand?), or using an accountant?

[WoodSprite]

Thanks Duckie.

My husband and I will use TurboTax software. (Unless a different software is recommended instead.)

[Duckie]

My husband and I will use TurboTax software. (Unless a different software is recommended instead.)

I personally use TurboTax Deluxe, the download version so I can see what things look like in Forms mode. Whatever works for you.

[WoodSprite]

Thank you. That sounds like a good plan, we will do that.

Tomorrow, I'm going to start a new thread and ask for guidance regarding my husband's IRA situation. I hope you and the other kind people who have helped me with my IRA will chime in and help us with his as well.

Many thanks!