Can I backdoor Roth after recharacterizing an incorrect roth ira contribution?

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Topic Author
whatisgood
Posts: 17
Joined: Wed May 11, 2022 8:26 pm

Can I backdoor Roth after recharacterizing an incorrect roth ira contribution?

Post by whatisgood »

Hi all, great forum. Learned a lot.

Long story short, filing my 2022 taxes and realized due to some unexpected income that we are just over the threshold to contribute to a roth ira.

So in 2022, $2,200 of each spouse's 6,000 roth ira contribution was deemed in excess. I was able to recharacterize that portion of the contribution as a traditional IRA contribution. Both accounts lost value in 2022 so the amount that was actually transferred to the traditional IRA by Vanguard's calculations was $1700 (rough loss of $500 from the initial contribution)

So here's my question:

I don't want to leave the money in the traditional IRA but want to do the least amount of headache to get it out of there i.e. I'm okay with the less optimal tax strategy if its less work.

Can I still use the backdoor Roth method to get it back into the Roth IRA? Is the loss on the account going to be a headache to deal with if that happens? I read on the whitecoatinvestor that the loss in the traditional IRA is something that is not fun on your taxes

Or can I just role the traditional IRA into my solo 401K for me and my spouse's traditional 403B and call it a day?

I've googled a ton and read on white coat investor but haven't found a succinct answer of what to do

Thanks in advance
Topic Author
whatisgood
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Joined: Wed May 11, 2022 8:26 pm

Re: Can I backdoor Roth after recharacterizing an incorrect roth ira contribution?

Post by whatisgood »

bumping to the top
NinnyMuggins
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Re: Can I backdoor Roth after recharacterizing an incorrect roth ira contribution?

Post by NinnyMuggins »

I may be in a similar situation. I am waiting on a Schedule K from my accountant next week to know for sure if my income is too high. It is going to be close. Backdoor Roth was my first thought too, I don't think I can, my employer sponsored plan is a Simple IRA.

You mentioned rolling over from IRA into 401K, I don't think that is possible.

My plan if things are really close is to max out 2022 HSA contributions for myself and my spouse. We left some space there. If I am still over the threshold I will simply convert to taxable and pay taxes on the gain. As I understand I will need to file Form 5329.
I strive towards laconic wit. My wife says I am half way there!
muddgirl
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Re: Can I backdoor Roth after recharacterizing an incorrect roth ira contribution?

Post by muddgirl »

Do you qualify for a traditional IRA deduction? I'm guessing you don't based on your income and employer-provided plans. If you don't qualify then the recharacterization must be to a non-deductible contribution to the traditional IRA. I don't think those can be rolled over to a 401k or 403b.

You can convert the non-deductible contribution back to your Roth IRA. The conversion happens in 2023.

The fact that your contribution now has a loss doesn't seem like that big of a deal. You will have some non-deductible basis hanging around in your IRA which can cover future gains. Or I think you have the option to zero out the basis but that doesn't make any sense to me. The complication is that you report the recharacterization and non-deductible contribution on your 2022 taxes, you will have an end of year non-deductible balance, then will report the conversion on your 2023 taxes. As long as your traditional IRA balance is 0 at the end of the year in which you do the conversion, the timing doesn't matter.

Edit: https://www.irs.gov/instructions/i8606 has a section on recharacterization for your 2022 taxes. For 2023 it will be exactly like a backdoor Roth IRA split across 2 years.
Topic Author
whatisgood
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Re: Can I backdoor Roth after recharacterizing an incorrect roth ira contribution?

Post by whatisgood »

muddgirl wrote: Wed Mar 22, 2023 2:22 pm Do you qualify for a traditional IRA deduction? I'm guessing you don't based on your income and employer-provided plans. If you don't qualify then the recharacterization must be to a non-deductible contribution to the traditional IRA. I don't think those can be rolled over to a 401k or 403b.

You can convert the non-deductible contribution back to your Roth IRA. The conversion happens in 2023.

The fact that your contribution now has a loss doesn't seem like that big of a deal. You will have some non-deductible basis hanging around in your IRA which can cover future gains. Or I think you have the option to zero out the basis but that doesn't make any sense to me. The complication is that you report the recharacterization and non-deductible contribution on your 2022 taxes, you will have an end of year non-deductible balance, then will report the conversion on your 2023 taxes. As long as your traditional IRA balance is 0 at the end of the year in which you do the conversion, the timing doesn't matter.

Edit: https://www.irs.gov/instructions/i8606 has a section on recharacterization for your 2022 taxes. For 2023 it will be exactly like a backdoor Roth IRA split across 2 years.
Thanks for the reply. I don't qualify for traditional IRA deduction.

So if I convert the non-deductible contribution back to my roth ira in the 2023 tax year then I will owe taxes on that conversion right? I guess what I'm asking is is that conversion the backdoor roth method or simply a conversion to roth where I pay taxes?
Topic Author
whatisgood
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Re: Can I backdoor Roth after recharacterizing an incorrect roth ira contribution?

Post by whatisgood »

NinnyMuggins wrote: Wed Mar 22, 2023 2:08 pm I may be in a similar situation. I am waiting on a Schedule K from my accountant next week to know for sure if my income is too high. It is going to be close. Backdoor Roth was my first thought too, I don't think I can, my employer sponsored plan is a Simple IRA.

You mentioned rolling over from IRA into 401K, I don't think that is possible.

My plan if things are really close is to max out 2022 HSA contributions for myself and my spouse. We left some space there. If I am still over the threshold I will simply convert to taxable and pay taxes on the gain. As I understand I will need to file Form 5329.
Yup much easier if I had just backdoor rothed from the beginning haha
muddgirl
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Re: Can I backdoor Roth after recharacterizing an incorrect roth ira contribution?

Post by muddgirl »

whatisgood wrote: Wed Mar 22, 2023 3:49 pm Thanks for the reply. I don't qualify for traditional IRA deduction.

So if I convert the non-deductible contribution back to my roth ira in the 2023 tax year then I will owe taxes on that conversion right? I guess what I'm asking is is that conversion the backdoor roth method or simply a conversion to roth where I pay taxes?
No, you should not owe any more taxes if you correctly fill out your form 8606 in 2022 and 2023. And if you didn't have any existing balance in your traditional IRA before 2022.

You made the original Roth contribution in 2022 with post-tax dollars.

When you recharacterize to a non-deductible traditional IRA, that is still post-tax dollars. You document this on your 2022 form 8606. You will reflect an end of 2022 basis of $2200. Meaning you already paid taxes on $2200.

In 2023 you will convert the balance in your IRA, say it's still $1700. All of that will be converted tax-free (because you already paid tax in 2022) and you will have a remaining basis of $500.

"Backdoor Roth" is not a special maneuver or IRS definition of anything. It's simply converting after-tax IRA funds to Roth IRA.
tashnewbie
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Re: Can I backdoor Roth after recharacterizing an incorrect roth ira contribution?

Post by tashnewbie »

whatisgood wrote: Wed Mar 22, 2023 3:49 pm So if I convert the non-deductible contribution back to my roth ira in the 2023 tax year then I will owe taxes on that conversion right? I guess what I'm asking is is that conversion the backdoor roth method or simply a conversion to roth where I pay taxes?
You will not owe tax on the basis in the TIRA. You would only owe taxes if the amount converted exceeds your 2022 tax year non-deductible contribution.

You will need to ensure you know how to fill out Form 8606 properly. You will need to fill out Part 1 with your 2022 tax return and include an explanatory statement about the recharacterization. I recommend reading the wiki about backdoor Roth and the White Coat Investor blogpost tutorial to see properly completed tax forms.

In 2024, you will need to complete a 2023 Form 8606...documenting the Roth conversion that happened in 2023 (plus any non-ded. contribution you make for 2023 tax year).
lakpr
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Re: Can I backdoor Roth after recharacterizing an incorrect roth ira contribution?

Post by lakpr »

muddgirl wrote: Wed Mar 22, 2023 4:20 pm In 2023 you will convert the balance in your IRA, say it's still $1700. All of that will be converted tax-free (because you already paid tax in 2022) and you will have a remaining basis of $500.
I am not so sure about the bolded part. If the balance in the Traditional IRA is $0 as of December 31st, as it should be if you are doing the Backdoor Roth correctly, I do not think the unused $500 basis carries over.

Best to not convert to Roth if the value of the IRA does not exceed the basis.
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Duckie
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Re: Can I backdoor Roth after recharacterizing an incorrect roth ira contribution?

Post by Duckie »

whatisgood wrote: Wed Mar 22, 2023 7:15 am Long story short, filing my 2022 taxes and realized due to some unexpected income that we are just over the threshold to contribute to a roth ira.
Do you expect this to happen again?
So in 2022, $2,200 of each spouse's 6,000 roth ira contribution was deemed in excess. I was able to recharacterize that portion of the contribution as a traditional IRA contribution. Both accounts lost value in 2022 so the amount that was actually transferred to the traditional IRA by Vanguard's calculations was $1700 (rough loss of $500 from the initial contribution)
Are your 2022 taxes on hold? What tax software are you using?
Can I still use the backdoor Roth method to get it back into the Roth IRA?
Yes.
Is the loss on the account going to be a headache to deal with if that happens?
Did you add Form 8606 for the now non-deductible $2,200 TIRA contribution? Did you add the required recharacterization statement? It's not a big headache once you know how to answer the software questions properly.
Or can I just role the traditional IRA into my solo 401K for me and my spouse's traditional 403B and call it a day?
The TIRA contribution is non-deductible, meaning it has basis, and an employer plan isn't allowed to accept rollovers with basis.
lakpr wrote: Wed Mar 22, 2023 4:24 pm If the balance in the Traditional IRA is $0 as of December 31st, as it should be if you are doing the Backdoor Roth correctly, I do not think the unused $500 basis carries over.
It did in TurboTax Deluxe download when I tried it. It appeared on line 14.
Last edited by Duckie on Wed Mar 22, 2023 4:50 pm, edited 1 time in total.
muddgirl
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Re: Can I backdoor Roth after recharacterizing an incorrect roth ira contribution?

Post by muddgirl »

lakpr wrote: Wed Mar 22, 2023 4:24 pm
muddgirl wrote: Wed Mar 22, 2023 4:20 pm In 2023 you will convert the balance in your IRA, say it's still $1700. All of that will be converted tax-free (because you already paid tax in 2022) and you will have a remaining basis of $500.
I am not so sure about the bolded part. If the balance in the Traditional IRA is $0 as of December 31st, as it should be if you are doing the Backdoor Roth correctly, I do not think the unused $500 basis carries over.

Best to not convert to Roth if the value of the IRA does not exceed the basis.
There's nothing on Form 8606 or the instructions that says to zero out the basis if it's more than the year end balance. I'm curious where this idea comes from that year end basis must be zero.

The annoyance appears to be that you are supposed to report this basis going forward but if someone plans to make conversions every year, 8606 has to be filed every year anyway.

Having a mix of deductible and non-deductible funds is annoying but that's not what is happening here. There is only non-deductible funds.
muddgirl
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Re: Can I backdoor Roth after recharacterizing an incorrect roth ira contribution?

Post by muddgirl »

...and of course The White Coat Investor includes all this same advice in his incredibly thorough article on Backdoor Roths:

https://www.whitecoatinvestor.com/backd ... erizations
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FiveK
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Re: Can I backdoor Roth after recharacterizing an incorrect roth ira contribution?

Post by FiveK »

muddgirl wrote: Wed Mar 22, 2023 4:48 pm There's nothing on Form 8606 or the instructions that says to zero out the basis if it's more than the year end balance.
Correct. The instructions for line 2 specifically refer to carrying forward the basis calculated on "the last Form 8606 you filed" without any mention of the year-end balance on line 6 of that form.

One possible "gotcha" is if you take a Roth IRA distribution in some year, requiring use of Form 8606 Part III, but not Part I. In that case, starting the year afterward, "the last Form 8606 you filed" would not have anything on the basis carry-forward line (currently line 14). This would happen regardless of whether there is a zero or non-zero balance in the traditional IRA.

Is form 8606 TIRA basis lost after backdoor roth? - Bogleheads.org has some discussion on this.
Topic Author
whatisgood
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Re: Can I backdoor Roth after recharacterizing an incorrect roth ira contribution?

Post by whatisgood »

muddgirl wrote: Wed Mar 22, 2023 4:20 pm
whatisgood wrote: Wed Mar 22, 2023 3:49 pm Thanks for the reply. I don't qualify for traditional IRA deduction.

So if I convert the non-deductible contribution back to my roth ira in the 2023 tax year then I will owe taxes on that conversion right? I guess what I'm asking is is that conversion the backdoor roth method or simply a conversion to roth where I pay taxes?
No, you should not owe any more taxes if you correctly fill out your form 8606 in 2022 and 2023. And if you didn't have any existing balance in your traditional IRA before 2022.

You made the original Roth contribution in 2022 with post-tax dollars.

When you recharacterize to a non-deductible traditional IRA, that is still post-tax dollars. You document this on your 2022 form 8606. You will reflect an end of 2022 basis of $2200. Meaning you already paid taxes on $2200.

In 2023 you will convert the balance in your IRA, say it's still $1700. All of that will be converted tax-free (because you already paid tax in 2022) and you will have a remaining basis of $500.

"Backdoor Roth" is not a special maneuver or IRS definition of anything. It's simply converting after-tax IRA funds to Roth IRA.
Thanks - this was super helpful
Topic Author
whatisgood
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Re: Can I backdoor Roth after recharacterizing an incorrect roth ira contribution?

Post by whatisgood »

Duckie wrote: Wed Mar 22, 2023 4:30 pm
whatisgood wrote: Wed Mar 22, 2023 7:15 am Long story short, filing my 2022 taxes and realized due to some unexpected income that we are just over the threshold to contribute to a roth ira.
Do you expect this to happen again?
No I don't but not sure.
So in 2022, $2,200 of each spouse's 6,000 roth ira contribution was deemed in excess. I was able to recharacterize that portion of the contribution as a traditional IRA contribution. Both accounts lost value in 2022 so the amount that was actually transferred to the traditional IRA by Vanguard's calculations was $1700 (rough loss of $500 from the initial contribution)
Are your 2022 taxes on hold? What tax software are you using?

Turbotax but haven't yet filed so I can figure this out
Can I still use the backdoor Roth method to get it back into the Roth IRA?
Yes.
Is the loss on the account going to be a headache to deal with if that happens?
Did you add Form 8606 for the now non-deductible $2,200 TIRA contribution? Did you add the required recharacterization statement? It's not a big headache once you know how to answer the software questions properly.

I will add that form.
Or can I just role the traditional IRA into my solo 401K for me and my spouse's traditional 403B and call it a day?
The TIRA contribution is non-deductible, meaning it has basis, and an employer plan isn't allowed to accept rollovers with basis.

Gotcha, thanks
lakpr wrote: Wed Mar 22, 2023 4:24 pm If the balance in the Traditional IRA is $0 as of December 31st, as it should be if you are doing the Backdoor Roth correctly, I do not think the unused $500 basis carries over.
It did in TurboTax Deluxe download when I tried it. It appeared on line 14.
good to know
Topic Author
whatisgood
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Re: Can I backdoor Roth after recharacterizing an incorrect roth ira contribution?

Post by whatisgood »

OK, thanks everyone for their help, getting closer.

I was able to go to vanguard and do the backdoor Roth conversion so the money is headed to the right place.

Now here's my question on correctly filling out from 8606 in Turbotax for 2022.

How do I answer this question for my 2022?
Tell us which accounts you contributed to in 2022: Check boxes for traditional and roth ira are options. I'm thinking I just check roth IRA here because later it asks me about if I recharacterized any of the roth contribution

It then asks me about any nondeductible contributions to my traditional IRA and to enter my basis:

Is the basis the $2200? is the basis the loss of -$500 since the current value is $1700 that was rolled over? I'm thinking the basis is $2200 but wanted to confirm.

Last question: since I just did the backdoor roth procedure in March of 2023, should I report it on my 2022 taxes or my 2023 taxes? From comments above, it sounds like 2023 taxes but since it's before April, I feel like it could go on the 2022 taxes. Clarity here would be greatly appreciated

I'll keep reading the whitecoatinvestor and physicianonfire tutorials but any help here would be greatly appreciated.

Thanks
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Duckie
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Re: Can I backdoor Roth after recharacterizing an incorrect roth ira contribution?

Post by Duckie »

whatisgood wrote: Thu Mar 23, 2023 8:24 am How do I answer this question for my 2022?
Tell us which accounts you contributed to in 2022: Check boxes for traditional and roth ira are options. I'm thinking I just check roth IRA here because later it asks me about if I recharacterized any of the roth contribution
You contributed $3800 to the Roth IRA and after recharacterizing you contributed $2200 to the TIRA. You'll get there either way but you DID contribute to both.
It then asks me about any nondeductible contributions to my traditional IRA and to enter my basis:

Is the basis the $2200? is the basis the loss of -$500 since the current value is $1700 that was rolled over? I'm thinking the basis is $2200 but wanted to confirm.
The basis is whatever you contributed. Since $2200 was recharacterized from the Roth IRA to the TIRA, $2200 is the non-deductible basis. That fact that its value went down is not relevant for this question.
Last question: since I just did the backdoor roth procedure in March of 2023, should I report it on my 2022 taxes or my 2023 taxes?
In your case, the now (after recharacterizing) non-deductible $2200 contribution goes on your 2022 taxes, because the contribution is FOR 2022. The conversion goes on your 2023 taxes because it happened IN 2023.

The backdoor Roth is a two-part process, the contribution and the conversion. They do not have to happen in the same year, although it's better that way. (I am assuming the "I just did the backdoor roth procedure in March of 2023" means you converted the 2022 contribution, not that you made a new 2023 contribution/conversion. It could be read either way.)

Your 2022 Form 8606 should look like this:
  • Part I
    Line 1 -- 2200
    Line 2 -- 0
    Line 3 -- 2200
    Line 14 -- 2200
That's it for the 2022 Form 8606. 2023's form will have more lines filled in.

Did you add the required recharacterization statement?

Next year you will get two 1099-Rs, one for the Roth IRA distribution (Roth IRA recharacterization to TIRA) and one for the TIRA distribution (TIRA conversion to Roth IRA).
Topic Author
whatisgood
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Re: Can I backdoor Roth after recharacterizing an incorrect roth ira contribution?

Post by whatisgood »

Duckie wrote: Thu Mar 23, 2023 3:12 pm
whatisgood wrote: Thu Mar 23, 2023 8:24 am How do I answer this question for my 2022?
Tell us which accounts you contributed to in 2022: Check boxes for traditional and roth ira are options. I'm thinking I just check roth IRA here because later it asks me about if I recharacterized any of the roth contribution
You contributed $3800 to the Roth IRA and after recharacterizing you contributed $2200 to the TIRA. You'll get there either way but you DID contribute to both.
It then asks me about any nondeductible contributions to my traditional IRA and to enter my basis:

Is the basis the $2200? is the basis the loss of -$500 since the current value is $1700 that was rolled over? I'm thinking the basis is $2200 but wanted to confirm.
The basis is whatever you contributed. Since $2200 was recharacterized from the Roth IRA to the TIRA, $2200 is the non-deductible basis. That fact that its value went down is not relevant for this question.
Last question: since I just did the backdoor roth procedure in March of 2023, should I report it on my 2022 taxes or my 2023 taxes?
In your case, the now (after recharacterizing) non-deductible $2200 contribution goes on your 2022 taxes, because the contribution is FOR 2022. The conversion goes on your 2023 taxes because it happened IN 2023.

The backdoor Roth is a two-part process, the contribution and the conversion. They do not have to happen in the same year, although it's better that way. (I am assuming the "I just did the backdoor roth procedure in March of 2023" means you converted the 2022 contribution, not that you made a new 2023 contribution/conversion. It could be read either way.)

Your 2022 Form 8606 should look like this:
  • Part I
    Line 1 -- 2200
    Line 2 -- 0
    Line 3 -- 2200
    Line 14 -- 2200
That's it for the 2022 Form 8606. 2023's form will have more lines filled in.

Did you add the required recharacterization statement?

Next year you will get two 1099-Rs, one for the Roth IRA distribution (Roth IRA recharacterization to TIRA) and one for the TIRA distribution (TIRA conversion to Roth IRA).
THANK YOU SO SO MUCH! I really appreciate your time in typing that out for me. I understand it much better. You are right the backdoor roth was for my 2022 contribution not anything I did in 2023
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