Backdoor Roth Confusion

[Hazel54]

Hi,

I transferred 12/29/23 6500$ in traditional IRA but forgot to do the conversion to Roth IRA account. I realized this in Dec 2024. I called Fidelity and I was told I should amend my 2023 taxes and include 8606 form which makes sense to me. I am confused that if I do the conversion in 2025, how will that impact the 2024 contribution which I will perform on 2025 prior to April 2025?
I am aware I will also need to pay taxes on gains, but which year I will do this?

I know I should plan it earlier but life happened and I am a newbie and learning from my mistakes. Can someone help guide me please? My CPA doesn't even know what is backdoor Roth IRA.

Thank you.



Note: I have read the WCI article 5 times and went through previous post to see if someone had my question but I didn't see any. It says if you forgot just pay the taxes, which doesn't make sense to me because I am not sure if that taxes on gains or pay taxes on the whole amount. Its not very clear.

[Geologist]

Roth conversions have no impact on later contributions (either to tIRA or Roth).

Conversions are always taxable in the calendar year that they occur. So conversion of your 2023 contribution in 2025 will be taxable in 2025 (the taxable portion should just be on the gains on the $6500 since presumably the $6500 was non-deductible). If you make a tIRA contribution for 2024 in 2025 and convert in 2025 (and there is no limit on the number or amount of conversions you can make), it will be taxable in 2025 too (but if you convert immediately, there should be no taxable income).

It appears to be common that CPA's don't know the terminology "backdoor Roth IRA". (It is colloquial, not an official term.)

[Geologist]

There are certainly previous posts where the OP discuss what to do if they made their initial backdoor contribution in one year and convert in a subsequent year (although usually they convert the very next year). I'm not sure how to search for them though. Ultimately, you account for this on Form 8606 for the years in question, but your CPA should be able to handle it (whether he knows the terminology or not).

[Rocinante Rider]

Agree with Geologist.

Contributions have an annual limit, conversions do not. If you make, or have made, non-deductible tIRA contributions, you need to be tracking them on Form 8606. The total dollar amount of non-deductible contribtions still remaining in any of your tIRAs represents your cost basis.

You can make conversions of tIRA funds to your Roth as often as you want and as much as you want. Those conversions are taxable in the calendar year during which they're made. The taxable amount is prorated and adjusted for your cost basis. If you're converting the entire balance of your tIRAs, then everything other than the non-deductible basis is taxable. The main reason to do a backdoor conversion immediately after making your non-deductible tIRA contribution is to get the money moved to the Roth before it has had a chance to grow. The growth is what's taxable.

[Hazel54]

Roth conversions have no impact on later contributions (either to tIRA or Roth).

Conversions are always taxable in the calendar year that they occur. So conversion of your 2023 contribution in 2025 will be taxable in 2025 (the taxable portion should just be on the gains on the $6500 since presumably the $6500 was non-deductible). If you make a tIRA contribution for 2024 in 2025 and convert in 2025 (and there is no limit on the number or amount of conversions you can make), it will be taxable in 2025 too (but if you convert immediately, there should be no taxable income).

It appears to be common that CPA's don't know the terminology "backdoor Roth IRA". (It is colloquial, not an official term.)

I am amending my 2023 taxes and I am filling out 8086 for 2023. My form only shows 0 and 6500 for certain lines as I was told my the agent on phone. So, will a form generate for me to pay the taxes or I need to fill the gains in 8086? I am sorry I am confused.

[Hazel54]

Which line is cost basis?

I am just trying to do the right thing and fix the mistake I made. I was told first amend my 2023 taxes with 8086 then I should contribute for 2024. I was told if I don't follow this order it will trigger something and I will have to pay taxes on $6500 because it was not known 6500 was non-taxable.

[LotsaGray]

Roth conversions have no impact on later contributions (either to tIRA or Roth).

Conversions are always taxable in the calendar year that they occur. So conversion of your 2023 contribution in 2025 will be taxable in 2025 (the taxable portion should just be on the gains on the $6500 since presumably the $6500 was non-deductible). If you make a tIRA contribution for 2024 in 2025 and convert in 2025 (and there is no limit on the number or amount of conversions you can make), it will be taxable in 2025 too (but if you convert immediately, there should be no taxable income).

It appears to be common that CPA's don't know the terminology "backdoor Roth IRA". (It is colloquial, not an official term.)

I am amending my 2023 taxes and I am filling out 8086 for 2023. My form only shows 0 and 6500 for certain lines as I was told my the agent on phone. So, will a form generate for me to pay the taxes or I need to fill the gains in 8086? I am sorry I am confused.

Assuming the 2023 tIRA contribution ($6500) was nondeductible (iow, after tax money into tax deferred account) and if you did the rest of your taxes correctly, you should not owe taxes nor be owed refund. You are simply doing the 8086 to show that the tIRA now has $6500 of already taxed.

The 2025 conversion of 2023 contribution will not have any impact on the 2024 contribution in 2025. What could be impacted though is if you "leave" any balance in the tIRA at the end of 2025. If you do not covert the entire balance (2023 and 2024 contributions and any growth), then the 2025 conversion will be subject to the proration rule. IOW some of the conversion would be from what you contributed (which is tax free) and some would be from the growth (which is taxable since taxes were never paid). Best solution is to just make sure you make your 2024 contribution and convert the entire tIRA balance leaving the balance at $0 on 12/31/2025. No proration will be needed but you will owe taxes on any growth.

[Duckie]

I transferred 12/29/23 6500$ in traditional IRA but forgot to do the conversion to Roth IRA account. I realized this in Dec 2024.

You made a $6500 contribution to a TIRA in 2023 for 2023 intending to convert to a Roth IRA, which has not happened yet. When you filed your 2023 taxes did you deduct the contribution on your taxes, or not? It sounds like not, but I'm checking.

I called Fidelity and I was told I should amend my 2023 taxes and include 8606 form which makes sense to me.

Depending on your above answer you may not need to amend your 2023 taxes. If you did not deduct your 2023 contribution you can download, fill out, and file the 2023 Form 8606 on its own.

I am confused that if I do the conversion in 2025, how will that impact the 2024 contribution which I will perform on 2025 prior to April 2025?

The 2025 conversion of the 2023 contribution will not affect the 2024 contribution and its 2025 conversion.

I am aware I will also need to pay taxes on gains, but which year I will do this?

You pay any taxes for the year you actually convert. So if you are converting in 2025 you will include Form 8606 which may include some taxes owed. I write "may" because there are details we don't know yet.

I am amending my 2023 taxes and I am filling out 8086 for 2023. My form only shows 0 and 6500 for certain lines as I was told my the agent on phone. So, will a form generate for me to pay the taxes or I need to fill the gains in 8086?

Wait on the amending. Did you deduct the 2023 $6500 TIRA contribution or not? Have you ever made a non-deductible contribution before 2023?

Which line is cost basis?

Line 2 has the previous cost basis from prior years. Line 14 has the current cost basis once you've done all the figuring. Line 14 is transferred to Line 2 on the next year's Form 8606.

[LadyGeek]

rufflesinc has a question which I've moved to a new thread. See: Can I do a Backdoor Roth with past contributions?

(Thanks to the member who reported the post and explained what's wrong.)

[Hazel54]

I transferred 12/29/23 6500$ in traditional IRA but forgot to do the conversion to Roth IRA account. I realized this in Dec 2024.

You made a $6500 contribution to a TIRA in 2023 for 2023 intending to convert to a Roth IRA, which has not happened yet. When you filed your 2023 taxes did you deduct the contribution on your taxes, or not? It sounds like not, but I'm checking.

I called Fidelity and I was told I should amend my 2023 taxes and include 8606 form which makes sense to me.

Depending on your above answer you may not need to amend your 2023 taxes. If you did not deduct your 2023 contribution you can download, fill out, and file the 2023 Form 8606 on its own.

I am confused that if I do the conversion in 2025, how will that impact the 2024 contribution which I will perform on 2025 prior to April 2025?

The 2025 conversion of the 2023 contribution will not affect the 2024 contribution and its 2025 conversion.

I am aware I will also need to pay taxes on gains, but which year I will do this?

You pay any taxes for the year you actually convert. So if you are converting in 2025 you will include Form 8606 which may include some taxes owed. I write "may" because there are details we don't know yet.

I am amending my 2023 taxes and I am filling out 8086 for 2023. My form only shows 0 and 6500 for certain lines as I was told my the agent on phone. So, will a form generate for me to pay the taxes or I need to fill the gains in 8086?

Wait on the amending. Did you deduct the 2023 $6500 TIRA contribution or not? Have you ever made a non-deductible contribution before 2023?

Which line is cost basis?

Line 2 has the previous cost basis from prior years. Line 14 has the current cost basis once you've done all the figuring. Line 14 is transferred to Line 2 on the next year's Form 8606.

I did not deduct anything in 2023 taxes. I was under the impression that I need to file 8086 by amending 2023 taxes. My tIRA prior to this was 0$. Thank you for guiding me. I will wait for your answers.

[Hazel54]

rufflesinc has a question which I've moved to a new thread. See: Can I do a Backdoor Roth with past contributions?

(Thanks to the member who reported the post and explained what's wrong.)

Thank you! I checked and this does not answer my question.

[Hazel54]

I am amending my 2023 taxes and I am filling out 8086 for 2023. My form only shows 0 and 6500 for certain lines as I was told my the agent on phone. So, will a form generate for me to pay the taxes or I need to fill the gains in 8086? I am sorry I am confused.

Assuming the 2023 tIRA contribution ($6500) was nondeductible (iow, after tax money into tax deferred account) and if you did the rest of your taxes correctly, you should not owe taxes nor be owed refund. You are simply doing the 8086 to show that the tIRA now has $6500 of already taxed.

The 2025 conversion of 2023 contribution will not have any impact on the 2024 contribution in 2025. What could be impacted though is if you "leave" any balance in the tIRA at the end of 2025. If you do not covert the entire balance (2023 and 2024 contributions and any growth), then the 2025 conversion will be subject to the proration rule. IOW some of the conversion would be from what you contributed (which is tax free) and some would be from the growth (which is taxable since taxes were never paid). Best solution is to just make sure you make your 2024 contribution and convert the entire tIRA balance leaving the balance at $0 on 12/31/2025. No proration will be needed but you will owe taxes on any growth.

Thank you, this answer makes things bit clear for me.

3 questions so far:

1. Amend 2023 taxes with 8086 form
2. My plan was to contribute for 2024 in convert entire balance before April 15, 2025 but then I will need another 8086 with 2024 taxes, correct?
3. 8086 for 2024 will look different based on my research because I have taxable gains. What lines should I be careful on?

[rkhusky]

Assuming the 2023 tIRA contribution ($6500) was nondeductible (iow, after tax money into tax deferred account) and if you did the rest of your taxes correctly, you should not owe taxes nor be owed refund. You are simply doing the 8086 to show that the tIRA now has $6500 of already taxed.

The 2025 conversion of 2023 contribution will not have any impact on the 2024 contribution in 2025. What could be impacted though is if you "leave" any balance in the tIRA at the end of 2025. If you do not covert the entire balance (2023 and 2024 contributions and any growth), then the 2025 conversion will be subject to the proration rule. IOW some of the conversion would be from what you contributed (which is tax free) and some would be from the growth (which is taxable since taxes were never paid). Best solution is to just make sure you make your 2024 contribution and convert the entire tIRA balance leaving the balance at $0 on 12/31/2025. No proration will be needed but you will owe taxes on any growth.

Thank you, this answer makes things bit clear for me.

3 questions so far:

1. Amend 2023 taxes with 8086 form
2. My plan was to contribute for 2024 in convert entire balance before April 15, 2025 but then I will need another 8086 with 2024 taxes, correct?
3. 8086 for 2024 will look different based on my research because I have taxable gains. What lines should I be careful on?

You will need a 8086 for 2024 if you make a nondeducted contribution for 2024, which it sounds like you are planning.

[RyeBourbon]

I've been told that if your amended return doesn't change the tax due, don't bother filing the amendment. With regard to the 8606, just fill on out for 2023, but don't mail it. Just keep it on file in case the IRS ever asks about it. Starting with your 2024 taxes, make sure the 8606 is correct.

I doubt it will ever be an issue. The IRS already knows you made a contribution in 2023 and they know you didn't deduct it.

[Duckie]

I did not deduct anything in 2023 taxes.

That makes it simple.

I was under the impression that I need to file 8086 by amending 2023 taxes.

You do not need to amend your 2023 taxes. It would change nothing on your Form 1040. You should download the 2023 version of Form 8606 and fill it out. At that point you may choose to mail it to the IRS but I recommend you just save it with your tax file. Since you had no previous basis, did not convert in 2023, and did not deduct it you will only have a few lines to complete:

• Line 1 -- 6,500 (non-deductible contribution for 2023)
  Line 2 -- 0 (previous basis)
  Line 3 -- 6,500
  Line 14 -- 6,500 (current basis, goes on line 2 when you fill out your 2024 taxes)

That's it for the 2023 form. For 2024, if you contributed $7,000, Form 8606 should be:

• Line 1 -- 7000 (non-deductible contribution for 2024)
  Line 2 -- 6,500 (previous basis from 2023)
  Line 3 -- 13,500
  Line 14 -- 13,500 (current basis, goes on line 2 when you fill out your 2025 taxes)