for more discussion. Does that mean her 50k rollover IRA is subject to pro rata when she rolls it over to a 401k? Get rid of any SEP-IRA, SIMPLE IRA, traditional IRA, or rollover … You can do this by clicking on the tabs for 'Federal Taxes', then scroll down under 'Deductions and Credits' to the 'Retirement and Investments' section, and click on the 'Start' button for contributions. by jimmy2040 » Thu Dec 10, 2020 9:10 pm, Powered by phpBB® Forum Software © phpBB Limited. Did your friend have any pre-tax money in the IRA in the years before making non-deductable contributions? If you are eligible for and thus make a $2,000 Roth contribution, you can only make a $4,000 (deductible or nondeductible) contribution to a Traditional IRA. The front of the form deals with your basis from the previous and the current year, while part of the back of the form deals with the Roth conversion. The total amount of these accounts on December 31st … What is the simplest and easiest way to get me from my SEP to a 401(k) that allows me to make a Backdoor Roth IRA conversion all while avoiding pro rata rule. Also note that the IRS doesn't officially recognize the term "Backdoor Roth", thus some tax preparers aren't familiar with it either. First, you will deposit money (a maximum of $6,000 in 2020 and 2021) to a traditional or non-deductible IRA. A successful backdoor Roth IRA contribution has three steps. Have a question about your personal investments? Beware of the Pro-Rata Rule. Withdrawals from an Inherited IRA cannot be converted. She knows she will pay the same amount of tax on $6,000 of her high income (for 2019) whether she deposits it into her taxable account or puts it in a Roth. "Publication 590-A (2017), Contributions to Individual Retirement Arrangements (IRAs)", "Publication 590-B (2017), Distributions from Individual Retirement Arrangements (IRAs)", Rollovers of After-Tax Contributions in Retirement Plans, https://thefinancebuff.com/how-to-backdoor-roth-taxact.html, "How to Report Backdoor Roth in TurboTax", https://thefinancebuff.com/how-to-report-backdoor-roth-in-turbotax.html, "How to Report Backdoor Roth in H&R Block Software", https://thefinancebuff.com/how-to-backdoor-roth-hr-block-software.html, "How to Report Backdoor Roth in FreeTaxUSA", https://thefinancebuff.com/how-to-backdoor-roth-freetaxusa.html, Backdoor Roth IRAs Could Cost Some Investors at Tax Time, 403b plans for K-12 public school district employees, https://www.bogleheads.org/w/index.php?title=Backdoor_Roth&oldid=71042. If you held the nondeductible contributions in the Traditional IRA for only a few days, the tax should be minimal. For a small Traditional IRA this may be the easiest and best option, but if the Traditional IRA is large, this will result in a large tax bill. See Is form 8606 TIRA basis lost after backdoor roth? Can he covert the 20k Traditional IRA to Roth IRA in 2020 without triggering the pro rata rule if he coverts the rollover IRA (50k) to an employer 401k before 12/31/2020? This will result in $5,357 ($6,000 * (1 - 10.7%)) of taxable income. The barrier to the backdoor Roth—in many folks’ minds—is the pro rata rule. For example: If your nondeductible contribution is only 25% of all the money in your Traditional IRAs, then only 25% of your Roth conversion amount will be tax-free. I did a backdoor Roth in 2017 with a Schwab traditional IRA funded with 2016 and 2017 contributions. The term is just a shortcut phrase that investors use. A few days later, she converts all of it to her Roth. At the end of the year, his Traditional IRAs are all empty. If you convert your traditional IRA into a Roth IRA you will be taxed on any deductible IRAs you have when you file your taxes at the end of the year. To do the backdoor Roth, you: (1) Make a nondeductible (i.e. [4], Enter your other income and wages as usual, but do NOT enter the 1099-R from your IRA distribution on your first pass. That is just like the Roth holding the entire $33,200 ($27,200 + 6,000) even though some of it is not taxed (ie, $8,038). Turbotax completed form 8606. Accomplish this transaction by "moving" or "exchanging" the cash/shares in your Traditional IRA and use the cash/shares to buy cash/shares in a Roth IRA. Leaving a dollar in the account and converting $5,939 might make it more likely she will retain $61 basis instead of losing $60 basis. In other words, was the balance of the IRA zero (0) on 12/31/2014? ↳ The Bogleheads® Wiki: a collaborative work of the Bogleheads community, ↳ Local Chapters and Bogleheads Community, https://www.irs.gov/pub/irs-prior/f8606--2019.pdf. … https://www.bogleheads.org/wiki/Backdoor_Roth Tax statements are normal with a backdoor Roth though. Instead, after entering other income, navigate manually to the IRA contribution section. The Backdoor Roth does NOT mean you won’t be taxed. Chris is nearing retirement and wants to be ready to do some large Roth conversions on her 401K before starting Social Security. If she converts it all, she will pay no taxes on the conversion. Most retirement accounts require withdrawals in retirement to be taxed as ordinary income. The rule says that you have to aggregate all your IRAs to determine how much income tax you owe … The tax-free amount of the conversion is: Example 1a If you have money in any of them, an attempt at the backdoor Roth will trigger the pro-Rata rule and you’ll be subject to income tax on the conversion. Backdoor Roth - pro-rata rules. She plans to roll some of it into a Traditional IRA right after she retires, but will leave it alone for this year and next. Note that the (yellow) basis is not part of any particular physical account. Mostly yes, but he will need to pay taxes on the gains on the $20,000 over the last 4 years. But the remaining basis in the Inherited Traditional IRA still needs to be addressed (and is useful for account owners to know if they will be leaving basis in their Traditional IRAs for their heirs). This nondeductible contribution becomes your "basis" if you don't yet have any or is added to your existing "basis" when you prepare your taxes. It also leaves no basis (or any other money) in his Traditional IRA. The Roth account may be an existing or new account. While money is in the Rollover IRA, DO NOT make any other contributions directly to that account. As noted above, in the Backdoor process, you made a contribution to a traditional IRA, so that's what you report -- not a Roth contribution. When filing your income taxes, Form 8606 considers all your traditional IRAs as if the accounts were merged in one Traditional IRA, regardless of which account the Roth conversion money came from. An example Form 8606 follows. To report a full backdoor Roth procedure in Turbo Tax (at least, and possibly in other software), it is often helpful to skip the tax software's default order of data entry, which asks you about income first, and IRA contributions later. The Backdoor Roth IRA is a process used to indirectly contribute to a Roth IRAfor taxpayers whose Modified Adjusted Gross Income prevents them from contributing to a Roth IRA directly. by jimmy2040 » Thu Dec 10, 2020 12:26 am, Post (Note that the Roth may have also grown the same amount.) It also leaves $3,200 of his basis unused (6,000 - 2,800). This will help make it possible for a future employer plan to accept the Rollover IRA, since some employer plans do not accept money from contributory Traditional IRAs (IRAs to which you contributed directly, instead of withheld from your paycheck). A while later in the year, he makes a nondeductible contribution of $6,000 and converts it the following day. Therefore, you shouldn’t ask your IRA custodian or trustee for a backdoor Roth … Does Vanguard prohibit opening … taxed and not deducted) contribution to a Traditional IRA. 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