Backdoor Roth IRAs: What to Know Before Stepping Through

The best way to minimize the gains is to leave it in cash (and then of course to do the conversion as soon after contribution as possible to minimize the “pennies” issue). Reporting the Backdoor Roth IRA properly on TurboTax is unfortunately even more complicated than filling out Form 8606 by hand. The key to doing it right is to recognize that you report the conversion step in the Income section but you report the contribution step in the Deductions and Credits section. At the end, you want to look at the Form(s) 8606 that TurboTax generates, just like you would check up on one filled out by an accountant.

  1. In 2024, you are allowed to contribute $7,000 ($8,000 if 50+) per year for you and $7,000 ($8,000 if 50+) for your spouse.
  2. If you make after-tax contributions to a traditional IRA—that is, contribute funds that are nondeductible and taxable that year—these amounts will not be taxed on their transfer to the Roth IRA.
  3. When you withdraw from your Roth, there are no taxes because you’ve already paid them.
  4. This step took the amount out of the taxable category.

Since you didn’t take the money out and buy a sailboat with it, click the first button. Since it was a Roth conversion, you click the second button in answer to the second question and hit continue. Any gains that occur before the final https://turbo-tax.org/ conversion are, of course, fully taxable at your ordinary income tax rate in the year of the final conversion. Perhaps most significantly, there are now two steps to getting money into your Roth IRA each year instead of just one.

You have until the due date of your tax return to do this (including extensions). So, if you did an IRA contribution in January of 2023 for the 2023 tax year, you have until October 15, 2024, to do a recharacterization. You can do the opposite as well if you contributed to a traditional IRA but meant to contribute directly to a Roth IRA. Get rid of any SEP-IRA, SIMPLE IRA, traditional IRA, or rollover IRA money. Make a $7,000 ($8,000 if 50+) non-deductible traditional IRA contribution for yourself and one for your spouse.

Is a Backdoor Roth Still Allowed?

Maybe you even got lucky and the market went down in between contribution and investment so now you get to buy low. Until only a couple of years ago, I had thought there was a waiting period after a recharacterization to then reconvert the money to a Roth IRA. However, that rule was only for recharacterizations of conversions, not contributions. There has never been a waiting period for a recharacterization. When double-checking your tax preparer’s work, you want to concentrate on lines 2, 14, 15c, and 18, and make sure they’re a very small amount, like zero, and not a very large amount, like $7,000.

Two Things in This Life Are Certain: Death and Tax Loopholes

I do this the very next day after I make the contribution. When you transfer the money, the website will throw up a scary banner saying something like “THIS IS A TAXABLE EVENT.” That’s true. But the tax bill will be zero since you’ve already paid taxes on the $7,000 and couldn’t claim your contribution as a deduction because you make too much money.

Late Contributions to the Backdoor Roth IRA

Another reason is that a backdoor Roth contribution can mean significant tax savings over decades because Roth IRA distributions, unlike traditional IRA distributions, are not taxable. With a backdoor Roth IRA conversion, these limits don’t apply. The investing information provided on this page is for educational purposes only. NerdWallet, Inc. does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks, securities or other investments.

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The most important tax implication to be aware of is the pro-rata rule. I would estimate that 90%+ of Backdoor Roth IRA screwups involve the investor having his or her conversion pro-rated. When you report a Roth IRA conversion backdoor roth ira turbotax on IRS Form 8606 (see below), there is a pro-rata calculation made. The denominator is the total of ALL traditional, rollover, SEP, and SIMPLE IRAs, but not 401(k)s, 403(b)s, 457(b)s, Roth IRAs, or inherited IRAs.

The way that backdoor Roth IRAs work has changed over the years. The traditional IRA gives the earner an immediate tax break because they can take a tax deduction for their contributions in the year they are made, and no taxes are due until the money is withdrawn. When withdrawals are made, usually after retirement, the account holder will owe taxes on both the dollars invested and their earnings. Let a local tax expert matched to your unique situation get your taxes done 100% right with TurboTax Live Full Service.

TurboTax seems convinced that it shouldn’t be a 7. But this year TurboTax 2022(Desktop/Windows) has different set of interview questions and I’m having trouble following the guide. Incidentally, if you have screwed this up and you’re not getting what you want and you just want to start over, all you need to do is delete all the applicable forms in Forms mode.

The income cap on conversions was permanently repealed. No matter what your income, you can convert a traditional IRA to a Roth IRA. Now you can see Turbotax’s version of Form 8606. It’s okay that it looks slightly different from the official IRS form. Remember if you did a spousal Backdoor Roth IRA to check both 8606s.

If you forgot to do the conversion step for eight months afterward, it could be a huge gain on which you’re unnecessarily paying taxes. No way to fix this one, just pay your “stupid tax” and move on. Even given that, the backdoor Roth IRA strategy can have advantages—especially for high earners. Roth IRAs don’t have RMDs, so you can hold them forever and pass them on to your heirs. Another reason is that a backdoor Roth contribution can mean significant tax savings over the decades because Roth IRA distributions, unlike traditional IRA distributions, are not taxable. Doing a “backdoor
Roth” in TurboTax is a 2-step process.

Want to really make your paperwork complicated? Contribute to your IRA each month and convert it each month. Then, you have 12 contributions and 12 conversions to keep track of each year. Seriously, though, if you make enough money that you have to contribute to your Roth IRA(s) through the Backdoor Roth IRA process, you make enough to do it at one time each year. A Roth IRA allows taxpayers to set aside a few thousand dollars from their annual earnings in a retirement savings account.

A backdoor Roth IRA allows you to get around income limits by converting a traditional IRA into a Roth IRA. Contributing directly to a Roth IRA is restricted if your income is beyond certain limits, but there are no income limits for conversions. The easiest solution is to convert the entire IRA, SEP-IRA, or SIMPLE IRA that caused the pro-ration and is now composed of both pre-tax and after-tax money. A harder solution that may save you some taxes involves isolating the basis in that IRA by rolling the rest of the account into a 401(k) and then convert just the basis to a Roth IRA.

Maybe you’ve rolled over a big 401(k) into an IRA. In most cases, that will consist of funds that have never been taxed so that you have your own pretax contributions that you’ve made. You maybe have the employer contributions that they’ve made on your behalf. None of that has been taxed in most instances. Not necessarily a reason not to do it, but a reason to just make sure that you’re thinking through the tax implications first. Reporting the Backdoor Roth IRA properly on Turbotax is unfortunately even more complicated than filling out Form 8606 by hand.

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