Is there any harm in doing a backdoor roth early in the new year then discovering later when our annual income for that year is known with certainty that it wasn’t necessary? Meaning we could have done the regular roth contribution route but did a backdoor roth.
No. It’s fine because anyone is permitted to make non-deductible IRA contributions. It just means another tax form you would otherwise not have had to file.
Thank you, I thought that might be correct but wanted more input.
If the IRA (that you are converting to the backdoor Roth) does not contain any non-deductible money (no money that was previously taxed), then the IRS would prefer that you NOT file Form 8606. See this “TIP” on page 1 of the Instructions for Form 8606:
*TIP
If you received distributions from a traditional,
traditional SEP, or traditional SIMPLE IRA in 2023
and you have never made nondeductible
contributions (including nontaxable amounts you rolled over from a qualified retirement plan) to these IRAs, don’t report the distributions on 2023 Form 8606. Instead, see Lines 4a and 4b in the 2023 Instructions for Form 1040 or the 2023 Instructions for Form 1040-NR. Also, to find out if
any of your contributions to traditional IRAs are deductible, see the instructions for Schedule 1 in the Instructions for Form 1040."
This is for 2023. The 2024 Form 8606 is not available yet. The deal is that the IRS wants you (in some cases) to use Form 8606 to find the taxable amount of your IRA conversion, but then report the taxable amount ONLY on Form 1040, Lines 4a and 4b. See this Exception 2 for Lines 4a and 4b:
"Exception 2. If any of the following apply,
enter the total distribution on line 4a
and see Form 8606 and its instructions
to figure the amount to enter on line 4b.
- You converted part or all of a traditional
IRA, traditional SEP IRA, or
traditional SIMPLE IRA to a Roth IRA
in 2023."
Note the word “figure” in Exception 2. It does not say “report” the amount on Form 8606. In fact, the instructions for Form 8606 say not to file Form 8606 UNLESS you made nondeductible contributions to the IRA that you are converting (receiving distributions from). Many tax preparers miss these subtle instructions and cause taxpayers to file many unnecessary forms. Or maybe because they charge extra for each form that they file?
Or maybe because the IRS charges $50 if you don’t file 8606, but should have.
@Lancie01,
Thanks for the input. But I don’t see how this applies, at least directly here.
But isn’t that point of a backdoor roth? The money in a TIRA is only non-deductible or be subject to the pro-rate rule when converting to a roth?
Here is what I’m doing… (actually helping my wife do it because I have pre-existing deductible TIRA assets and she doesn’t)
Making a non deductible max contribution for 2024 as MFJ into her TIRA (Vanguard MM which has a current balance of 0). This will require 8606
Immediately convert it to her existing Roth IRA.
Unfortunately or fortunately our income tends to bounce in and out of the roth max contribution limit. I’ve chosen the backdoor route at the first of the year so she doesn’t lose those 12+ months of investing if we were to wait and see if she would qualify for a direct roth contribution.
Have you looked into transferring them into your 401k? Or if not, can you set up a Solo 401K? From what I read on WhiteCoatInvestor, it’s fairly easy to set one up, and qualifying is trivial.
No I haven’t doesn’t that require self employment or earned income?
Self-employment income can be income from taking a survey, and doesn’t have to be much. I haven’t looked too deeply into it because all my pre-tax money is my 401k. Your 401k may accept rollovers from IRAs as well.
I made Roth conversions for 10 years, and only filed one Form 8606 because my first conversion was done with already-taxed money (not tax- sheltered) that I had put into a retirement fund, then moved later to a Rollover IRA, and finally to a Roth IRA. The Roth conversion for this money required the Form 8606, but NONE of the 9 subsequent conversions with 100% not-taxed money required that form, according to the very clear IRS instructions. I never paid $50 for not filing the form, or got any complaints about this from the IRS. I worked for many years as an unpaid volunteer tax preparer for AARP, so I know some of the methods to increase tax-preparation income. I imagine that if I had went to a tax professional, that I would have paid a substantial fee to file each of those not-required forms.
Billinin, Because your wife has this after-taxed money in a Vanguard account, then she should be able to log into her Vanguard online account, then do a Rollover of the TIRA Money Market to a Vanguard Rollover IRA. Now she has the money positioned so that it qualifies to be CONVERTED online directly into a Roth IRA account (which she will have to open as a new Vanguard Roth account). During the conversion process, Vanguard will give her a choice of how she wants to pay the tax on the conversion. One choice (the worst) will be to withdraw the tax from the funds being converted. Another will be to pay the tax out of her savings, or have it withheld from her income. All this will require NO Form 8606. That will come later (if needed) when you fill out your tax forms for 2024.
PS: Why would your wife put retirement money into a practically no-return money market account? Probably she has a fear of loss that is greater than her would-be joy at receiving 10% per year on her retirement funds! This is very common, and very hard to overcome. Psychologists call it Loss Aversion.
Your hallucinations about what other people charge are noted.
I couldn’t find a price for H&R Block Form 8606 filing, but I did find a lot of conversation from people who though (wrongly) that H&R should have filed a Form 8606 for their IRA. They were puzzled about why they didn’t! No surprise, it is not required for all IRA distributions or conversions. What I am surprised about is that H&R did not file it anyway.
Sorry I didn’t point out the existing roth is VTSAX along with two other funds… a Midcap and an Int. The MM is used for the non-deductible TIRA step before immediate conversion over to existing Roth. While sitting in the non-deductible TIRA any gain is taxed… hence the MM.
That makes sense. If you can convert directly to the Roth with previously-taxed money, then you should owe no extra federal tax on that money. No IRS payment should be needed. You will need to fill out Form 8606 when you do your 2024 taxes next spring. You could owe state tax if this particular batch of money has not already been taxed by the state. State treatment of previously-taxed IRA money varies all over the place.
On the other hand, it federal tax has not been paid on the money before it was moved into the money market fund, then the easiest way to pay the tax is by increasing the tax withholding on a current income stream. The IRS doesn’t care which tax is used to pay for any particular income, as long as you pay in enough during the year to cover ALL the tax you owe jointly with your wife. Paying in a little too much is much better than not paying in enough. The late payment fees have really gone up this year and the IRS is cracking down on non-payment of taxes.
I’m not sure why you keep posting irrelevant information in this thread. OP clearly knows how and why to do a Roth conversion.
Forget everything I said, then, if it bothers you!