Taxes on back door Roth - Taxed twice?

[Anonymous]

Last year we did a Roth conversion/back door Roth for the first time. Help me understand the tax implications, please.

We got a 1099 indicating the $6k we pulled from an IRA for the conversion is taxable. We wouldn’t have gotten the tax deduction for those IRA contributions anyway because spouse also has a 401k and we are above the income threshold for being allowed to take any deductions under those circumstances.

The $6k we put into the IRA is obviously from post-tax money. And now, we have to pay taxes again on the “withdrawal” from the IRA, even though it’s going right into a Roth. We don’t face any penalty or anything, but still seems unfair or not quite right.

Can those who have done this before please weigh in? Is this what you typically experience also?

I do understand that a back door Roth is already a benefit via a tax loophole. Is this just the price of that benefit?

[Anonymous]

You don't. Explaining the tax software is complicated but all you have to do is say that your basis in the IRA is $6K and therefore you will not owe any taxes. If any interest accrued on the $6K before you converted, you will owe taxes on that.

If it still shows you owe taxes on the $6K, you are doing something wrong.

[Anonymous]

Anonymous wrote:Last year we did a Roth conversion/back door Roth for the first time. Help me understand the tax implications, please.

We got a 1099 indicating the $6k we pulled from an IRA for the conversion is taxable. We wouldn’t have gotten the tax deduction for those IRA contributions anyway because spouse also has a 401k and we are above the income threshold for being allowed to take any deductions under those circumstances.

The $6k we put into the IRA is obviously from post-tax money. And now, we have to pay taxes again on the “withdrawal” from the IRA, even though it’s going right into a Roth. We don’t face any penalty or anything, but still seems unfair or not quite right.

Can those who have done this before please weigh in? Is this what you typically experience also?

I do understand that a back door Roth is already a benefit via a tax loophole. Is this just the price of that benefit?

Technically, this is only a completely non-taxable event if you have no previously deducted IRA, rollover IRA or SEP IRA balances. If that is the case, then the $6K you put into the IRA (the non-deductible) portion is basis and that means your IRA was 100% basis. When you roll into a Roth, the "distribution" that is reported on Form 1099-R is not taxable.

If you have a rollover IRA, a SEP IRA or a traditional IRA from way back when, this backdoor Roth conversion doesn't work as advertised. Most of the amount reported on Form 1099-R will be taxable.

[Anonymous]

I’m interested in this too, but don’t quite understand OP’s question. The money that went into the traditional IRA was before-tax, so no taxes have been paid on the contributions. Same thing for any investment gains. When the never-taxed contributions and investment gains are converted to a Roth, it’s my understanding that one pays tax on the full rollover amount. If that’s not correct, please correct me.

[Anonymous]

You need to file form 8606. You should not pay additional taxes, assuming you do not have other IRA money (which would violate the pro-rata rule for the backdoor Roth IRA).

[Anonymous]

Anonymous wrote:I’m interested in this too, but don’t quite understand OP’s question. The money that went into the traditional IRA was before-tax, so no taxes have been paid on the contributions. Same thing for any investment gains. When the never-taxed contributions and investment gains are converted to a Roth, it’s my understanding that one pays tax on the full rollover amount. If that’s not correct, please correct me.

OP's money she deposited in the traditional IRA was post-tax.

[Anonymous]

Anonymous wrote:I’m interested in this too, but don’t quite understand OP’s question. The money that went into the traditional IRA was before-tax, so no taxes have been paid on the contributions. Same thing for any investment gains. When the never-taxed contributions and investment gains are converted to a Roth, it’s my understanding that one pays tax on the full rollover amount. If that’s not correct, please correct me.

You are correct assuming you have no BASIS in your IRA(s).

[Anonymous]

Anonymous wrote:

Anonymous wrote:I’m interested in this too, but don’t quite understand OP’s question. The money that went into the traditional IRA was before-tax, so no taxes have been paid on the contributions. Same thing for any investment gains. When the never-taxed contributions and investment gains are converted to a Roth, it’s my understanding that one pays tax on the full rollover amount. If that’s not correct, please correct me.

OP's money she deposited in the traditional IRA was post-tax.

Thank you! I see that now. But, why would OP do that? If one’s not going to get a deduction for the traditional IRA contribution, why not put the money directly into a Roth?

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:I’m interested in this too, but don’t quite understand OP’s question. The money that went into the traditional IRA was before-tax, so no taxes have been paid on the contributions. Same thing for any investment gains. When the never-taxed contributions and investment gains are converted to a Roth, it’s my understanding that one pays tax on the full rollover amount. If that’s not correct, please correct me.

OP's money she deposited in the traditional IRA was post-tax.

Thank you! I see that now. But, why would OP do that? If one’s not going to get a deduction for the traditional IRA contribution, why not put the money directly into a Roth?

She probably makes too much money. You can only contribute directly to a Roth if your income is below a certain threshold depending on your filing status.


So many people mess up Roth conversions because they have big trad IRA balances

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:I’m interested in this too, but don’t quite understand OP’s question. The money that went into the traditional IRA was before-tax, so no taxes have been paid on the contributions. Same thing for any investment gains. When the never-taxed contributions and investment gains are converted to a Roth, it’s my understanding that one pays tax on the full rollover amount. If that’s not correct, please correct me.

OP's money she deposited in the traditional IRA was post-tax.

Thank you! I see that now. But, why would OP do that? If one’s not going to get a deduction for the traditional IRA contribution, why not put the money directly into a Roth?

The income limits for directly contributing to a Roth IRA for 2022 were 214k if married filing jointly and 144k if single. If you make over that amount, you would want to instead do what OP did, which is termed a "backdoor Roth IRA" (contributing post-tax money to a traditional IRA and then doing a conversion to a Roth IRA).

[Anonymous]

I volunteer with the IRS to file taxes for low income folks. I have done my own taxes since I was a student. For the last few years, we have been doing the backdoor roth. It is very confusing how to report this in the tax software. There is a way to do it, but its not straightforward. I can totally see why the OP had trouble with this.

OP - have you figured it out? If not, share what tax software you are using, and we could help better.

[Anonymous]

OP here: Thanks for the responses this far.

Yes, I didn’t contribute directly to the Roth because we’re over the income limits.

I am using Turbo Tax.

[Anonymous]

Anonymous wrote:OP here: Thanks for the responses this far.

Yes, I didn’t contribute directly to the Roth because we’re over the income limits.

I am using Turbo Tax.

Just follow the prompts on turbotax and it will guide you through the process. Check the Form version of the return to make sure that TT didn't mess up. I don't know why they don't make this less complicated..

[Anonymous]

Anonymous wrote:I volunteer with the IRS to file taxes for low income folks. I have done my own taxes since I was a student. For the last few years, we have been doing the backdoor roth. It is very confusing how to report this in the tax software. There is a way to do it, but its not straightforward. I can totally see why the OP had trouble with this.

OP - have you figured it out? If not, share what tax software you are using, and we could help better.

+1 on it being unnecessarily confusing. The two entries are made at different points in the software so at first it seems like you are being taxed on the distributions then later it reverses the additional taxes.

[Anonymous]

Anonymous wrote:

Anonymous wrote:OP here: Thanks for the responses this far.

Yes, I didn’t contribute directly to the Roth because we’re over the income limits.

I am using Turbo Tax.

Just follow the prompts on turbotax and it will guide you through the process. Check the Form version of the return to make sure that TT didn't mess up. I don't know why they don't make this less complicated..

The order really matters in how they are entered in TT. I believe I had to jump around in the program to get it right. Google the question specifically. That is how I resolved it. There are blogs out there that will lead you through it step by step.