Hi Everyone,
I contributed to a 401k,where the employer does not match.Also did a Backdoor Roth thru Fidelity.
For the year 2021, I contributed the max to the backdoor.HOWEVER, I received a 1099-R form saying my contribution is “taxable”. I am confused as to why it is taxable AGAIN, since this is my pos-tax dollars I am using for the Backdoor.
Its possible I am misunderstanding something conceptually or I have been misinformed.
Any clarification and feedback will help LOTS!
Best, Mike
FYI, my accountant is not familiar with a Backdoor
Also did a Backdoor Roth thru Fidelity. For the year 2021, I contributed the max to the backdoor.
Do you have any T-IRA balances at Fidelity or other brokers, in addition to the contribution that you converted?
HOWEVER, I received a 1099-R form saying my contribution is “taxable”. I am confused as to why it is taxable AGAIN, since this is my pos-tax dollars I am using for the Backdoor.
Conversions from a Traditional IRA to a Roth IRA are always reported as taxable on 1099s. You need to document how much of the conversion has already had tax paid on it by filling out Form 8606 in your tax return to determine the pro-rata share of your total T-IRA holdings that have already had tax paid on them. If you have significant T-IRA holdings that are pre-tax, you will actually end up paying taxes on much of your conversion and have a remaining basis that’s already been taxed in your total T-IRA balance.
FYI, my accountant is not familiar with a Backdoor
Well, that’s a problem, since the way you document non-taxable back door Roth IRA conversions is through Form 8606 on your tax return. Is s/he your ‘accountant’, your ‘tax preparer’ or both? If s/he’s your tax preparer or both, then I would be looking for a different tax preparer. And in the future, if you plan on doing any tax moves like a back door Roth, discuss it with your tax preparer first, to be sure that you are both on the same page.
The backdoor IRA that I did was for my wife. Initially, I transferred her balance of T—IRA from Vanguard to T-IRA at Fidelity AND opened a Roth IRA for her as well.
Then, I transferred the T-IRA to the R-IRA AND contributed $6k as a backdoor in the same calendar year of 2021.
Also, we file married jointly AND I have T-IRA account at Vanguard as well.
Hope that makes things clearer.
I understand that the conversion of the balance of the T- IRA to R-IRA is taxable but the 5498 form
and the 1099-R includes the $6k contribution of the backdoor as well which is increasing my taxable income
Just want to second AJ’s suggestion about getting someone else. I won’t comment on the quality of your current accountant, but if you’re doing things he/she is not familiar with, then you need to find someone who is familiar with them so that they are properly executed and reported.
1poorguy (doesn’t have an accountant, but has been giving some thought to it)
I understand that the conversion of the balance of the T- IRA to R-IRA is taxable but the 5498 form and the 1099-R includes the $6k contribution of the backdoor as well which is increasing my taxable income
How do you know that the $6k contribution is increasing your taxable income, and hasn’t been adjusted out in your tax return? As I said previously, conversions from Traditional IRAs to Roth IRAs are always shown as taxable on a 1099-R, and it’s up to you/your tax preparer to document how much of the amount is not taxable using Form 8606 https://www.irs.gov/pub/irs-pdf/f8606.pdf The reason that 1099-Rs always show the total conversion as taxable is because the brokerage issuing the 1099-R has no idea how much of the converted amount is basis that has previously been taxed. But just because it’s shown on the 1099-R as taxable doesn’t mean that it ends up being taxable on your 1040.
If your tax preparer has given you an initial copy of your tax return, you can look at line 4 on your 1040 https://www.irs.gov/pub/irs-pdf/f1040.pdf where 4a will show the total amount converted, and 4b will show the taxable amount of that conversion. (This assumes that neither of you had any other IRA withdrawals for 2021 - if you did, then the numbers on line 4 would also account for those withdrawals, so you will need to figure out those adjustments, too.) If 4b is $6k less than 4a, then the back door contribution has been adjusted out, and is not increasing your taxable income. You should also be able to find Form 8606 in your tax return to see how this was calculated. If the difference is something other than $6k, then it’s either because your wife has other T-IRAs with pre-tax money that were pro-rated, or that your tax preparer didn’t properly fill out the Form 8606.
As I also said previously, if your tax preparer doesn’t understand how to file a Form 8606, I would be looking for a different tax preparer. However, at this point, it may be too late to look for a different preparer, and you may just want to give your current tax preparer the instructions for Form 8606 https://www.irs.gov/pub/irs-pdf/i8606.pdf and tell them to figure out in their tax software how to file this form.
Thank you for the feedback!
I checked there was no 8606 form completed; on the 1040, 4a. was left blank and 4b. had the entire total balance.
Thus, u mentioned, “my wife having other T-IRAs that were pro-rated”. To my understanding I have consolidated all her 401ks from her previous jobs in the past to a T-IRA but have not made the conversion up until NOW to the R-IRA so I can do backdoor from this point forward.
How does the “pro-rata rule” apply to all this?
Does my own T-IRA affect it as well since we are filing jointly?
I checked there was no 8606 form completed; on the 1040, 4a. was left blank and 4b. had the entire total balance.
Okay, then your tax preparer didn’t prepare your return correctly, based on what you have told us. Did you tell your tax preparer that the 2021 contribution to your wife’s T-IRA was non-deductible?
Hopefully, your return hasn’t been filed. If it has, you will have to do an amendment. I would suggest waiting until after tax season is over and finding a new preparer to do the amendment. If it hasn’t been filed, don’t sign it and make sure that your preparer knows that the contribution you made for your wife’s 2021 IRA was non-deductible, and that they need to file a Form 8606. And then find a different preparer for next year.
Thus, u mentioned, “my wife having other T-IRAs that were pro-rated”. To my understanding I have consolidated all her 401ks from her previous jobs in the past to a T-IRA but have not made the conversion up until NOW to the R-IRA so I can do backdoor from this point forward. How does the “pro-rata rule” apply to all this?
If she has no other pre-tax IRA money left in any other accounts, then pro-rata doesn’t apply.
Does my own T-IRA affect it as well since we are filing jointly?
No. IRAs are “Individual” so each SSN would file it’s own 8606 if needed, even on a joint return.
I contributed to a 401k,where the employer does not match.Also did a Backdoor Roth thru Fidelity. For the year 2021, I contributed the max to the backdoor.HOWEVER, I received a 1099-R form saying my contribution is “taxable”. I am confused as to why it is taxable AGAIN, since this is my pos-tax dollars I am using for the Backdoor.
I did a partial Roth conversion in 2020 and also did a trustee-to-trustee transfer of some portion of my 401k to an IRA at a different place. Both the Rothified IRA and 401k were from Fidelity. In early 2021, I got some paperwork from Fidelity that showed both as withdrawals from my IRA/401k accounts. But, when I did my taxes with TurboTax, whatever codes were on the paperwork caused the transfer to come back out of the taxable income, and the Roth conversion to be left in, so it came out correct.
Not sure if this is the same as your case, but it might be.
FYI, my accountant is not familiar with a Backdoor
Sounds like you have a bookkeeper, not an accountant.
Thanks for your input; In addition, I asked him if one can contribute to a 401k,AND a Roth IRA, he said no due to the fact that an employer offers u a 401k, u are not able to contribute to a R-IRA as well.
I may be misunderstanding him but what does he mean by that? Based on what I have read, u can do that.
Thanks for your input; In addition, I asked him if one can contribute to a 401k,AND a Roth IRA, he said no due to the fact that an employer offers u a 401k, u are not able to contribute to a R-IRA as well.
I may be misunderstanding him but what does he mean by that? Based on what I have read, u can do that.
Wow, I would strongly suggest that you look for a new tax preparer. Either he doesn’t understand tax law or he’s not communicating tax law correctly to you. In either case it seems like a really bad fit to be preparing your taxes.
The fact that an employer offers you a 401(k) has NO BEARING on whether you can make contributions to a Roth IRA. What does matter is:
a) That you have enough compensation make the contribution(s) and
b) your MAGI (Modified Adjusted Gross Income) is below the limits for the year, which for 2021* is $198k for MFJ, $125k for Single, HOH or MFS if you didn’t live with your spouse at any time during the year, and $10k form MFS when you did live with your spouse at for at least one day. MAGI can be calculated using IRS Pub 590-A https://www.irs.gov/pub/irs-pdf/p590a.pdf but for most people, it’s their AGI plus tax-free interest minus any retirement account withdrawals, including for conversions
*The MAGI limits increased for 2022, but since you’re still eligible to make contributions for 2021 until April 18, 2022, I quoted the 2021 limits. 2022 limits can also be found in IRS Pub 590-A
The fact that an employer offers you (and/or your spouse, if married) any retirement plan (401(k), pension, 403(b), SEP-IRA, etc.) does affect the income limit on deducting T-IRA contributions. Details can also be found in IRS Pub 590-A
AJ
So to add further,to my understanding, to your previous response to point B: if your MFJ and your MAGI EXCEEDS the income requirements, then that is when you can do the Backdoor Roth.
Correct?
So to add further,to my understanding, to your previous response to point B: if your MFJ and your MAGI EXCEEDS the income requirements, then that is when you can do the Backdoor Roth. Correct?
Kind of. I would actually if your MAGI is over the limit for your filing status, if you want to do a Roth contribution, you would have to do the back door Roth process of making a non-deductible contribution to a Traditional IRA, and then converting it to a Roth IRA. You are also allowed to make non-deductible contributions to a Traditional IRA, without converting them to a Roth. In either case, you would file a Form 8606 to document the non-deductibility of the contribution you made.
Thanks for your input; In addition, I asked him if one can contribute to a 401k,AND a Roth IRA, he said no due to the fact that an employer offers u a 401k, u are not able to contribute to a R-IRA as well.
One has nothing to do with the other. You are getting bad answers/advice from this “accountant.”