I have contributed after-tax money into an IRA for a few years now, and I want to convert that IRA into a Roth.
Is it right to say that the gains from the after-tax money going to be taxed when I do that?
Do we just substract the after-tax contributions from the total of the IRA account to determine the amount that I would be taxed on?
If next year, I contribute again with after-tax money to the IRA, and I convert right away (no gain on that part of the money) to Roth, I would not need to pay any (additional) tax due to this conversion?
But if I open another IRA account with 0 balance. Can I convert immediately so I would not pay any tax for this particular conversion?
No. When doing the math and completing the forms as explained above, you must add together all of your traditional IRA accounts. You can’t report them separately.
I have contributed after-tax money into an IRA for a few years now, and I want to convert that IRA into a Roth.
I would also point out that in order to document the after-tax basis in your T-IRAs, you should have been filing Form 8606 as a part of your tax return each year that you made an after-tax contributions. If you did not file those forms, you need to go back and file one for each year that you made the contribution, before you do a conversion.
Additionally, as previously indicated, taxes for conversions are based on the percentage of pre-tax money (gains and contributions) for all T-IRAs that you own, including, but not limited to, rollover, SEP and SIMPLE IRAs, even if those balances are spread across different accounts at multiple brokerages.
That said, if your goal is to just convert after-tax contributions, there is a way to get around being taxed on the pre-tax funds, if you have access to an employer plan, like a 401(k), you can roll the pre-tax money to. Since employer plans don’t accept after-tax money, you can roll all of the pre-tax money (i.e. gains and pre-tax contributions) into the 401(k). You will be left with a T-IRA that contains only your after-tax basis, which you can then convert and won’t owe any taxes on, assuming you have no gains. Since employer funds generally also only take cash, and you need to leave a specific dollar amount (your after-tax basis, plus any pre-tax amount that you might be willing to pay taxes on) in the IRA to be converted, you will probably have to sell all of your investments and go to cash for a while. And your 401(k) would also need to have investment choices and fees that you find acceptable. So you would have to determine if the tax savings will offset those issues for your particular situation. I know that for some people, it has proven worthwhile to be able to do the back-door Roth process without having to worry about paying taxes on part of the conversion.
But if I open another IRA account with 0 balance. Can I convert immediately so I would not pay any tax for this particular conversion?
The basis for your IRA is across all of your IRA accounts.
Doesn’t matter if you open a new IRA with a different company from where you’ve had your other IRA accounts - as far as the IRS is concerned it’s all lumped together on form 8606.
To expand on Mike’s example:
You have an IRA with $200K, you’ve made $40k of after tax contributions over the years.
In 2022 you open a new IRA account with Ameritrade and make an additional $5k contribution after tax. (lets say your old accounts are with Schwab - not that it matters)
Now you convert the $5k at Ameritrade from IRA to Roth IRA.
When it comes time to fill out form 8606, I think you will have $205k value to the IRA, and a $45k basis.
$45k/$205k = 21.95%
So for the $5k you convert, $1097 will not be taxed, and $3903 will.
If it makes you feel better, the $3903 getting taxed hadn’t been taxed previously.
Others have answered your question about opening another account. As part of the explanation for that IRA actually stands for Individual Retirement Arrangement, not Individual Retirement Account. That’s why all of you TIRA accounts are lumped together as part of your Arrangement.
I was looking at doing a Roth conversion this year, where the source T-IRA has after-tax contributions. I’ve been filing form 8606 through the years.
Will/should the 1099-R forms indicate if a portion of the distribution includes after-tax dollars?
Ugh! I feel like an idiot! I’m hoping someone can help.I’ve just become aware of Form 8606 and although I’m happy to report that my accountant has been filing it for me, after reading quite a few articles regarding the Form and trying to read and understand Publications 590 a and b, I remain full of questions and very confused.
I have been doing a backdoor Roth ever since I heard about it (probably right here), contributing the full after tax amount to a traditional IRA and immediately converting it to a Roth. (I don’t qualify for contributing to a pretax IRA or directly contributing to a Roth). I have also contributed to a workplace 401K to the max. The workplace 401K had a profit sharing component, so there was an additional contribution for that. (I should mention that I maxed out an HSA for a time and have never touched it beyond the contributions). These were all pretax.
The workplace 401K was closed and all my funds were distributed into a Rollover IRA. (in 2021)
I want to make my usual after tax contribution to a traditional IRA and then immediately roll it into the Roth, but then I started reading about form 8606 as I mentioned. I asked my accountant to check out the article from Motley Fool and a reference also. He replied that Form 8606 only mattered after I started taking withdrawals, which didn’t really answer my questions. So I checked out my previous Form 8606 he has filed for me: each year he has correctly shown on line 1 the $7000 non-deductible contribution I made, on line 2 he has consistently put $19500 (which is the amount of 401K contributions before catch-up contributions and profit sharing, or just some random number), line 4 is always blank, this has consistently led to line 14 being 19500 after all the math. It’s the same every year.
First question: Is my accountant playing too much golf?
Second question: Does it make any sense to do my usual backdoor Roth or should I focus on getting some of the rollover converted to a Roth?
I just like the idea of putting as much into the Roth as possible and as I am still working, I know it’s possible.
Any advice, comments, suggestions would really be appreciated.
During the time that you were doing the backdoor Roth, did you have any money in Traditional IRAs? For example, other money from an employer plan that you had rolled over into a rollover IRA?
Well, that was a mistake if you wanted to keep doing backdoor Roth. That said, based on the information from few lines that you gave us on your 8606, it looks like you were already making that mistake.
What were your questions? I will say that 8606 matters before you start taking withdrawals if you are doing non-deductible contributions to a Traditional IRA, even before you start taking withdrawals. Making a non-deductible IRA contribution is the first step in doing a backdoor Roth, so if you understood your accountant correctly, he’s wrong, and you need to get someone else to look at your 8606s.
Well, I’d actually have to see what other lines were, too, but that makes no sense. First of all, if the $19,500 was truly the contribution amount to a 401(k), it shouldn’t have been on the 8606. Secondly, if the accountant was doing the math correctly, and you had other money in Traditional IRAs, the number should have been going up each year you made a backdoor contribution, since your contributions should have been adjusted using the pro-rata rule.
Well, without seeing the series of 8606s, it’s hard to tell, but it doesn’t make sense to see the same number on line 14 year after year if you’ve been doing backdoor contributions for multiple years.
It doesn’t make sense to do backdoor Roth contributions whenever you have any money in a Traditional IRA. If you were to roll all of your pretax money that’s in any and all Traditional IRAs that you own into an employer plan, so that you had no pretax money in any Traditional IRAs, then a backdoor Roth can make sense.
Bottom line, I think you need to understand your 8606 filings before you do attempt any more backdoor Roth contributions, and you
That’s not always a good idea. It depends on what you expect your income and tax bracket to be when you retire vs. where your income and brackets are now.
Thank you for your reply. I don’t know how to break up my remarks like you did, but no, I never had any money left in a traditional IRA until the 2021 rollover of my 401K. I was afraid you were going to say my accountant was wrong and I would have to review and have someone else review many past years (and refile Forms 8606). And no more Roth conversions until I understand.
One more question, Each year I made a non-deductible contribution to a traditional, Even though I immediately converted it to a Roth, I still added to my basis, correct?
Highlight the part you want to copy and click on the “Quote” link that comes up next to it.
Are you REALLY REALLY sure that your SSN has no money in any Traditional IRAs, including SIMPLE IRAs and SEP IRAs (not just rollover and/or contributory IRAs)? If so, then I am confused about the $19,500 that’s on line 14. That’s supposed to be the after-tax basis you have in any traditional IRAs. If you had no money in Traditional IRAs, then why do you still have a basis on line 14? That’s a question you need to ask your accountant.
I’m not yet convinced that your accountant is correct, especially since they told you that Form 8606 doesn’t matter until you make withdrawals. Technically, that may be true, but you need to realize that every time you do a conversion - back door or normal - it’s a withdrawal from your T-IRA. That means that the Form 8606 is important for that year, too.
Not just Roth conversions - you should not be making any non-deductible contributions, either. If you made a non-deductible contribution for 2022, you need to consider removing it before your 2022 taxes are filed, since you had money in a T-IRA during 2022.
No. The form 8606 adjusts your basis to account for any basis that was converted to a Roth. If your SSN truly had NO T-IRA money allocated to it other than your non-deductible contributions, and you converted the entire balance of the IRA that you made the non-deductible contributions to, then the entire basis would have been converted, and line 14 of your Form 8606 would be $0
Very interesting! My husband has a Traditional IRA where he made non-deductible contributions, all tracked on form 8606. He also has a separate rollover IRA with the money from a former employer’s 401(k).
The 401(k) with his current employer does allow roll-ins (is that the right word?).
It sounds like you’re saying that he can roll the pretax money from both IRAs into the current 401(k), leaving just his basis in the T-IRA. He could then roll the remaining amount in the T-IRA into a Roth. This sounds great!
First question: Are you saying that when money is rolled into the current employer’s 401(k), there’s no issue with calculating the % of non-taxable money across the accounts? That is, as long as I’m careful to leave at least the basis amount in the T-IRA, the roll-in is treated as all pre-tax money?
Second question: Are there timing issues? If I move the pretax money into the current employer’s 401(k) in 2023, is there a problem with also converting the remainder to a Roth in 2023?
Yes, since the law changed (2006 maybe?) most 401(k)s have changed their rules to allow IRAs to be rolled into them.
That said - before doing this, you should be sure that you are happy with the investment choices and any fees that his 401(k) charges.
Yes, that’s correct. Most 401(k)s require the rollover to be cash, so he will likely have to cash out all of his investments. He should request a direct transfer from the IRA(s) to the 401(k) of all money except for the basis amount, plus any additional amount he may want to convert. Once the money has left the IRA to go into the 401(k), he can then do a conversion into a Roth IRA.
No need to worry about percentages. The dollar amount of the basis is what is important. He will likely need to sign something for the 401(k) administrator certifying that the money being rolled in is all pre-tax.
Edited to add: If he were to roll some of the basis into the 401(k), he would effectively lose that basis, as all the money in the 401(k) will be treated as pre-tax after it’s rolled in, and he will end up paying taxes on it twice.
As long as you wait until the basis is the only money that’s left in both IRAs, you should be fine to convert the basis into a Roth IRA without incurring any taxes. If, because of timing, the basis earns any interest or dividends after the rest of the money is rolled over into the 401(k), you will be taxed on that.