If someone did a backdoor Roth last year but now realized that it was not necessary because their income was low enough to contribute straight to a Roth, are there any consequences?
Thank you, Ken
1 Like
Hi Ken -
The key difference between a direct contribution to a Roth IRA and a backdoor contribution to a Roth IRA is that with a direct contribution, you can withdraw your contributed amount at any time for any reason and pay no taxes or penalties on that withdrawal. With a backdoor contribution, the contribution generally has to season in the Roth for 5 years first (unless you qualify due to age & length of time you’ve had a funded Roth) in order to avoid a 10% penalty on withdrawing that contribution.
In addition, if you have other money in Traditional IRAs aside from the balance you rolled into your Roth, the act of funneling your Roth money through the Traditional IRA could result in a higher tax bill for the year than you would have faced with a direct Roth IRA contribution. If that’s the case, then you will also need to be sure to track your tax basis in your Traditional IRA, in order to be able to “true up” later.
The good news, though, is that if you don’t have any other Traditional IRAs and you keep your money in your Roth IRA for at least five years, money contributed through the backdoor approach would then ultimately behave just like money contributed directly to a Roth.
Regards,
-Chuck
Home Fool
3 Likes
If your income was low enough** for the contribution to be deductible, be sure to take the deduction. There is a fairly large gap between the Traditional deductibility limit vs. the Roth contribution limit, so it’s likely that it’s not deductible. But I thought I’d mention it just in case. Other than that, @XMFBigFrog described the issues with the conversion withdrawal rules vs. direct contribution withdrawal rules correctly.
** This presumes that you are covered by an employer plan, so there is a limit to your ability to deduct Traditional IRA contributions.
AJ
1 Like
I meant the traditional IRA contribution was not deductible. A backdoor Roth conversion was done on that IRA contribution last year. Now, it’s realized we did not need to use the backdoor Roth strategy but could have contributed to a Roth directly. Are there any tax or other consequences of doing the backdoor Roth last year? Assume no other traditional IRA were existing other than the one the Roth conversion was made from.
Thank you, Ken
Is there other money in that Traditional IRA?
If not, then your backdoor Roth IRA contribution looks and feels a lot like a direct Roth IRA contribution would. The key difference would be the 5-year timeframe before the contribution can be taken out (unless you otherwise qualify based on your age and your Roth IRA’s first funding date).
If there is other money in that Traditional IRA, then you may have created an event where it costs you a bit more in taxes for 2022 in exchange for a higher tax basis in your Traditional IRA.
You will get a 1099-R from your Traditional IRA provider indicating a withdrawal from your Traditional IRA. If you did the backdoor Roth contribution as a direct trustee to trustee rollover, particularly if it’s with the same IRA provider, that 1099 should be coded in a way that it shouldn’t trigger an early distribution penalty. Mine gets coded as “2”.
Regards,
-Chuck
Home Fool
1 Like
Thank you Chuck. There is no other money in the traditional IRA.