Make Backdoor Roth Easy On Your Tax Return

It’s tax filing time. I’ve been fielding a lot of questions on my two popular articles about the backdoor Roth (if you are not familiar with it please read these first):

On theme quickly emerged. All those who are confused were contributing to the traditional IRA for the previous year and then converting it to Roth. They made it too hard for themselves.

For example they contributed $5,000 to traditional IRA for 2012 in 2013 and then converted it to Roth in 2013. They are planning to contribute $5,500 for 2013, again in 2014 before April 15, before converting it to Roth. Although it’s OK to do so, it just gets very confusing at tax time when they do it this way.

The tax law requires that you report your traditional IRA contribution *for* that year and your converting to Roth *in* that year.

In the example above, the $5,000 contribution made *for* 2012 in 2013 goes on the 2012 tax return. It has to carry over $5,000 tax basis to the 2013 return. Its conversion to Roth *in* 2013 goes on the 2013 tax return. The $5,500 contribution *for* 2013 to be made in 2014 again goes on the 2013 tax return but the conversion *in* 2014 must wait for the 2014 tax return.

The 2013 tax return ends up having a $5,000 basis carried over from the previous year, a $5,000 conversion, a $5,500 contribution (to be made in 2014), and a $5,500 basis carried forward to the next year. The Form 8606 ends up looking like this (I’m assuming there was $20 in earnings by the time it was converted; click on it to see page 2):

That can be very confusing.

The easy way to do it is to contribute for the current year rather than waiting until the following year. Contribute for 2013 in 2013 and convert in 2013. Contribute for 2014 in 2014 and convert in 2014. This way will be clean and neat. Both the contribution and the conversion go on the same tax return. You don’t carry over anything from one year to the next or wait until the following year to finish it off.

Imagine if you contributed $5,000 for 2012 in 2012 and then converted it in 2012. You have $5,000 contribution and $5,000 conversion, both on the same 2012 tax return, all done. The same for 2013 tax return: if you contributed $5,500 for 2013 in 2013 and then converted it in 2013, your 2013 tax return would have both on it, with nothing carried over from 2012 and nothing to carry forward to 2014. Next year, repeat.

The Form 8606 when you are doing it the easy way looks like this:

That’s very clean (I used the same assumption for $20 in earnings by the time it was converted; click on the image to see page 2).

If you are doing backdoor Roth, please do yourself a big favor and do it the easy way. Contribute for the current year and convert it in the same year. Contribute for 2014 in 2014 and convert in 2014. Don’t wait until the following year. Otherwise you just confuse yourself at tax time.

If you must get caught up for one year, that’s fine. Contribute for 2013 in 2014, before April 15, but also contribute for 2014 in 2014, and convert both in 2014. This way you will have a clean slate come 2015, which lets you do it the easy way in 2015.

[Photo credit: Flickr user lilivanili]

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Comments

  1. indexfundfan says

    Maybe I am mistaken, but at one time have you advocated to do a conversion only once every two years to avoid issues with the step transaction doctrine?

    • Harry says

      That still works if you don’t get confused about carrying forward the basis. Otherwise wait some time within the same year will do. I’m only against converting the very next day, which is really unnecessary.

  2. Bob says

    Echo the comment above – it only is confusing if you fail to carry forward the basis. I thought it was pretty straight forward – compared to the way they deal with ESOP sales this year. To your point, I did consider just contributing in December and having on less thing (carry forward) to remember. This is my first year using Turbotax in a while, but I believe Turbotax will pick up the carry forward from your last return.

  3. UAPhil says

    If your IRA contributions are non-deductible (for example, because your income is too high and you are covered by a retirement plan at work), and if you have other IRA funds, the “back door Roth conversion” is likely to result in a net tax liability on conversion. The reason is that the IRS requires you to prorate the Roth Conversion across all your IRA’s. Caveat emptor!!

    • Harry says

      Only if you didn’t read the complete how-to linked at the beginning of the article.

  4. Eric says

    I must filling out this form wrong. I have a 2012 non-deductible contribution of $5000 that I didn’t convert to a Roth. I have a 2013 non-deductible contribution of $5500 and a 2013 conversion of $10,500 to Roth.

    Form 8606:
    Box 1: $5500
    Box 2: $5000
    Box 3: $10,500

    Box 5: $10,500
    Box 6: $10,500
    Box 8: $10,500
    Box 9: $21,500

    Doesn’t this generate .50 in Box 10 and a taxable amount of $5,250? I was under the impression that since all contributions were non-taxable the entire conversion should be non-taxable.

    • Harry says

      Line 6 should be zero? After you converted you would have nothing left by the end of the year.

  5. Albert says

    I contributed $5500 to a non-deductibile IRA in Feb 2014 and converted to Roth IRA the following day. I did not realize that the Roth IRA has to be reported for the 2014 tax season and not 2013. I should have contributed and converted in the 2013 calendar year.

    Since my traditional IRA is $0 since I converted and I did not accumulate any gains, do I still need to fill out form 8606?

    • Harry says

      Yes you do if your contribution was for 2013. That’s how your basis is going to carry over to 2014 to offset the conversion in 2014.

  6. HMck says

    Hello,

    If I am getting caught up for the first time this year, I understand that I contribute for 2013 IRA before Apr 2014(and show it in my 2013 Tax return) along with my 2013 calendar year conversion to Roth in the same 2013 Tax return. How do I contribute for 2014? Do I just open another traditional IRA anytime this year (2014) and convert before Dec 2014 to Roth?

    • Harry says

      That will work. Or you can contribute to the same IRA again for 2014 and convert before 12/31. Usually when you convert, the assets move over to your Roth. The account is still there with a zero balance.

  7. Patrick says

    Hi Harry,

    I made excess contributions for 2013 and 2014 to my Roth IRA due to exceeding income limits. I would like to recharacterize the excess Roth IRA contributions as non-deductible traditional IRA contributions *then* convert the traditional IRA back to a Roth IRA. From what I understand, I’ll be taxed on the earnings from the contributions while it was in my Roth IRA (which is fine by me). Are there any other consequences/pitfalls to doing this?

    BTW, really great articles!

    • Harry says

      Just the same “hiding” other IRAs in a qualified plan, as detailed in the complete how-to article linked at the beginning of this article. Be sure to still report your 2013 Roth IRA contribution and its recharacterization on your 2013 tax return.

  8. Robert says

    Regarding the moving of IRA funds to a 457 plan to lower the tax hit on the conversion, I checked with my one of my 457 plan providers and the representative I spoke to said they accept rollovers from a traditional IRA, but that it is listed still as an IRA within the 457 plan. So, if the money is still showing as a rollover IRA within the 457 plan, does that make it part of the pro rata calculation, incurring a higher tax on the conversion? I am planning to do this for 2014 so I have some time to figure this out.

  9. Robert says

    I will have to check further with the 457 provider. The individual I spoke to may have meant that the money would be identified separately as a rollover IRA from the deferred compensation $ within my account. I am assuming you mean that once the money is transferred to the 457, it no longer is counted as IRA and does not follow those pro rata rules as far as conversions are concerned. Is that documented anywhere in IRS publications as far as you know?

    • Harry says

      The money is either in an IRA or it’s not. If it’s in a 457 it’s not in an IRA. How the 457 accounts for it is their business. The IRS says count your money in traditional, SEP, and SIMPLE IRAs. That’s already documented.

    • Robert says

      Hi Harry,

      Checked with another rep for the 457 plan re: transfer. He said it would be counted as part of my 457 plan but it would be identified separately because it still would be following the traditional IRA rules as far as distributions and penalties for early withdrawal etc.which is different than the 457 rules. But he agreed with what you are saying in that the IRS would not be seeing it as IRA $. Does that 8606 form have a line that accounts for the lowering of the basis as a result of the transfer of the money to the 457 plan another qualifed plan?

    • Harry Sit says

      Robert – Your basis is your total non-deductible contributions. It does not lower when you transfer pre-tax money out. Form 8606 line 6 asks for the total value in your traditional, SEP, and SIMPLE IRAs as of Dec. 31. When the pre-tax money is no longer in those IRAs, the value by definition drops.

  10. Tom says

    Great article, thanks Harry! Quick question – I am needing to do a catch-up this year so I am contributing now for the 2013 year and will contribute again later in the year for the 2014 year. As far as the conversion goes, can I do the conversion for the 2013 year now and do it again later in the year for 2014? In other words, during the calendar year 2014 I will have done 2 conversions (one for 2013 and another for 2014). Can I do that or am I limited to 1 conversion for year?

  11. Tom says

    Ok, cool. So when I file my 2014 taxes, I will just enter the sum of both my conversions for my Gross Distribution on the 1099-R?

    • Harry says

      Your IRA provider may put it on one 1099-R or two. If you use software and you get two 1099-R’s you just enter each one separately, as you do when you have multiple W-2′s or multiple 1099-INT’s, etc.

  12. bmints says

    Hi, If I have no traditional IRAs, and can’t contribute to a ROTH due to income, I can open a fully funded traditional non-deductible IRA and then immediately convert it to a ROTH the next day. Assuming zero gain/loss, do I then need to pay taxes on the $5,500 that comes out of my traditional IRA? I thought the answer was “NO”, but my CPA has added this $5,500 to my taxable income for 2013. This is wrong, right?

    • Harry says

      bmints – You have to tell your CPA about your non-deductible contribution. Otherwise they wouldn’t know. There’s a 1099-R form for the conversion. If they didn’t know you made a non-deductible contribution, the 1099-R form makes it taxable.

  13. bmints says

    Hi Harry, Thanks for the reply. I just checked our return. Turns out the tax preparer completed Form 8606 (for both my wife and I) and line 25 (taxable amount) says “zero”, yet they still entered $11k ($5,500 for the two of us) on the 1040 line 15b. I think it looks like it was just a mistake?

  14. Jim says

    Great article! I just want to make sure I’m completing the 8606 form correctly. In 2013, I contributed $5,000 to a traditional IRA for 2012 and converted it to a Roth IRA. In 2014, I contributed $5,500 to a traditional IRA for 2013 and converted it to a Roth. Here’s what I reported on the 8606 for 2013:

    Part I:
    Line 1: $5,500
    Line 2: $5,000
    Line 3: $10,500
    Line 4: $5,500
    Line 5: $5,000
    Line 6: 0
    Line 7: 0
    Line 8: $5,000
    Line 9: $5,000
    Line 10: 1.00
    Line 11: $5,000
    Line 12: 0
    Line 13: $5,000
    Line 14: $5,500
    Line 15: 0

    Part II:
    Line 16: $5,000
    Line 17: $5,000
    Line 18: 0

    Does that look right?

    • Harry Sit says

      Yes it looks right. It will become much simpler once you start doing it the easy way.

  15. Rob says

    One thing is confusing me about this. I understand that I need to contribute to my traditional Ira before April 15 2014 for 2013 but does the conversion to Roth also need to take place by April 15?

    • Harry Sit says

      It does not. Because it happens *in* a year, and not tied to any specific contribution, it can take place at any time.

  16. Brian says

    In the second (“easy”) way, I’m confused that you only fill in Part 2 (the conversion part) of the 8606.

    Don’t you also need to account for the nondeductible contribution in Part 1?

    • Harry Sit says

      My tax software did it that way, based on the reading of the 3rd bullet under the Part I heading:

      “You converted part, but not all, of your traditional, SEP, and SIMPLE IRAs to Roth IRAs in 2013 (excluding any portion you recharacterized) and you made nondeductible contributions to a traditional IRA in 2013 or an earlier year.”

      It means you don’t have to do Part I if you converted all.

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