Back door Roth residual earnings

Submitted by Denny Pierre on Thu, 2017-04-20 22:01

Prior to the tax filing deadline a person makes a 2015 non deductible contribution to a Traditional IRA of $5,500 (contributor was 49 in 2015) with the intention of executing a ‘back door Roth’. Before the conversion to the Roth takes place $0.10 interest is earned and posted to the account, then a partial conversion of $5,500 is executed, thereby leaving $0.10 in the Traditional IRA. After the conversion takes place an additional $0.56 of interest earned prior to the conversion is posted to the acct after the conversion, now leaving $0.66 in the Traditional IRA. This $0.66 was not noticed until 4/18/2017. Then on 4/18/2017 another non deductible contribution is made to a Traditional IRA for 2016 of $6,500 (contributor was 50 in 2016) with the intention of converting this via ‘back door Roth’ strategy. What can should be done to the $0.66?



Submitted by Alan - IRA critic on Thu, 2017-04-20 22:49

  • Whenever a back door Roth conversion is done, these incidental earnings amounts should be converted. In this case, the 8606 reporting the conversion might be off by a dollar once the year end balance left in the TIRA reached .50 since that rounds up to a dollar. The 8606 should report a dollar on line 6 as the year end balance in the TIRA and that would cause the conversion to have a taxable amount of one dollar. These differences are so small that I would not bother to amend the 1040 for such a difference.
  • Having a small balance left in the IRA after converting might prevent the custodian from closing the account, so there would still be a TIRA open for the next contribution.
  • In other words, having a small amount of earnings left after conversion has no real tax impact other than triggering a couple more lines on the 8606, and annoying the TP by being there. Typically, whenever the TP converts, the entire TIRA balance should be converted if it is small.

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