Backdoor Roth Conversions

Submitted by Eddie Holland on Tue, 2020-03-03 19:56

For many years, taxpayer has made nondeductible contributions into an IRA and subsequently converted the balance of this small IRA into a Roth IRA each year. Taxpayer had a separate rollover IRA funded from a 401(k) rollover but was not aware of the “cream in the coffee” rule.

So, even though taxpayer had two IRAs (one being used for a Backdoor Roth contribution and the other from a 401(k) plan), taxpayer never calculated the pro-rata tax on the Roth IRA conversion. In other words, taxpayer assumed no tax liability on each backdoor Roth contribution.

How should taxpayer handle these previous year backdoor Roth contributions? Is there a statute of limitations on these Roth conversions? In other words, is taxpayer responsible for paying tax on the previous backdoor Roth contributions if they occurred many years ago?



Submitted by Alan - IRA critic on Tue, 2020-03-03 22:55

The IRS can only go back to 2016, and after 4/15 can only go back to 2017 to bill back taxes unless the understated income is more than 25% of the income on the return. However, the more recent returns could be subject to various penalties if the IRS notices the error.

Submitted by John Britton on Wed, 2020-03-04 18:41

In January, 2019 I converted $140,000 from a traditional IRA to a Roth IRA. I just completed the first draft of my tax return and owe $22,000. I have the funds to pay the bill on time. Will I be hit with a penalty for not filing estimated quarterly taxes?  If I convert a similar amount into Roth this year, will I need to send in the expected taxes quarterly?

Submitted by Alan - IRA critic on Wed, 2020-03-04 19:35

  • To avoid underpayment penalties, you must meet one of the safe harbors. Those are either paying in 110% of your 2018 tax liability (assumes you are higher income, otherwise 100% of 2018) or 90% of your 2019 tax liability. Guessing that you would not use the latter due to the large conversion in 2019, but you might be able to use it for 2020. As to HOW you pay these amounts, that can either be withholding done anytime in the year or if you pay estimates, then 25% for each quarterly payment. Finally, if you pay quarterly estimates and your income including the conversion was incurred late in the year, you can pay as you go but will have to file the detailed Form 2210 AI to break down your income and deductions by quarter. But that will not work for 2019 since you converted in January. You can also mix quarterly estimates with withholding if you wish, but it is simpler to do one or the other. You might be stuck with an underpayment penalty for 2019 because it is too late to pay any more in, but you can still control how you want to pay in for 2020 once you determine how much you are going to convert. 
  • Taking a larger TIRA distribution for withholding is not recommended since that either shrinks your conversion or drives your taxes even higher by taking a larger distribution. You may have no choice but to commence quarterly estimates starting next month for 2020.

Add new comment

Log in or register to post comments