Post-contribution excess, removal, and backdoor re-contribution
Hello, I’m in a somewhat complicated situation with my contribution this year and would appreciate any advice on the situation. At the start of the year I contributed $6000 to my Roth IRA and then later in the year I had some unplanned capital gains that will probably put me over the income limit for a Roth IRA. After asking my IRA provider what to do I submitted a removal of excess form with them for the $6000. The amount I got back was about $5700, as between the time I made the contribution and the time I did the removal of excess, the value of my account had gone down a bit. When I asked them about what to do, I also learned about the backdoor Roth process, which I would be interested in doing in order to get the money back into the Roth account without the income limit. I created a new non-Roth IRA account but I’m not sure how much I can contribute to it and then convert. $6000 because that’s the excess I asked for back? $5700 because that’s the amount I actually got back? Are there any other issues that would prevent me from doing the backdoor Roth conversion? Thanks in advance for any input.
Permalink Submitted by Alan - IRA critic on Tue, 2021-10-05 15:39
You had your full Roth contribution returned to you net of loss. Therefore, you still have a limit of 6000 to contribute to a TIRA. For the back door conversion to be tax free, you cannot have a pre tax IRA balance in any owned TIRA, SEP, or SIMPLE IRA account. Your TIRA contribution should not be deducted even if you can deduct it. This will make your conversion non taxable and also allow you to avoid a 10% penalty if you happen to need to withdraw this conversion from your Roth IRA in the next 5 years. You will report the non deductible contribution on Form 8606, and also your conversion on the same form.
With respect to your 300 loss on the prior contribution, since there are no gains, you will not be taxed on the return of contribution, but you still need to report it on Form 1040, and include an explanatory statement that you made a Roth contribution of 6000 and had it returned net of loss.
Permalink Submitted by Aaron P on Tue, 2021-10-05 16:04
When you say that I cannot have a pre-tax IRA balance, is that only for the account types you listed (TIRA, SEP, SIMPLE IRA)? I have a 403b with some pre-tax money and employer match contribution. The only IRA account I had previously was the Roth, and now I have a new Traditional IRA that I just made for this process but haven’t contributed any money too yet.
Permalink Submitted by Aaron P on Tue, 2021-10-05 16:02
Accidental duplicate reply
Permalink Submitted by Alan - IRA critic on Tue, 2021-10-05 17:16
You are fine to proceed. The pre tax amounts that would cause your conversion to be mostly taxable only apply to IRA balances, not to qualified plan balances. Therefore, your 403b balance has no effect on your back door Roth conversion process.