Backdoor Roth Conversion Question

Submitted by Adam Hoffman on Thu, 2022-10-06 14:22

I think I may have made a mistake by recently rolling over an old 401k rollover (~$60k) that I have in my current 401k plan into a traditional IRA with M1 Finance to get lower fee, more investment options & auto rebalancing than in my current 401k. I have a question about Backdoor Roth Conversions and how this may or may not affect me. Earlier this year (May 2022) I made a $6,000 contribution to a different IRA at another broker (TD Ameritrade) and then converted that to a Roth in an IRA Roth account at TD. Now, I have $0 in that IRA and the $6,000 in the Roth account. However, since now I have $60k in another IRA at M1 Finance, am I now going to run into the ‘Pro-rata aggregation rule’ with that backdoor conversion because I just moved a rollover (Sept 2022) into M1 (and out of the 401k)? If that is the case, would I owe additional income tax on the $6,000 conversion and/or the balance ($60k) that I rolled over into M1? Lastly, if I have done this incorrectly, what are my options to avoid/fix this issue? Is my only hope to roll this back into the 401k before December 31st? I have checked and my plan would allow this to be rolled back in. Note- my wife and I are above the income limits for IRA’s and Roth’s.

This probably wasn’t worth the hassle and I didn’t catch the pro-rata rule until it was too late but fortunately before the years end. I guess I was trying to have to best of both worlds by doing the Roth conversion to build up my Roth account and have more control over that old roll over.

Can anyone advise how the IRS is going to handle this. I’m hoping I’m safe b/c I didn’t have any other IRA’s out there when I did the conversion back in May and if I get rid of the other IRA back into the 401k before December 31st I’m hoping this will all have been a ‘mute’ point and all that it will cost me is the 100 bucks in transfer fees out of M1.

Thanks for any help you can provide-

Adam



Submitted by David Mertz on Thu, 2022-10-06 15:21

  • It doesn’t matter that the Roth conversion was done from a different IRA.  The amount in the rollover IRA at year end must be included on line 6 of Form 8606 in determining the taxable amount of the Roth conversion.  If you roll the entire rollover IRA back to the 401(k) before the end of the year, you’ll have the necessary zero balance in traditional IRAs at year end to be able to apply all of your basis in nondeductible traditional IRA contributions to the Roth conversion and not have to carry any of that basis forward to apply to future traditional IRA distributions.
  • Another alternative would be to just convert the rollover IRA to Roth, leaving a zero year-end balance in traditional IRA.  Of course that would be taxable, but subsequent growth would be tax-free instead of tax-deferred as long as the gains remain in the account until your Roth IRAs are qualified.
  • The rollovers from and to the 401(k) will be reportable on your tax return but will be nontaxable.  Each rollover will be reported on a separate Form 1099-R.  The Roth conversion is also reportable.  Your tax return will require completion of Form 8606 Parts I and II.


Submitted by Adam Hoffman on Fri, 2022-10-07 19:49

Thank you so much for the detailed reply and explanation.  I was under that impression but its always nice to hear a 2nd opinion.  I will be rolling the IRA back into the 401k to avoid any tax issues this year.  



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