Backdoor Conversion to Roth from Trad IRA — taxes need to paid from converted funds?

Submitted by Malcolm MacKenzie on Tue, 2023-08-15 23:33

Have established a Roth via a backdoor conversion from Trad IRA. There will be a substantial tax bill, due to the conversion. Do those taxes owed on the converted funds have to come from the converted funds? Or, can I just pay the taxes owed from other, non-IRA funds — and thus retain a larger balance of funds in the new Roth? Many thanks.



Submitted by Alan - IRA critic on Tue, 2023-08-15 23:38

It is preferable to pay the taxes from your other funds so that the full distribution from your TIRA goes into the Roth. However, back door Roth conversions are typically non taxable or have a small taxable amount, but if you have pre tax IRA balances in traditional, SEP, or SIMPLE IRA accounts your back door conversion will be mostly taxable. The taxable amount of the conversion is calculated on Form 8606.



Submitted by Malcolm MacKenzie on Tue, 2023-08-15 23:55

Many thanks.  Yes, I converted to Roth from a pre-tax IRA — and thus there will be high proportion of converted funds that I will pay taxes on.  So, the payment of the taxes on the converted funds in the Roth from my other funds (non-IRA) will not be viewed as a contribution by the IRS?



Submitted by Alan - IRA critic on Wed, 2023-08-16 00:14

  • Correct. Your tax payment does not constitute a contribution to an IRA. The only funds being contributed to your Roth IRA are coming from your traditional IRA.  Also, if you still have a large pre tax IRA balance, you could reduce the taxable portion of the conversion by rolling the remaining TIRA balance into your employer plan if you are still working and your plan would accept an IRA rollover. This must be done before the end of this year. It sounds like your prior non deductible TIRA Contributions are minor compared to the pre tax IRA balance. 


Submitted by Malcolm MacKenzie on Wed, 2023-08-16 03:37

Great.  Thanks very much.  Will look into that.



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