Non Ded IRA and ROTH Conversion (Backdoor ROTH)

Submitted by David Berdow on Mon, 2015-04-06 13:30

A new client has been making non-ded IRA contributions and converting them to a ROTH IRA for last year and this year. She has other IRA’s and a qualified retirement plan at work, however her husband does not have IRA’s but has a qualified plan at work.

Their income is in excess of the amount which they can normally make ROTH contributions. That is why they were doing the “backdoor ROTH IRA”. However were not paying any additional tax for the conversion keeping in mind the other IRA’s.

My questions and asking for clarification:

1. I believe they can re-characterize back to the Non-Deductable IRA (Correct for 2014 and 2015)by October 2015 / October 2016.

2. Can they both continue to contribute to non-deductable IRA’s moving forward regardless of income and other employer related retirement plans.

3. If they do nto re-characterize back to the Non-Ded IRA then she will pay tax on a calculation based upon her other IRA account values (all pre-tax contributions), however the husband is okay because he does not have any IRA’s aside from the non-deductible one and a 401k at work.

Thank you



Submitted by Alan - IRA critic on Mon, 2015-04-06 16:00

  1. 1 is correct.
  2. Yes, all they need is earned income.
  3. Yes, correct. No need for him to recharacterize his conversion. She may want to consider any earnings on her conversion before recharacterizing, and/or whether she is able to roll the pre tax TIRA balance into her workplace plan to enable these conversions to be tax free in the future.

Submitted by David Berdow on Mon, 2015-04-06 17:29

How are the earnings treated if she does the recharitarization?

Submitted by Alan - IRA critic on Mon, 2015-04-06 17:39

Any earnings on the Roth contribution must be transferred to the TIRA as part of the recharacterization. This is not a taxable event, but if the TIRA is later converted to a Roth IRA, the earnings will be taxable as part of the pro rate calculations done on Form 8606. Rolling the pre tax balance to an employer plan will eliminate these taxes, because all that will be left in the TIRA to convert will be the basis from non deductible contributions.

Submitted by David Berdow on Tue, 2015-04-07 17:07

If someone has some earnings in the roth IRA and no employer provided retirement plan and does the re-characterization back to a non-deductable IRA how are those gains treated.

Submitted by Alan - IRA critic on Tue, 2015-04-07 17:40

  • As above. The gains are transferred to the TIRA and are not taxed until they come out of the TIRA as a distribution. This is the case whether the TIRA contribution can be deducted or not. Put another way, if a contribution is recharacterized it is treated as if it was made to the second IRA all along. That means the gains are also treated as having been earned in the second IRA.
  • Participating in a retirement plan often results in no deduction for a TIRA contribution. But even if the client does not participate in a plan at work, her husband does and that also can result in loss of a deduction for her TIRA contribution. But the income limit is much higher before the deduction is eliminated if the spouse participates but the taxpayer does not.

Submitted by David Berdow on Tue, 2015-04-07 17:45

Thank you

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