Backdoor Roth IRA Conversion on prior years’ tIRA contributions?

Submitted by Joyce Liu on Sun, 2017-12-31 00:05

For 2016, I made a non-deductible contribution to my traditional IRA. I didn’t know about backdoor Roth conversions then. I expect for 2017, due to my income, I will again need to make my 2017 contribution to a non-deductible tIRA. I have no other contributions ever made in a tIRA. I would like to convert both my 2016 and 2017 tIRA contributions (which means my entire tIRA balance) via backdoor Roth. However, it’s already past the last trading day in 2017, so I expect this conversion can’t take place until the beginning of 2018. Is it too late to do the backdoor Roth conversion?

Is there a deadline for when I can perform a backdoor Roth conversion on a particular year’s tIRA contribution? I’ve searched exhaustively on the internet for a definitive answer, but there seems to be a lot of conflicting information out there. Some sites say that you have only until December 31 of the year for which the tIRA contribution was made, but other sites say that you can convert a tIRA contribution to a Roth IRA at any time in the future. For example, this site (https://www.whitecoatinvestor.com/late-contributions-to-the-backdoor-roth-ira/) says that you can do a backdoor conversion after the year is over and even shows how you would fill out your taxes for that scenario, and I’ve seen other sites that agree. But I’ve also seen other sites that say December 31 is the last day this conversion is possible, and when I called Betterment support, they told me the same and said it is too late to convert my tIRA contributions from 2016 to a Roth (and that it will be too late for my 2017 contribution as well) because it must be done in the same calendar year as the contribution’s tax year. So who’s correct?

Just to clarify, I am not concerned about which tax year the taxable portion (in my case, the gains/interest earned in my tIRA, since the principal was all non-deductible therefore non-taxable) of the tIRA will fall in when I do the conversion. I am fine with it being taxed in the 2018 tax year rather than the 2016 and 2017 tax years. I just want to know whether it is even possible to do a backdoor Roth conversion on my entire tIRA balance (which is solely funded by my 2016 and 2017 contributions plus the resulting gains/interest) in the calendar year 2018.

And if I can, I also want to confirm that doing this backdoor conversion will in no way affect how much I can contribute to my Roth IRA for 2018 (my 2018 MAGI will be low enough to qualify me for contributing the full $5500 to my Roth IRA for 2018). So if in 2018, I do a backdoor conversion on $11,000+ (contributions from 2016 + 2017 + gains/interest) in my tIRA, will this count towards my 2018 limit and therefore prevent me from contributing an additional $5500 to my Roth for 2018? The IRS instructions for form 8606 state that rollovers and Roth conversions don’t count towards the contribution limit, but I just want to be extra sure that’s the case (or whether I misinterpreted what they meant).



Submitted by Alan - IRA critic on Sun, 2017-12-31 01:16

  • A conversion is not linked to any particular year’s contribution, so it is never too late to convert. Whichever year you convert, Form 8606 will be completed to calculate the taxable portion of the conversion. In your case, you needed to report your 2016 non deductible contribution on a 2016 8606. You would also report your 2017 non deductible contribution on a 2017 8606 which would show your total IRA basis from non deductible contributions for both years. When you convert in 2018, you will be taxed on your 2018 8606 on which you will report the conversion. The taxable amount will be the amount by which your conversion exceeds your non deductible contribution total. 
  • The longer you wait to convert after making a contribution, the more likely there will be gains that will be taxable. Therefore, you should convert the TIRA balance next week unless you are going to make your 2017 contribution very soon. If you make it soon, you can combine into one conversion. For that matter, you have been making TIRA contributions at the end of the contribution window. If you had the money you could make both your 2017 and 2018 contributions at the same time next month, and would then have 3 years of ND contributions to convert at one time.
  • Now let’s say you cannot afford to make any new contributions until April. In that case, if you convert your current balance, make the 2017 contribution in April then convert that right away, the two conversions will simply be added up, will be reported to you on a single 1099R, and your current balance would not continue to generate earnings for another 3 months like it has for the last several months, earnings on which you will be taxed when you convert. In other words, the longer your contribution remains in the TIRA before you convert it, the more likely it will generate earnings on which you are taxed.
  • Conversions never count against your regular contributions limit. They are totally separate.
  • One thing you will want to avoid. Since your conversion(s) will be in 2018, be sure you do NOT roll over an old 401k into an IRA anytime in 2018 because that will cause your conversions to be mostly taxable because you must show the year end TIRA balance on line 6 of the conversion 8606. Therefore, you might have a mostly non taxable conversion done real soon, but if you rolled over a 401k even in December, 11 months after your conversion, it will make your conversion taxable. Further, the new tax law eliminates your option to recharacterize that conversion back to TIRA, so you would be stuck with that tax bill.

Submitted by Joyce Liu on Tue, 2018-01-02 18:11

Thanks, this is super helpful and completely answers my questions! And thanks for bringing up the last point (about rolling over 401ks anytime in 2018). It’s not something that would’ve occured to me, but it totally makes sense, and I’ll remember to avoid that.

Add new comment

Log in or register to post comments