Non-Deductible IRA contribution then entire IRA conversion to ROTH
Hi-We have a client who has been making annual non-deductible IRA contributions into his IRA. He made his 2020 non-deductible contribution in Oct, then did an ENTIRE conversion of his IRA account to a ROTH on Nov. 9th. He assumed his last contribution would simply be converted along with the rest but as he’s doing his taxes the software is wanting him to recharacterize that contribution. Is there a reason for this?
Thanks!
Permalink Submitted by Alan - IRA critic on Mon, 2021-02-01 18:50
Strange suggestion. Apparently he has the earned income to support any type of IRA contribution, or the program would have flagged an excess contribution, not a recharacterization. SInce conversions cannot be recharacterized, the only option for recharacterization would be to change the contribution to a Roth contribution if his MAGI is low enough for a Roth contribution. Has client entered the conversion yet? Any chance client is describing a recharacterization with the removal of an excess contribution?
Permalink Submitted by David Mertz on Mon, 2021-02-01 19:09
Yes, that message from the tax software indicates that he has erroneously entered the Roth conversion as a Roth contribution. His annual contribution was a traditional IRA contribution, not a Roth IRA contribution. It’s a common error that people make because of the misnomer “backdoor Roth contribution.”