Backdoor IRA mistake

Submitted by Robert Witt on Tue, 2023-04-04 16:11

My client contributed $7k for 2022 and $7,500 for 2023 into a non-deductible IRA and converted the funds in January 2023 (i.e Backdoor conversion). It was determined this client does not qualify for an IRA contribution (no earned income, only deferred compensation). The problem is that you can not undo a conversion so how do you go about withdrawing the IRA contributions?



Submitted by Alan - IRA critic on Tue, 2023-04-04 16:23

What is the current balance in the TIRA account he converted from, and what is the balance in any other TIRAs he owns?

Submitted by Jerry A Feathers on Wed, 2023-04-05 21:45

If a sole prop. starts a SEP  for tax year 22 and already taking rmds is the first rmd on the sep required in 2023 since there was no balance at end of 22?

Submitted by Robert Witt on Wed, 2023-04-05 21:53

This client does have a 401(k) with substantial value and is retired (client is 60). There is no onther balance in any traditional IRA’s. That is my problem – don;t have any monies to move out given the Roth IRA conversion can’t be recharacterized. If possible, I was thinking she could roll over $14,500 from her 401(k) if they let her and then have that amount removed from the IRA. In this case, she is ultimately taxed on the IRA conversion and we still get the money out of the IRA (via the rollover). I know it’s 2 sperate transactions, but that is the only plausible way I see forward?

Submitted by Alan - IRA critic on Wed, 2023-04-05 23:42

  • Your solution should work if providing the IRA custodian will correctly process a corrective distribution for both contributions. Of course, the 401k plan must allow partial contributions or a full IRA rollover will be required. This would allow the conversion to stand.
  • While there is no specific IRS guidance, the client might be able to convince the Roth custodian that conversion of clearly excess contributions is a failed conversion. As such, the conversion would be treated as an excess regular Roth contribution and corrected as such followed by 1099R forms for each year’s excess Roth contributions. This method also presents reporting issues, because the conversion 1099R could not be reported as a conversion on Form 8606. It would be a (non) taxable distribution from the TIRA and a regular Roth contribution.

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