backdoor ROTH gone awry!

Submitted by Dana Evans on Tue, 2023-04-04 18:43

Client attempted to make a backdoor ROTH contribution in 2022. Instead, the client contributed $6000 directly into the ROTH, which they are not allowed to do (income too high). By the time the mistake was discovered, the investment lost value and Vanguard recharacterized only $5845 to TIRA. Client let it sit for a while and it lost value again to $5331, then completed a backdoor ROTH conversion.
I have reported the $6000 ROTH contribution, the subsequent recharacterization and ROTH conversion.

Issue #1: I have $155 showing on the Retirement Worksheet as a direct ROTH contribution, which of course is not allowed and not intended…only shows because of the decline in value. Is this an issue and if so, how can I correct? Should we call Vanguard and ask them to take another $155 out of the account before April 18, 2023? Would that even help?
Note: I have attached a statement to Form 1040 explaining the sequence of events and decline in value.

Issue #2: Form 8606 is showing basis of $514 ($5845 – $5331) on Line 14 to carry forward. Is this correct treatment? Any suggestions on how to make lemonade out of the lemons?
Thank you in advance!!!!!



Submitted by Alan - IRA critic on Tue, 2023-04-04 19:38

  • Form 8606 should be filed for 2022 showing a $6000 non deductible TIRA contribution per the recharacterization, as well as the conversion. The worksheet you are looking at should not show any Roth contribution, but since it does it appears that it picked up a 5845 recharacterization instead of 6000, so the amount recharacterized was evidently not entered as 6000. 6000 was recharacterized despite the amount actually transferred to the TIRA being less. Try to get the worksheet corrected so it will not carry a non existent Roth contribution forward. Your attached statement should give advance notice to the IRS for transactions that will not be reported on a 1099R until next January. Definitely do not involve VG further.
  • Line 14 of the 8606 should be $669 (basis of 6000 less conversion of 5331). Correction of the recharacterization should correct the 8606. Of course, this assume client has no other TIRA accounts or balances and the only distribution was this conversion.

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