Failed backdoor roth contribution
Taxpayer was supposed to make a non-deductible deposit to TIRA, and then convert to Roth. Taxpayer has no other TIRA’s so no pro-data rules. INSTEAD, taxpayer accidentally made deposit directly to Roth, without going through the “back door” process. Client’s AGI prohibits Roth contributions and deductible TIRA contributions.
Is there a better way to fix this other than removing the contribution and earnings; paying income tax plus early withdrawal penalty on earnings; and then redoing the backdoor roth process properly?
Permalink Submitted by Alan - IRA critic on Tue, 2025-02-25 18:15
Yes, if for 2024 the Roth contribution can be recharacterized as a non deductible TIRA Contribution, then converted back to Roth. Taxes will only be due on the amount of gains generated on the contribution before converting. A 2024 non deductible contribution will have to be reported on a 2024 8606 form, and the 2024 return should include an explanatory statement regarding the Roth excess contribution, the recharacterization, and the amount transferred to the TIRA. This procedure is part of many back door Roth contributions.
The conversion will be reported on a 2025 8606, which also calculates the taxable portion of the conversion.
If client expects the same income situation in 2025, they could also make the 2025 ND contribution now and convert it as part of the same conversion of the recharacterized 2024 contribution.