Whether on its own or in a backdoor Roth strategy, tracking, reporting, and using an IRA’s nondeductible basis wisely can be tricky.
While an excess or failed backdoor Roth can feel very stressful to solve, it is a normal and quick fix for your qualified financial custodian.
Here are three common Roth transactions and how they interact with MAGI for Roth IRA purposes.
Luckily for Roth lovers like us, you don’t have to choose between Roth conversions or Roth contributions.
Once you know how to file it, it is a simple and easy process.
If you have an accepting employer plan, you could consider rolling the pre-tax funds into your 401(k) this year while converting your nondeductible basis cleanly to a Roth IRA.
This person has an IRA balance, but is about to empty it with a reverse Rollover. So the question is one of timing: can they do the IRA Rollover before the nondeductible contribution so that their cream and coffee never mix?
If you inherit a traditional IRA from a person who had a basis in the IRA because of nondeductible contributions, that basis remains with the IRA assets as they come into your ownership.
Luckily for the charitably-inclined individuals with nondeductible balances, QCDs are excluded from your Form 8606 taxable and nontaxable calculations.
This person has no IRA balance, but is about to get one with an IRA Rollover. So the question is one of timing: can they do the IRA Rollover after the nondeductible contribution has already been converted so that their cream and coffee never mix?
Luckily for Roth lovers like us, you don’t have to choose between Roth conversions or Roth contributions.
Under the Tax Cuts and Jobs Act, you are still allowed to make nondeductible contributions and still allowed to convert IRA assets to Roth IRA.
Like how diner coffee gets more bitter as the waitress tops off your cup with more coffee from the pot, so too the growth on your nondeductible assets increases your tax owed by decreasing the percent post-tax assets in your cup.
Yikes! This is a costly mistake.
The backdoor Roth strategy involves contributing after-tax funds to a traditional IRA.
Even over the income threshold, you may still be able to add funds to your Roth IRA with what is called a backdoor Roth.
“Once you put cream in the coffee, all coffee removed from the cup is partly cream and partly coffee.”
How to report a backdoor Roth in Turbo Tax.