Did I screw up my Backdoor Roth and what should I do?

#1

Hi PFC community,

In 2020, my wife and I surpassed the allowable income that says you can contribute to your Roth IRAs as we file our taxes jointly. I hate that we can do separate taxes and each file as single and then qualify for Roths but that’s more of a hassle. The income limit for filing jointly should be double that of single but I’ll get off my soapbox now ($140k single/$208k joint).

So in 2021, I figured we would do backdoor Roth conversions to add more into our Roths and get the non-taxable income later in retirement and I’m fine with paying the little extra in taxes if need be. I deposited $6k into both of our traditional IRAs and then transferred the same $6k over to our Roths, all via Fidelity. I found out later that you are not allowed to do Backdoor Roth conversions if you have traditional IRA balances, which we both do as they are old 401ks rolled over. It’s technically allowed but comes with some very tricky tax implications.

Has this happened to anyone and how do I handle the taxes this year on it as I’m sure I’ll get a tax document stating I deposited $6k and then probably withdrew $6k (for both of us)? If I pay way too much in taxes and it’s a huge red flag to the IRS then I’ll just put our yearly contributions into our traditional IRAs going forward.

Hopefully, vivitron sees this one as I saw she mentioned the pro-rata rule in another posting.

Thanks,
Ian

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#2

Definitely consult a tax professional, but I THINK you can withdraw the contributions from the Roth and recharacterize them as a traditional IRA but still pay taxes/lose the deduction for the recharacterization.

Again I am not a tax professional and being lower income I’m not very familiar with the backdoor Roth at all. I do believe you can still contribute to traditional without the deduction if you’re over the limit.

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#3

I do agree that I might just contribute to the traditional IRA yearly going forward and not mess with the backdoor. I did find an article last night actually that says I’ll need to calculate how much of IRA was pre-tax and how much was post-tax and use that pre-tax percentage as the amount of the $6k I will owe taxes on that I sent to the Roth. Which everything in my IRA was pre-tax except the $6k deposit so it’ll be a very high percentage, unfortunately.

Article for anyone interested:

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