Backdoor Roth Conversion $12,000 MFJ

[JJKIMCPA925]

Hello,

I have a client, with MFJ filing status, who contributed $12,000 to a traditional IRA and then converted the entire amount to a Roth IRA (no other IRA/SEP/SIMPLE as of 12/31/21). The account statement and 1099-R show his name and SSN only, which suggests it is his own account. The entire $12,000 contributed is non-deductible as his household income exceeds the threshold (both spouses work W-2 jobs). He claims the $12,000 was for a 2 year period ($6,000 x 2), but I'm not sure what he means by that. In any case, when I enter this amount on the 1099-R input screen, the result is that $6,000 of the $12,000 is taxable income.

My question is: Are you able to contribute $12,000 (for a two year period) for a backdoor Roth? Assuming the answer is no, is he allowed to contribute $6,000 each for him and his wife into his one account? If so, is there a box I need to check to signal that so that there is no taxable amount? The only way I am able to bring the taxable amount to $0 on their return for this Roth conversion is by manually separating the $12,000 1099-R into two separate 1099-Rs for $6,000 (for each spouse). However, I don't think this is the correct way to report this so any help would be much appreciated!

Thank you,

[TaxGuyBill]

When exactly did he contribute?  When exactly was it converted?

If a person contributes between January 1st and April 15th, they can contribute to the prior year. 

For example, let's say March 2021 they decided to contribute $6000 for tax year 2020, and $6000 for tax year 2021.  That would be fine.  Well, except that the $6000 for tax year 2020 should be on the 2020 tax return.

[rbynaker]

Let me guess, there's a banker involved somewhere?

Like the one who told my 72-yo client that he should just convert his traditional IRA RMD into a Roth IRA.

[joshuabarksatlcs]

RE: Well, except that the $6000 for tax year 2020 should be on the 2020 tax return.

Just wanted to clarify as follows:

In @TaxGuyBill 's scenario, $6K should be reported as non-deductible IRA on the 2020 return and $6K on the 2021 return.  The basis upon conversion from the said contributions would be $12K on the 2021 return. 

If the $6K was NOT reported as non-deductible IRA on the 2020 return, some would suggest to amend it, but that would be a different consideration. 

In this scenario, the BEGINNING basis of the IRA for 2021 should include the $6K.  (Check if there had been other non-deductible IRA contributions made in prior years.)  Upon the conversion, the basis should be $12K.

[qbteachmt]

"which suggests it is his own account"

They are only and always Individual Owned. That's the point of Retirement accounts.

If he thought he was putting $6,000 x 2, you need to indicate this as there would be two different years for Form 5498. Get the 5498 to see what happened.

"Are you able to contribute $12,000 (for a two year period)"

As two separately labeled events. Right Now, you can fund your 2021, if you waited, and your 2022, for instance. But you Tag Them as such.

"for a backdoor Roth?"

"Backdoor" just means, Converted immediately to Roth, to avoid earnings that would be taxable, and the contributions were not deducted, so they are Basis, and conversion of Basis is not taxable.

"Assuming the answer is no, is he allowed to contribute $6,000 each for him and his wife into his one account?"

Nope. He puts her share into Her account.

"into two separate 1099-Rs for $6,000 (for each spouse)."

You didn't issue the 1099-R. You don't get to change reality.

There still is time to do a Corrective Distribution, and move her half to her account.

[JJKIMCPA925]

@qbteachmtThank you for your detailed/clear response!

I requested form 5498 from the client for both years, but wouldn't the 2021 5498 be unavailable until after the deadline for contributing (i.e 4/18/22)? As you pointed out, it does appear that the client made a $6,000 contribution for tax year 2021 and 2022. Assuming that is the case, how do I go about inputting correctly the basis correctly for the 1099-R so that he does not have taxable income?

As of now, I put $6,000 under "IRA basis for 2020 and earlier years" and $6,000 in the field "2021 nondeductible contribution (-1=none)"

This seems to flow through correctly, as there is no taxable amount for the Roth conversion.

Again, thanks in advance for your insight. Very much appreciated!

Thank you!

[qbteachmt]

"As of now, I put $6,000 under "IRA basis for 2020 and earlier years""

Put, where? A 2020 contribution is a 2020 event, even if made in 2021. It goes on the Tax Year 2020 paperwork. The Form 5498 for 2020 will show it is for 2020 and will show $6,000. If not, your taxpayer did it wrong.

"and $6,000 in the field "2021 nondeductible contribution (-1=none)""

You cannot work with 2021 until you address 2020. Let's go back to this part: "Are you able to contribute $12,000 (for a two year period) for a backdoor Roth?"

Let's lay out how it should be, and I will make assumptions based on what you told us. If they are wrong, this isn't your answer, then.

For tax year 2020, they do not qualify for Roth Contribution. And they determine 2021 will look about the same. Instead of putting $6k into Her IRA and $6k into His IRA, they determine he should put $6k into his for 2020 as nondeductible and another $6k right now, early in 2021, intended to be for 2021 also as nondeductible. Assuming there are no other IRA/SEP/SIMPLE before that money is contributed, then the $12k is basis (post-tax) and is immediately transferred or rolled to a Roth account, which means it also avoided Earnings (which would be pre-tax).

"Backdoor" simply means Conversion.

And the tax filing of 2020 is supposed to have the 2020 contribution on it. There is no Transfer/Rollover event in 2020 and no Conversion. The contribution is documented.

The Tax filing of 2020, then, establishes an account balance as of Dec 31, 2020 + the tax year contribution paid in before the tax form filing due date.

Now it is 2021:

The contribution Form 5498 for 2021 will show up later, that's true; you would have a proof of deposit, a statement, something to prove there is $6k in as 2021 ("Current Year").

There is a 2021 1099-R for the $12,000 Distribution that is the Transfer/Rollover of Basis to Roth. Because it is Basis and there are no earnings in the account, this is only basis, and that makes it tax free (already taxed, really). That was the full amount that went in, and came out. No withholding.

Having a Conversion of $12k isn't a problem. It's the amounts and timing and identification for what went into the IRA that needs to be addressed.

You need to amend 2020, it seems. This is assuming the amount(s) into the Trad IRA met the deadline(s), of course.