Backdoor IRA across years

[KJM14]

I was trying to piece together previous replies on this topic, but wanted to check on this scenario

I have a customer who contributed $6K to an IRA in 2022 and did a backdoor Roth IRA in 2023.  They also did another IRA contribution in 2023 for $6.5K and another backdoor Roth IRA conversion.  So she got a 1099-R for $12.5K.

I  am looking for advice on how to report this given the contribution/conversion process for the 2022 amount spans into 2023 and is reported in 2023.

thanks

[Just-Lisa-Now-]

were these IRA contributions non-deductible? if so they should have landed on the 8606 so when the 1099R for the conversion was received, it would be reduced by the non-deductible IRA basis on the 8606.

[qbteachmt]

"spans into 2023 and is reported in 2023"

The tax year of the contributions isn't important.

"I have a customer who contributed $6K to an IRA in 2022 and did a backdoor Roth IRA in 2023."

By definition, then, that is not Back Door.

A "Backdoor" is just a conversion. What makes it "backdoor" is that the contributions are supposed to have been post-tax, so that makes them basis (and nondeductible) and the conversion is nearly simultaneous to that contribution date, so that it avoids any gain (which is untaxed income). And the other trick is that this person is supposed to have no other Trad IRA, SIMPLE IRA or SEP-IRA pre-taxed or "never taxed" funds, because these get aggregated into applying Basis to a conversion to determine if there is pro rata taxable conversion.

In other words:

Everything goes in as basis and is immediately converted, and is the only amount that existed in this type of account. That's the magic of "back door" because it is how a person not eligible for Roth, still manages to end up with funds in Roth without triggering a taxable conversion event. Ta Da!

So, set aside "backdoor" and simply determine if all of this (all in one tax year) conversion is a taxable event, a pro rata taxable event, or a nontaxable event.

[KJM14]

these would be non deductible (after tax) IRA contributions.  she has no IRA basis as of now

[qbteachmt]

"these would be non deductible (after tax) IRA contributions."

Okay. But you also stated the contribution made in 2022 wasn't converted until 2023. You did not state the contribution was made in 2023 for tax year 2022. So, either there is gain, loss, or neither. The market has gone crazy, and with any delay, that makes it more likely your taxpayer has gain. This is not Basis. This is taxable income, upon conversion.

"she has no IRA basis as of now"

A Full conversion is going to be pro rata. A Partial conversion is going to be pro rata.

The word "backdoor" is used to describe an immediate and instantaneous conversion of only basis with no other funds not being converted at that same event. And it's not just "IRA" but aggregated as Trad, SEP and SIMPLE IRA accounts.

Otherwise, all you have is a regular conversion.

[KJM14]

Sorry, I am not explaining things very well.  There were two contributions.  One in 2022 for 2022 ($6000) and one in 2023 for 2023($6500). She said both were converted as backdoor IRAs.  The one in 2023 is no problem contribution and conversion in 2023 .  The question was for the 2022 contribution that was converted in 2023. The 1099R showed $12,500 but I didn't think it would be a taxable 'event'

[qbteachmt]

You are explaining it fine, but the terminology is being used incorrectly, and that will always be confusing. We're just reviewing that the situation really qualifies as it is being described.

"There were two contributions.  One in 2022 for 2022 ($6000)"

Then, by the explanation given, there was a delay in the Conversion. That means gain or loss is taken into consideration. That delay puts "backdoor" no longer in play. Now it is just conversion with Basis.

"and one in 2023 for 2023($6500)."

Again, the issue is how quickly was that converted.

"She said both were converted as backdoor IRAs."

She doesn't understand how to state it. Backdoor = immediately. The goal for "Backdoor" is, "I don't qualify for Roth directly, but I have put in nondeductible Traditional IRA funds and then, when they are converted to Roth, this is already post-tax money."

But it has to be an immediate conversion, to avoid the risk of gain or earnings.

"The one in 2023 is no problem contribution and conversion in 2023 ."

You don't know that unless you examine the carryover of the 2022 funds for Total. The separate years of contribution do not stand alone for purposes of the conversion; you might be thinking of how Roth conversions work. That delay, in a typical scenario, results in a Total Gross that is higher than Total Contributions. The difference is the taxable income. That means the total conversion is taxable pro rata.

"The question was for the 2022 contribution that was converted in 2023."

If I understood this correctly, there is one conversion that moved all funds. There is no separation of years, as I explained. Conversion amount compared to Account(s) Totals. Not by year.

"The 1099R showed $12,500 but I didn't think it would be a taxable 'event' "

Yes, this is the exact amount that was contributed. So, was there no gain or loss in that account? Did that leave any funds in that Trad IRA (or SEP or SIMPLE IRA) account? Was the money never invested, then? Having no change in value over time is really odd.

[KJM14]

I truly appreciate the additional information and insight. I will go back to the client and get more information regarding the timing of things, and any gains that might have been realized. Thank you very much.

[qbteachmt]

No problem. It's the "across years" that really has no applicability here.

[KJM14]

I think there was confusion. When I went back to recheck, she stated that: "In Jan 2023, I made a 6k contribution/conversion for tax year 2022 and Dec 2023 I also made a 6.5k contribution/conversion for tax year 2023, which is why the [2023] 1099-R form shows 12.5k." So it turns out there was no delay after all!!

[qbteachmt · Accepted solution]

"she stated that: "In Jan 2023, I made a 6k contribution/conversion for tax year 2022 and Dec 2023 I also made a 6.5k contribution/conversion for tax year 2023, which is why the [2023] 1099-R form shows 12.5k." So it turns out there was no delay after all!!"

So, is there where we are:

She had no Trad IRA, SIMPLE IRA or SEP IRA. She made a nondeductible contribution into a new Trad IRA account in Jan 2023 for tax year 2022 and immediately converted all of it to Roth.

And later that year:

She had no Trad IRA, SIMPLE IRA or SEP IRA. She made a nondeductible contribution into a new Trad IRA account in Dec 2023 for tax year 2023 and immediately converted all of it to Roth.

Yes, then each transaction is a Backdoor Conversion. Again, "across years" is meaningless and inapplicable to anything we've covered. There are Roth considerations where that applies. Not getting into the Roth, but afterwards.

[KJM14]

thank you again.  While, it ended up being simpler than previously explained, I did learn a lot from your explanations.  Appreciate it.