Back Door Roth Contributions

[AnmarieA]

Hello all, I have a number of client's who did "back door" Roth contributions as their income was beyond the IRS threshold not allowing them to make such contributions in the prior year. Is 100% of this type of contribution "taxable" even though the taxpayer made the contribution with non-qualified money. I have read the fiduciary guidelines and I am still a bit confused on the taxability of this type of transaction. 

Can anyone give me some insight as how to determine how much if any of the back door Roth contribution is taxable. 

Thanks for your assistance. 

[sjrcpa]

a. The initial IRA contribution was a nondeductible IRA?

b. Work through the 8606 and read the instructions. It all depends on whether they had other IRA balances and other IRA basis.

[ptax255]

If no other traditional IRAs, including SEP, it should be tax-free.

[BobKamman]

But how many of these people don't already have a traditional IRA, or rollover IRA from a 401(k) or other retirement plan?  And why didn't they consider the tax implications before they did it?  Just another way to fool people into thinking a Roth saves taxes.  

[qbteachmt]

"Backdoor" relies on Basis. That means it's the same as Roth IRA money (no tax benefit for the contribution), but not put directly into a Roth IRA account. That means it is not deductible and it is tracked.

When you convert Basis to Roth, since it is already post-tax, there is no taxable event. However, the "backdoor" process only works when this is only Basis. Let's review:

They can't have any non-Basis funds in any Trad IRA, SEP IRA or SIMPLE IRA. These account types are aggregated for purposes of the conversion. If they have any pre-taxed, rollover or contribution or earnings, in any of these account types, their Backdoor is now a commingled conversion subject to pro-rata taxation.

And once there are commingled funds, every conversion is not only partially taxable and partially not, but the partially Not Taxable amount is tracked, as it will reduce Basis. Then, the next conversion needs to take this updated Basis figure into consideration.

[BobKamman]

@qbteachmt wrote, "And once there are commingled funds, every conversion is not only partially taxable and partially not, but the partially Not Taxable amount is tracked, as it will reduce Basis. Then, the next conversion needs to take this updated Basis figure into consideration."

Exactly!  And you get to charge them a higher fee for the rest of their lives, for completing and tracking the Form 8606.