I've got my FA working on this, but I thought I'd come here for some extra info.

I closed out my 403b account last year and turned it over to my Financial Advisor. They opened a new account for me, and it's an IRA.

Previous to this, I did not have an "active" IRA. I do have a Roth, and in the past few years, I had been contributing to it via the backdoor method. So, I have an IRA account, but there is nothing in it because its just a pass-through to get money in the Roth.

I didn't make the connection re my new account last year, and like an idiot, I contributed to my Roth like I always do.

I did not make any contributions to the new IRA, other than to roll over the funds from the 403b.

But, it's my understanding that the IRS treats all these IRAs as one account, and I made a mistake by contributing to my Roth.

I usually do my own taxes using TurboTax, but I'm thinking I might turn this over to a CPA this year because I want to make sure it gets done correctly.

What are my options for correcting it? My Roth should be down compared to when I put the money in last year (I did lump sum), so I doubt there are any gains.

If I understand the situation correctly this doesn't sound like an over contribution. It just sounds like your Roth conversion is a taxable event.

In previous years of doing your backdoor Roth you likely had $0 on line 6 of your form 8606. If you now have a traditional IRA with funds in it still you will put the balance of that account as of 12/31/22 on that line and finish the worksheet to see how much tax you owe for the conversation.

The 403b rollover to an IRA is not considered a contribution. In the above I am assuming last year you contributed to the "pass through IRA" and then Roth converted it. If you contributed directly to the Roth because your income was low enough to do that this year then that contributed wouldn't be taxable. If you contributed directly to the Roth and your income was too high, that would be an over contribution, but the 403b rollover wouldn't have any impact on that.

Yeah, over contribution probably wasn't the best term to use, but I didn't really know how else to describe it.

And yes, I did the "pass-through" and converted it to a Roth. It's my understanding that I can't do this anymore because of the new IRA that was opened with the 403b money. I'm not making any contributions to that account.

I usually account for the backdoor using TurboTax, but it's always a little confusing. And I end up having to Google it every year, because my first attempt is always wrong.

The $6k contribution was done with money that I've already paid taxes on. When I don't do the Backdoor conversion in TurboTax correctly, it wants to tax that as income. Is that's what's going to happen in this case? Because, if it is, ugh.

How much tax you owe depends on how much money is in your other IRA.

If the end of year balance on your IRA was $54000 and you made a $6000 rollover from the other account it would be 6000/60000 = 10% is tax free and you owe tax on 90% of the conversation.

It might seem like double taxation, but in the above example the IRS would now consider the rollover IRA to have $5400 worth of after tax money in it and down the road when you start drawing money from that IRA you won't have to pay tax on $5400 of the distributions.

Ok, so the $6k is sitting in my original Roth IRA. None of that $6k went into the IRA that was created from the 403b. The 403b that is now the new IRA is worth about 3x the Roth where the $6k was invested.

Does that affect the taxable basis? Or do I strictly use the amount that's in the new IRA?

The balance of your Roth isnt relevant.

Take a look at last year's tax return (assuming you backdoored last year). Your form 8606 for 2022 will now have you fill out the value of the rollover IRA on line 6 instead of $0. Once you work through the formula you will have a number less than $6000 on line 13 and a number greater than $0 on line 14. You will want to keep this information so you know what amount of money is after tax in your traditional IRA now (the value on line 14)

I understand you didn't make any direct contributions to the rollover IRA, but the IRS doesn't see it that way. From their point of view both your passthrough IRA and rollover IRA were the same account. So even though all 6000 came from one the place you put the after tax money, from there point of view only a proportion of the rollover was post tax and thus now you have post tax money in your traditional IRA as well.

TurboTax should be able to do this correctly, but it may be a tad bit tricky on answering their questions correctly so that it can calculate it.

hypeiv's example would work with your situation.

6k roth - tax free
+
18k (3xRoth) - taxable
=
24k

18/24 = 75% will be taxable. You converted 6k, so $4500 will be taxable at your bracket (should be at least 1k tax hit).

I am not sure you want to do this, but you could roll your IRA to your new company plan. You then could start doing backdoor Roths. Usually, you can't rollover and convert tax free in the same year (like what happened to you in 2022). I am not sure what the rule is for a reverse rollover. At the worst, you have to wait until 2024 to start converting at no tax if you rollover in 2023.

That's effectively what my FA told me…that the two IRA accounts are viewed as one by the IRS. I didn't think the amount in the Roth mattered, but I just wanted to clarify that I don't have to sum the two accounts.

I'm still a little bit confused, though. The new IRA has pre-tax money in it…I'll owe taxes on that when I finally start drawing from it.

The $6k that went into the Roth is after tax money. Based on the way the IRS views my accounts, I put after tax money in an account with a bunch of pre-tax money, and then rolled over an equivalent amount to the Roth.

Maybe I'm being dense here, but I'm not clear as to why doing anything with after-tax money would trigger a taxable event. That's kind of why I called it an over contribution in the first place - because I mistakenly funneled after tax money through a pre-tax account (at least the way the IRS views it).

I totally get why it would cause problems if I took money that had been sitting in the 403b all this time and tried to roll it to a Roth. I would owe taxes on that.

Is it just that the IRS assumes that any money that goes into a traditional IRA is pre-tax? Unless it's the very special "backdoor Roth conversion".

I guess that's where my idea of a correction came from. I can prove that the $6k contribution that went into the Roth was after tax money. I'm actually not even eligible to contribute to a pre-tax IRA every year and claim the deduction.

So, I actually just called today and initiated the mega backdoor Roth option on my 401k. That's where my $6500 Roth contribution for 2023 is going, since I can't do the backdoor option anymore.

There is $84k in the Roth and about $250k in the new IRA (that was the 403b). So, if the basis for the taxable amount is $6k/$250k, then I pretty much owe taxes on the whole amount.

I see what you're saying about how I did a rollover and a conversion in the same year, and you're not supposed to do that. But, like I said, I can prove the conversion was done with after tax money. There was no co-mingling of pre-tax and after-tax funds in any one account.

To make this sting even worse, the Roth is actually worth slightly less today than when I put the $6k in last year. So, I'll be paying taxes on $6k that I don't even have (at least not at the moment).

This all results from the dumb backdoor Roth loophole. I swear, it's the stupidest tax law on the books and needs to be eliminated. Just let whoever wants to contribute to a Roth contribute and remove the income limits that aren't really limits.

From the IRS point of view you basically put the $6000 in the same account as the rollover. They don't see them as separate despite the fact the funds are held in two different bank accounts.

So you had 250k in one account and 6k in another. Your after tax basis is 6k and you did a 6k Roth conversion. Using pro-rata your tax free portion of this conversation is:

6000 * (6000/(250000 + 6000)) = ~$141

You will owe tax on the other $5859 but that amount will also be the basis for your remaining IRA.

In the future if you take distributions from that IRA you will report the basis $5859 and get a tiny tax break from that distribution.

Got it. That lines up with the convo I had with my FA, but it makes more sense now.

Even though that $6k isn't actually in the tax-deferred IRA, I can still take that as a "tax break" when I finally start collecting from that IRA.

So stupid because the money was never even co-mingled, which is probably why I'm having such a hard time wrapping my head around this. It's all sorted out in my head, but the IRS doesn't see it that way.

I don't know if the institution will track that basis for you so you need to keep a note about for when you start taking IRA distributions.

The number will carried forward and widdle down until the entire account is liquidated. If your IRA outlives you, who ever inherits the account can pick up that number and continue to carry it forward untill they exhaust the account.

I'll keep track out of principle, but good grief, that's a lot of bean counting for taxes on $6000!!!

As a side note, would the rollover of the 403b to the IRA have generated any tax documentation?

I'm going to check my account, but I know I don't have any paperwork for the Roth, before I started doing the backdoor conversion. It was sort of the honor system. I've only ever done one other rollover and it was 401k to 401k.

I believe the 403b to IRA rollover should generate a 1099R. It will show the amount rolled over but should state that none of the distribution was taxable.

As far as previous documents for the Roth, you should have 1099Rs from the pass through IRA showing those distributions as well as record of form 8606 from the tax years you made them as proof. If you don't pull any money from the Roth until after 59.5, you would only need those to prove the money has been in the account longer than 5 years. I would say it's extremely unlikely you would ever need anything on the Roth side for proof.

Edit: if you made direct Roth contributions before doing back door you should have 5498s from those years plus documents on your tax returns from those years showing the contributions

Just found the 1099R.

I know I have statements for the Roth from the years I did the backdoor. I don't have anything for the years when I contributed directly, though.

I originally opened the Roth with a different company, and I remember asking my accountant about this back then. The answer was along the lines of, you've already paid taxes on the money, so there is no need to report.

The company sent me year-end statements, but never any tax documents. I've actually lost track of how much I put in before transferring it to Fidelity. I think I have the paperwork…somewhere.

TXTransplant said:

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Just found the 1099R.

I know I have statements for the Roth from the years I did the backdoor. I don't have anything for the years when I contributed directly, though.

I originally opened the Roth with a different company, and I remember asking my accountant about this back then. The answer was along the lines of, you've already paid taxes on the money, so there is no need to report.

The company sent me year-end statements, but never any tax documents. I've actually lost track of how much I put in before transferring it to Fidelity. I think I have the paperwork…somewhere.

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Your CPA is correct. You do not need documentation for the Roths.

You and the IRS received form 5498 each year around mid May from your financial institution.. Most people don't know what to do with that form because it is after tax filing deadline, so no telling what you did with it.

There are minor reasons to need documentation for a Roth, but I doubt any of those will pertain to you. Even in the 5 yr rule, you just tell the IRS you owned it for more than 5 yrs. You don't have to prove it with paper. Also, they get the 5498s all those years, so they could see if you did or not.

Form 8606 can keep track of all these things, but it is only as good as you and your CPA completing the form each year. You can add several years at once.

The yr end statements from the previous firm will likely show you the contributions so you can get them on the 8606.

Thanks to both of you for talking me through this. I went into TurboTax and entered my two 1099-R forms, and it's all starting to make sense.

Before I entered the 1099-R forms, I had a refund of about $1400. When I do the $6k backdoor Roth that doesn't change. When I put in the 1099-R for the old 403b rollover, that refund doesn't change. When I put in the form 5498 for the Roth and its associated pass through IRA, that refund doesn't change.

Prob is, I don't have a 5498 for the new IRA that was created from the old 403b. When I put in what I know the value was on Dec 31 (from my last account statement), my refund drops to something like $70. That seems like a lot considering the tax bracket I'm usually in.

So, I'm going to wait and see if I get a 5498 for that account. Notes on my account indicated they are behind and I could get something later this month.

Thanks again!

Sounds about right to me. The conversation is going to be at your marginal tax rate not your effective tax rate..

1330/.24=5540 which is about what I would expect the taxable portion of your rollover to be.

I'm guessing your bracket is pretty high since you need to do a backdoor Roth instead of a direct so this doesn't surprise me.

Edit: sorry, I read your post 3 times and see you mentioned how your refund dropped. Still, hopefully the following still explains why that is correct. And see next post for explanation on 5498.

$18,000 pretax 403b rollover + $6000 after tax IRA contribution

75% of IRA is now pre tax, 25% is after tax

Convert $6000 (I.E. backdoor) you owe taxes on 75% ($4500) while 25% is tax free ($1500). If you entered conversion and your refund didn't change, then you didn't tell it you had a pre tax balance.

Moving forward, TurboTax will carry forward your basis, ask you each year for the new balance, and tax pro rata accordingly.

Also, you should not be entering the 5498 (or at least it is irrelevant). Form 5498 is mailed in May to reference any prior year contributions to IRAs. So, the 5498 you currently have was sent to you May 2022, detailing 2021 contributions.

That form is nothing more than a check and balance system to confirm you actually made any contributions you claimed, up to and including tax filing deadline. Without it, someone could claim and deduct an IRA contribution, but then there would never be anything to tax on distribution of they didn't actual find the retirement account. It's sent in May because they have to wait until tax deadline to capture all contributions.

I have two 5498 forms in my Fidelity account. One is for the traditional IRA (my backdoor pass through) and the other is for the Roth. Both are for 2022 contributions.

The traditional has a fair market value of $1.33 as of Dec 31, 2022 (my $6k pass throughs have earned a tiny amount of interest over the years) and the Roth has a fair market value of about $78k.

When I put in the info for the $6k contribution and conversion, it went to another screen that specifically asked me for the number on the 5498 that corresponds to the traditional IRA, so I put in $1.33. My $1400 refund didn't change when I did that.

But that screen also says the number should be the total of ALL accounts. I don't have a 5498 for the IRA that accepted the 403b funds, but I put in the balance from my last statement just to see what would happen. And that's when my refund went away. I changed the value back to $1.33 and went on my way.

I'm in TurboTax now, and I can't get that same screen to pop back up. I'll see if I can get to it and post exactly what it says here.

As of right now, TurboTax is keeping the two transactions separate and seems to understand what I'm doing. Since I have two separate 1099Rs, it asks me if I rolled the $6k over to a Roth (yes) when I input that 1099R, and then it asks me if I moved the $264k from my 403b to a Roth (no) when I input that 1099R. But I've worked in TurboTax long enough to know that it will let me do things that aren't necessarily correct when it comes to IRS rules.

Ok, found the screen. It says the following:

Enter the total value of all your traditional IRA, SEP, and SIMPLE IRA accounts on Dec 31, 2022. This information is sent by mail on Form 5498. Do not include ROTH IRAs.

Then there is a box to enter the amount.

There are two other boxes to enter any outstanding rollovers or recharacterizations, but that doesn't apply.

Since I only have the one 5498, I only entered the value from that form ($1.33).

I told myself I'm going to give it to the end of the month to see if I get a 5498 for the other account that has the 403b money.

I seem to recall my FA saying something about I can pay the taxes now or maybe kick the can down the road and pay them later, when I start taking distributions. Now I'm thinking, if the 5498 isn't reported in time for me to put it on my tax return this year, it will just change my taxes down the road when I finally do start taking distributions. I'd actually prefer to do that.

Here is the thing I'm kind of hung up on: I'm not even eligible to make a deductible contribution to a traditional IRA. Haven't been in many years, and I've always had an employee-sponsored retirement account. So, had I put the money in the IRA and just left it there (not converted it to a Roth), I wouldn't be eligible for a deduction. And no one is reporting that contribution as a pre-tax contribution (ie, my employer didn't take it out of my paycheck pre-tax). What would happen if I'd just left the money in the traditional IRA?

I'll be honest.. I'm lost on the fact your already have gotten 5498 for 2022.

I have no idea what your FA means when they say you can defer the taxes to later.

Bottom line, you can still do the backdoor Roth. But once you established a pre tax Roth, any conversion you do for the year will be pro rata pre tax/post tax relative to the year end balance (gross of any amount you withdrew or converted).

I think counting on the 5498 for your info may lead to an incorrect return for you to amend later. I'd advise you stop thinking of that form (I won't see any of mine until mid-May).

Take your year end IRA statement, and add in the dollar amount you converted earlier in the year. Tell turbo tax the breakdown of that total amount relative to pre and post tax. Once you then enter the conversion, it will adjust your basis and hold that for you.

You also keep referencing the valor of the Roth. Forget that, it is completely irrelevant.

Lastly, you might want to consider reversing all of this (look at recharacterization and removal of excess contributions). You confused things for me when you said the value of the ira was 3x the Roth. That is so irrelevant that I read that initially as the IRA was 3x the Roth conversion amount (which would be relevant). Once clarified that there is $250k in the IRA, the $6000 new after tax contribution isn't only 2.3% of that account.. so you will pay tax on 97.7% of whatever amount you convert.. which can be any or all of your entire IRA balance.

Lastly.. you need to find out why your FA can't clearly and promptly explain and advise you in this matter... This should be basic knowledge for an advisor and there should not have been anything for him to be working on.

You will be taxed on the majority of the rollover so that will pretty much wipe your refund out.

I think your FA was trying to explain that it isn't double taxation because you will eventually get it all back as you withdraw from the regular IRA.

I don't think recharacterization is an option. This was a Roth conversion not a direct contribution

Pretty sure you can. Recharacterize takes it back too IRA, then you remove excess contribution to get it out of the IRA. Assuming this is still accurate (it's from 2017) https://turbotax.intuit.com/tax-tips/investments-and-taxes/reversing-a-roth-ira-conversion/L0yVOfwyZ

FA is an FA, nor a CPA. He's got an inquiry out to a CPA, but I haven't heard back yet. I've been doing my own taxes for at least 13 years, so I don't have one I can ask. This is all on me. My FA advised me last year to do the mega backdoor Roth, but I procrastinated and screwed it up.

Quote:

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Take your year end IRA statement, and add in the dollar amount you converted earlier in the year. Tell turbo tax the breakdown of that total amount relative to pre and post tax. Once you then enter the conversion, it will adjust your basis and hold that for you.

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I get what you're saying to do here, but I'm limited in what I can do in TurboTax because it's treating my two 1099Rs as two totally separate transactions. The best I can do is go back and add the Dec 31 "fair market value" balance from the rollover IRA to the $1.33 balance from the pass through on the screen that references form 5498. I've already given TurboTax the amount that was rolled over and the additional $6k contribution, and the software isn't combining the amounts.

If I do that, it's going to eat up almost all of my $1400 refund. I get that I screwed up, but this seems like a really harsh penalty for what was an honest mistake.

I remember seeing something about recharacterization when I put in the backdoor Roth. I'll go back and look at those screens and see if I can correct this there.

Since I don't have a 5498 for the rollover account, I was wondering if I could ignore that for now. I'm assuming at some point one will be sent to the IRS. Those forms are used to determine taxable income when you finally take distributions. I thought maybe the discrepancy would come to light at some point in the future when I start taking money out and could be corrected at that time.

I think either that year or 2018 was the last year you could do it.

Also there isn't an over contribution since it was made to a traditional IRA.

Technically it wasn't an over-contribution, but it was a contribution that I wasn't eligible to make - at least not while also claiming a deduction/deferring taxes. That's why I asked what would happen if I had made the $6k contribution and not converted it to a Roth. How would you fix that?

You need to forget about the 5498. You are way over complicating this. It's not a penalty.

If you had made the contribution and didn't Roth convert it, it would grow tax free and when you withdrew the money from your IRA you would get a small discount on your taxes as you withdrew it.

So if you made a $6000 post tax contribution to an IRA and let it grow to $24k and withdrew all of it in the same year whole retired you would have only paid tax on the $18k growth.

In a normal year when you had no other iras, your IRA cost basis equalled the roll over so you owed no taxes. This year the cost basis was only ~2.2% of your existing IRAs so you owe tax on the other 97.8% since the IRS considers this a rollover of pre tax money.

That last ~$5870 or so of after tax money is still considered to be in your traditional IRA so you will eventually get it out without paying taxes.

Remember that money is fungible so which accounts the pre and post tax money flowed through is irrelevant.

Edit: also you were eligible to make the post tax contribution as long as you had at least $6000 in earned income last year. Lots of people do that and pay taxes on Roth conversions of they think they will be in higher tax brackets on retirement. So you didn't do anything wrong that needs to be corrected.

Ok. That makes sense. I was thinking you couldn't make after tax contributions to a traditional IRA because that's what the Roth is for. I thought this because when I don't do the Roth conversion correctly in TurboTax, I get an error saying I'm not eligible to contribute to the traditional IRA because I make too much money and have 401k contributions.

When I thought again about the contribution basis being reduced when I finally take distributions, it kind of made sense. Except there's a chance I'll be in a lower bracket by then. So this is being taxed now at probably my highest rate. I doubt it will end up being a wash.

I'm still going to wait a little longer and see if I get the 5498. I'm pretty sure it has to be filed, it's just a matter of when.

cjsag94 said:

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You need to forget about the 5498. You are way over complicating this. It's not a penalty.

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I'm not overcomplicating this. TurboTax is literally asking for the number that's on the 5498 form, and the only value I have to put there is $1.33 (at least until I get the other 5498).

If I ignore that form and leave that blank in TurboTax, it shows me as getting a $1400 refund.

There is no way in TurboTax for me to do this (which is what you suggested): Take your year end IRA statement, and add in the dollar amount you converted earlier in the year. Tell turbo tax the breakdown of that total amount relative to pre and post tax. Once you then enter the conversion, it will adjust your basis and hold that for you.

I'm pretty sure the input TurboTax is asking me for is trying to mimic the form 8606. It's just going about it in a different way. The form isn't exactly replicated in the software.

hypeiv said:

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You will be taxed on the majority of the rollover so that will pretty much wipe your refund out.

I think your FA was trying to explain that it isn't double taxation because you will eventually get it all back as you withdraw from the regular IRA.

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I didn't see this post earlier. And I think this is what he was probably trying to tell me, too. But he was clumsy about it, and I didn't have any context in which to process it.

And I know I'm not being directly penalized, but it feels like this is a penalty for what was a mistake. I'm having to pay $1400 in taxes now that I don't owe to not have to pay taxes on that equivalent amount in 15-20 years. If that $6k contribution wasn't taxed, this would all come out in the wash when I retire. When you look at the actual documentation for the accounts, it's easy to see I never rolled over any pre-tax contributions. But I understand that's not how the IRS views these accounts.

Again, I appreciate your patience. I follow TurboTax to the letter, so if I'm missing any documentation, my instinct would be to wait until I get it to file. I think if I were doing this with paper forms (or maybe even different software), it would be more clear/obvious what info goes on form 8606. It's also pretty clear I screwed up, so withholding a number from TurboTax just because I don't have one specific form isn't going to all of a sudden make the problem go away. TurboTax will let you make mistakes, and I want to avoid that.

I empathize with you and agree when you consider your tax bracket now, future inflation and the time value of money this likely wasn't the most ideal move. The good thing is you have now shifted to mega backdoor Roth through your 401k so you won't have to worry about going forward.

I have been on a crusade over the years on this forum cautioning people about the nuances of the backdoor Roth because many people over simplify it. For people who meet all the right conditions, it is indeed trivial, but its not difficult or uncommon to trip up with it.