Backdoor Roth IRA Conversion Issue

Submitted by Successful-Sample-11 t3_11em1py in personalfinance

I just got married in late 2022, and my husband and my combined income does not allow us to contribute to Roth IRA or receive tax deduction for traditional IRA contribution for 2023. Without thinking much, I contributed $6500 to traditional IRA account with Vanguard as I did for the last few years and was hoping to make backdoor roth IRA conversion. I contacted Vanguard and was told that I have to convert the entirety of what is in the account (I received tax deduction for traditional IRA contributions until 2021) as the funds cannot be separated. For 2022 contribution, I paid tax on it. Please help me understand the situation and advise if there is any way we can receive tax deduction now or in retirement. Thank you.

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DeluxeXL t1_jaesk0l wrote

Do you have a 401k? Ask them if you can roll over traditional IRA to your 401k. If the answer is yes, roll over only the pretax balance (anything but the $6500 you just contributed (2023) and the $6000 (2022) you didn't deduct) to the 401k, and convert all remaining balance (i.e. the $12500 you leave behind) to Roth IRA.

To make sure the account value doesn't change while you're doing the rollover, liquidate everything in the account first.

If you have more than one non-Roth IRA, they are considered one big account for this purpose.

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Successful-Sample-11 OP t1_jaetau4 wrote

Unfortunately I only have a SIMPLE IRA account starting this year.

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DeluxeXL t1_jaetuaq wrote

>Unfortunately I only have a SIMPLE IRA account starting this year.

You cannot do a clean backdoor Roth for the forseeable future.

If you can get MAGI low enough by increasing workplace contributions (your SIMPLE IRA + spouse's workplace account), contribute directly to Roth IRA (recharacterize the two traditional IRA contributions you already made).

If you cannot get MAGI low enough, reverse your 2022 and 2023 IRA contributions. The procedure is called "removal of excess contribution"

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BouncyEgg t1_jaesgr3 wrote

Your issue is referred to as "Pro Rata Taxation."

Pay attention particularly to Screwup #5 in the Second Link.

Read this for everything you need to know about Backdoor Roth and Form 8606:

Read this list of common screwups and solutions with respect to backdoor Roth. Beware of Screwup #5.

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