Roth IRA Backdoor Questions

[Coopman14]

Hi there,

I contributed to my Roth IRA last year without knowing exactly what my AGI would be. As it turned out, my income surpassed the allowable threshold to contribute to a Roth. I understand that I will need to recharacterize this contribution into a Traditional IRA to avoid a 6% penalty. Once in the Traditional IRA, I would ideally convert this back into my Roth. What is the process for completing these steps? What does my timeline need to be for reacharacterizing, paying taxes, April 15th (and any other pertinent dates), and transferring back into my Roth?

On a related note, I have the same question for a normal backdoor process into a Roth. When do I need to contribute to my Traditional IRA, pay my taxes, and recharacterize to my Roth IRA? Is there a specific amount of time that the contribution needs to stay in the Traditional IRA before converting to the Roth, and do either of these contributions need to happen before or after a certain date?

Thanks for your help!

Cooper

[Lou S.]

I think IRS Publication 590 will answer all of your questions. http://www.irs.gov/publications/p590/

As to the conversion it depends on if you have other existing IRA accounts or not as to the tax treatment of conversion and what portion is considered conversion of basis and what portion is considered conversion of income.

[Coopman14]

Hi there,

I was able to recharacterize into my Traditional, but now I have a couple questions regarding the conversion back into my Roth. I wasn't able to find answers in the Publication above.

Am I able to convert directly back into my Roth, or would this fall into the "Reconversion Restriction", meaning I would have to wait until next year to convert? I am having trouble understanding if this restriction would apply to me or if this only applies to converting from a Traditional to a Roth back to a Traditional.

I would prefer to pay taxes on the conversion to my Roth when I file my taxes, instead of paying at the point of conversion. If I select the option "Effective [blank], I elect not to have Federal income taxes withheld.", what do I put in the [blank]? Do I enter the date that I am filling out the form? I'm not sure what else would seem appropriate within that statement.

Thanks for your help!

Best,

Cooper

[John G]

If I understand your problem correctly...

Your recharacterizing a Roth to an IRA had to do with eligibility. Essentially, you never had a Roth after this is done.

To convert to a Roth this year, you need to meet the current year eligibility requirements.

You never want to pay the cost of conversion out of your IRA. If you must do this, then perhaps you should not be making the conversion. Instead, pay the conversion taxes out of your taxable bank or brokerage account. You don't have to play the taxes at the time of conversion, but you may need to make estimated tax payments to cover the annual federal tax bill (and state income tax bill if any).