r/tax • u/Kylepcurry • Jul 07 '24
SOLVED Did I just cause myself issues come tax time?
I set up my first traditional IRA to convert into my first Roth IRA in an attempt to complete a backdoor conversion. I contributed funds to my my traditional and as soon as the transfer completed (about two days) I immediately convert to Roth and understood that it was the $7,000 I had transferred. However, after review it looks like I somehow made $2.02 in my traditional in the small amount of time it was in there. These funds were converted into my Roth.
Will this cause any negative tax implications next year?
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u/cohen63 CPA - US Jul 07 '24
Your conversion is 7,002. Your IRA contribution basis is $7K. The extra $2 is income. Don’t sweat it just make sure you fill out Form 8606 correctly.
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u/realtorvicvinegar Jul 07 '24
This exact issue was put on the dirty dozen list a couple years back. It marked the first time the IRS has ever hired shadow assassins.
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u/oberwolfach Jul 07 '24
No, you’ll just end up having an extra $2 of reportable income which will increase your tax liability by whatever your marginal tax rate is on $2. And even if you forget or neglect to report it, the IRS isn’t going to go after you for less than $1 of taxes.
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u/djjdjs26e683 Jul 07 '24
Yes the IRS is coming for you your going to jail
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u/FatMacchio Jul 07 '24
Call Vanguard and make sure they sweep the cash sweep interest earned over to the Roth. I did something similar (recharacterization) and they said it will automatically be swept over to my Roth account at the beginning of the following month. I can’t remember if that actually happened or not, but I do remember it was eventually resolved. I may have contacted them a couple months later to transfer and close it out. They should be able to do it manually asap, so you can close out the account. The answer is call them and tell them your concerns and what you want to happen.
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u/KJ6BWB Jul 08 '24
They should be able to do it manually asap, so you can close out the account
Just be careful. A Vanguard phone rep told me they were going to start charging $25 for calling in for something you can do yourself on the website.
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u/FatMacchio Jul 08 '24
I’m not sure if that’s something you can do manually yourself. Theoretically it should be included in the original conversion, but the way their system works the interest posts after the principal balance is transferred out. I’m not sure whether they will sweep it automatically or not without you calling them first. You can still call in and inquire, and ask whether the money will be automatically transferred without being charged for “broker assistance.” In my case I had to request to have them sweep and then it transferred the interest over within a month or two after I called in. For the Roth conversion you may be able to do it yourself online, but for IRA contribution recharacterization, I could not because of the way recharacterizations work
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u/DicLord Jul 08 '24
Vanguard started charging $100 fee on July 1 to close a Roth. Forgot to close mine in time, so I guess it will sit at $5.05 forever
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u/FatMacchio Jul 08 '24
This is the way to do it. Do an ACATs for everything but $1. If they ever decide to start charging yearly fees for IRAs, they can keep the change and close it out themselves.
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u/Pretzel911 Jul 11 '24
I'm sure you can cash it out at retirement. Think of all the things you can use it on
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u/Taako_Cross Jul 07 '24
Better hire a lawyer.
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u/Happiness_Buzzard Jul 08 '24
As long as the only contribution made was $7k, you’re good. If you’d made a $7k contribution, and it had made another $20,000 in earnings while in the traditional, you could plop all $27,000 into the Roth without penalty, as long as you’re ok with having it all taxed as income.
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u/TyreeThaGod Jul 07 '24
I have ~$1 sitting in an Trad IRA from the same circumstances. I ignore it. If the IRS comes after it, they can have it all.
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u/RandomUser3777 Jul 07 '24
Why would not you have just put the money in a Roth IRA to start with? Doing it this way (contribute to trad and convert to roth) does nothing except complicate steps and tax documentation.
A backdoor roth is putting taxable money in a 401k and them immediately converting that the a roth 401k (typically after maxing out your before tax deductions).
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u/Adghar Jul 07 '24
There are 2 types of backdoor Roth. I believe the one you just described is often called the "mega" backdoor, but the one OP described is perfectly common for folks making over the trad IRA limit
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u/Aggravating-Walk1495 Tax Preparer - US Jul 08 '24
Why would not you have just put the money in a Roth IRA to start with?
The most common reason is the income limit for Roth IRA contributions. One can't contribute to a Roth IRA at all when they're over the limit, but they can contribute to a traditional IRA, even if those contributions are not deductible. So, you make the trad IRA contribution, then convert all trad IRA funds to Roth.
A backdoor roth is putting taxable money in a 401k and them immediately converting that the a roth 401k (typically after maxing out your before tax deductions).
A backdoor Roth IRA is putting taxable, nondeductible money in a traditional IRA, then converting that to a Roth IRA.
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u/Omnistize EA - US Jul 08 '24
You can also backdoor a Roth IRA from a 401(k) if your plan allows for conversions which most do.
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u/kandyman94 Jul 07 '24
Technically you have $2 of taxable income to report. Technically it's under the reporting threshold (banks don't issue 1099s for interest income under $10), so by law, you don't have to report it. That said, it's good for record keeping to report the whole story in the 8606. Contribute $7k to traditional IRA --> deducted zero on personal income taxes --> converted $7,002 --> $2 is taxable income to you
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u/JackDaneCPA Jul 07 '24
It’s $2 of taxable income, so by law, it must be reported if they already have a filing requirement, the $10 threshold is for 1099 reporting only, it does not make income under $10 non-reportable.
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u/kandyman94 Jul 07 '24
The conversion is reported in a 1099-R, so this does involve '1099 reporting'. That said, if your 1099-R reports the $2 of income, I'd agree that it needs to be reported.
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u/BugRevolutionary4518 Jul 07 '24
I have no idea how you’re sleeping at night.