Question About Backdoor Roth IRA Tax Consequences
I have a question regarding the backdoor Roth IRA process (contribute max out $7500). If there’s some interest generated in the IRA account and it doesn’t zero out the account, what are the tax consequences?
Thank you for your assistance!
Answers
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Hello,
So if this is all non-deductible traditional IRA contributions and you gain a bit of interest before converting the amount to a Roth IRA, then you will be taxed on that bit of interest. Usually, it is not very much if you contributed to a traditional and convert it over to a Roth IRA right away.
If the value of your IRA was to decrease instead, then you would be left with a little bit of basis for your traditional IRA. This would roll over from year to year until you use it up by converting more Traditional IRA funds to a Roth IRA account.
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yes, if I convert funds from a traditional IRA(non deductible) to a Roth IRA and there’s a tiny amount of interest generated—less than $1—resulting in the account not being zeroed out. What steps I need to take or what forms to report this?
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The software will calculate it for you. Generally, the number should be rounded. So if it is under $.50, it will round down to 0 and if it is $.51 it will round up to $1. The software will take your information and fill out Form 8606, where it will figure out the amount of taxable amount of your conversion. If you have some taxable interest, it will be taxed accordingly and then converted with the rest of your contributions.
We have some great articles here on how to report your backdoor Roth on our software: https://community.freetaxusa.com/kb/articles/60-how-do-i-report-a-backdoor-roth?utm_source=community-search&utm_medium=organic-search&utm_term=backdoor+roth
And if you are still unsure everything have been taken care off, please feel free to contact customer support.
