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Best Timing for Traditional to Roth IRA conversion

Hello,

I have Traditional IRA account that I opened in the end of 2023. I contributed into it during 2023 and 2024. A part of 2024 contributions were for 2023 (to meet the max).

Recently, I filed my 2023 taxes and figured out that I cannot claim tax deductions for my Traditional IRA contributions due to high income.

I want to convert my Traditional IRA to Roth IRA, but want to understand when is the best time to do that (to comply with pro rata rule). All my contributions came from after-tax money but I already have some gains on my Traditional IRA account.

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Accepted answers

RyanZ

On your 2023 tax return a form 8606 should have been generated to report the Nondeductible Traditional IRA contribution(s) in addition to a form 5329 that calculates an additional tax on the excess contributions to the traditional IRA account.

If you have NOT already submitted your 2023 income tax return to the IRS, you can indicate that you will withdraw the excess contributions before the due date of the tax return (April 15, 2024) so that the Additional Tax isn't calculated. If you have submitted your return to the IRS for 2023 AND form 8606 was NOT included, you will need to amend the return so that the form 8606 will be generated, which will be important for when you file your 2024 tax return.

The optimal time to convert the Traditional IRA to a ROTH IRA is in the same year that the contributions were designated for. As an example, to make the conversion for tax year 2023, during 2023. That doesn't usually happen, so since you will make the conversion during 2024, you will receive in 2025 a form 1099-R for the 2024 distribution from the Traditional IRA account, which will probably have a distribution code 2. This will be reported on the 2024 tax return along with the basis from the 2023 tax return, so the conversion of the nondeductible contribution won't be included in taxable income. Earnings (gains) on the account prior to conversion, however, will be included in taxable income.

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RyanZ

Thank you for the answer! I did my 2023 taxes with FreeTaxUSA and I do have form 8606 included :)

That doesn't usually happen, so since you will make the conversion during 2024,
you will receive in 2025 a form 1099-R for the 2024 distribution from the Traditional IRA account,
which will probably have a distribution code 2. 
  
This will be reported on the 2024 tax return along with the basis from the 2023 tax return,
so the conversion of the nondeductible contribution won't be included in taxable income. 
Earnings (gains) on the account prior to conversion, however, will be included in taxable income.

Does FreeTaxUSA support 1099-R forms? In other words, will I be able to file my taxes with FreeTaxUSA after Trad→Roth conversion for not-same year?

TaxMorgan

Yes, we support 1099-R forms in our software. You will be able to continue to file with us next year if you make the Roth conversion. If you have specific questions as you are preparing your returns you can contact support from your account for help in your specific situation.