Author Topic: I messed up my backdoor Roth contribution, can I fix it?  (Read 1998 times)

TXScout2

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I messed up my backdoor Roth contribution, can I fix it?
« on: February 19, 2016, 10:29:39 AM »
Here's what I did:  I had about $3000 in an IRA, which has been there for a couple years.  I wanted to do a backdoor Roth contribution.  So I put another $5500 into the IRA, and then recharacterized it into a Roth.

Then I realized that I'll have to pay taxes on some of that because of the $3000 that had been sitting in the IRA. What I should have done was rolled over the $3000 in the IRA into my 401k, and THEN done the $5500 contribution and recharacterization.

Is there a way to undo the transactions, and re-do them so as to avoid paying taxes on it?  I know I can unrecharacterize the Roth contribution.  But can I then pull the $5500 back out of the IRA and then roll over what was already there to the 401k?  Or since I already added the money to the IRA is it  too late now?

Thanks for any advice.

Ursus Major

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Re: I messed up my backdoor Roth contribution, can I fix it?
« Reply #1 on: February 20, 2016, 11:56:52 AM »
I'm not sure that the sequence of actions is important. Can't you still roll the $3000 into a 401k? For allocation of the"cost basis" what matters is the combined balance in your IRAs at the end of the year.

Alternatively you could also convert the $3000 into the Roth, take the one time tax hit on the $3k and then enjoy tax-free growth of that money as well. That would be my personal preference, but you might come to a different conclusion.

signhere

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Re: I messed up my backdoor Roth contribution, can I fix it?
« Reply #2 on: February 22, 2016, 02:01:57 PM »
I'm not sure that the sequence of actions is important. Can't you still roll the $3000 into a 401k? For allocation of the"cost basis" what matters is the combined balance in your IRAs at the end of the year.

Alternatively you could also convert the $3000 into the Roth, take the one time tax hit on the $3k and then enjoy tax-free growth of that money as well. That would be my personal preference, but you might come to a different conclusion.

I might be wrong, but I believe he's not on the hook for $3000 (total balance in the account); he's only on the hook for the income on the investment. At least that was my understanding when I backdoor converted my tIRA funds into a Roth, though all of my tIRA contributions were non-deductible.

TXScout2

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Re: I messed up my backdoor Roth contribution, can I fix it?
« Reply #3 on: February 23, 2016, 09:32:05 AM »
I think it works like this:

I had $3000 in the IRA, I added $5500 more.   So I divide the new contribution ($5500) by the total amount in the IRA ($8500) to get the percentage that I can convert tax free, which is 65%.  65% of the $5500 is $3575, which means the remainder ($1925) will be counted as taxable income, taxed at the highest marginal rate.   If I moved all $8500 into the Roth I would be adding $3000 to my taxable income.  I'm not sure why I'd want to do that, since I will be taxed less in retirement than I am now, but maybe I'm missing something?

I would be on the hook for the whole $3000 because I've never paid taxes on it (they were deductible contributions).

If I'm able to just move the $3000 into my 401k without any more steps that would be pretty easy.  What you said makes sense, if the cost basis is determined by the combined balance of my IRAs at the end of the year, then converting to 401k now should work.   I guess I was sort of worried about what they would count as the end of the year.