3

In 2020, wife and I filed separately. She was unable to make an IRA contribution (a deductible one, at least) due to being highly-paid and covered by a retirement program at work, and I was unable, due to having no compensation income (retired).

However, we just filed an amended return, changing filing status to MFJ, for a variety of reasons. If we had done that originally, I would have been entitled to make a Roth contribution or a deductible TIRA contribution. But, obviously we are well past the usual deadline for making a 2020 IRA contribution.

Question: Can I retroactively make a 2020 IRA contribution ? Not TIRA, since it would affect the return we just filed (and we'd have to amend again). But, a Roth one ?

4

Nope.

If you had actually made the contribution timely (before April 15 May 17, then yes.

Otherwise, no, you can't make an IRA contrib late merely because you filed or amended late. That would just give people incentive to file late lol. (for which there is no consequence unless you owe tax).

The backdoor Roth

If you are keen on making Roth contributions, but are above the income limits, you need to know about the Backdoor Roth. This is a method, for people who do not have any traditional IRAs, to do a Roth and ignore the income limits altogether. Congressional and IRS documentation both admit this is valid technique. You'll see why when you hear the "gotcha".

A Backdoor Roth is where you do 3 things in rapid succession.

  • Make a Traditional IRA contribution. (say $5000.00).
  • Don't take the tax deduction for a trad IRA, making it a Non-Deductible IRA (NDIRA).
  • Convert the IRA to a Roth (best: promptly).

What's going on there? You contributed $5000 into an IRA. It grew to $5001.13 (from 3 days interest) and you converted it to Roth. Normally you would owe $5001.13 tax on the Roth conversion. However since you have $5000 of NDIRA you did pay taxes on, you don't need to pay taxes again on that. So you only pay tax on the $1.13.

That's pretty cool. It basically means there's no income limit to Roth contributions.

The gotcha

So what's the gotcha? The gotcha is Roth conversions must be apportioned among all your IRAs and NDIRA contributions. This means if you have existing traditional IRAs, this turns into a hellacious mess.

Let's suppose you made four prior IRA contributions of $5000 in past years, and they have appreciated to $45,000. And you add this $5000 NDIRA, and that's a total of $50,000 ($5000 of which is NDIRA contributions on which tax has already been paid). If you converted it all today, you'd need to pay taxes on $45,000 of it, that's easy and fair.

OK... but if you only convert part of it, then you must apportion that. So today, 10% of it is NDIRA that isn't taxed. If you convert $5000 to Roth, then 10% is not taxed, so $500 is not taxed and $4500 is taxed when you do the conversion.

And then the next time, you must remember that you already converted $500 of that $5000 NDIRA, so it's only $4500 of NDIRA. So your next conversion, say your total IRA value has appreciated to $60,000, so the NDIRA is 7.5% is your brain starting to hurt? My brain is starting to hurt.

Your tax professional can sort it out, but the upshot is having an existing traditional IRA takes all the fun out of the Roth backdoor.

My best recommendation is wait until a "gap year" until your income is low, and then convert the whole shebang to Roth, pay the taxes, and then you can use the Roth backdoor anytime you want.

I always get into fights about which is better, the mathematicians say it's a wash, and Trad is slightly better for taxes. That's true, but it assumes you are able to predict your lifespan and draw out the money evenly every year to the end. I find the opposite in the real world: end-life defies planning, and I've seen couples withdraw $250,000 in a single year for skilled nursing and memory care. This makes Traditionals very disadvantageous, and favors the Roth, where the tax was paid decades ago and there are no mandatory withdrawal schedules.

3
  • That's a great explanation of the backdoor Roth, thanks. But one still needs to have compensation income in order to make that NDIRA contribution, right ? In fact, 2021 will be the last year either of us has ANY compensation (I'm retired, wife retired early in the year) so I'll just do a 2021 Roth contribution. Dec 10 '21 at 5:23
  • Or maybe I'll do a TIRA contribution. I've previously rolled all my TIRA money to a TIAA "Bailey" account, which magically makes it state-tax free. But I have started a new small TIRA, which I'll use for QCDs. Thus my TIRA is the "moral equivalent" of a donor-advised fund (DAF), with the benefit that it effectively makes my DAF contribution deductible even though my deductions are well below the recently-increased standard deduction. Additionally, those contributions aren't irrevocable: in the unlikely event I really need that TIRA money for myself, I can use it just by paying tax on it. Dec 10 '21 at 5:28
  • 1
    Do note that buried deep in some versions of the Build Back Better plan, the ability to perform backdoor Roth conversions are being eliminated (almost all versions I've seen eliminate the 401k mega-backdoor Roth, several versions remove the backdoor Roth IRA as described here, some eliminate neither). When or if the legislation passes, a good deal of the above advice may need to be amended. If the above advice is something you want to consider, then keep an eye out for changes possibly made by Congress. And I would suggest if you are planning on doing this for 2021, get it done ASAP. Dec 10 '21 at 16:12
3

No, you cannot make a 2020 IRA contribution after May 17, 2021 (the deadline was postponed from April 15, 2021).

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.