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I recently opened a new traditional IRA account and deposited the maximum contribution for last year (2022 - 6k). Since my 2022 MAGI was low enough (<144k as single), I then amended my already submitted tax return to include the amount as deduction and the return was accepted (still waiting on the refund).

I now have a job offer that will push my MAGI for this year above the deductible range thus making the tIRA no longer appealing in the future and I'm looking into the option to convert it to a backdoor Roth IRA but that's complicated since I already deducted my contribution.

What would be my best option? I'm thinking to ask my IRA broker to do the conversion now and file another amended tax return to reflect the situation (i.e. give back the deducted money to the IRS and notify them of the non-deductible conversion). Would this make the most sense?

Thanks

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    144k is the MAGI limit to contribute to Roth. The MAGI limit to deduct trad is lower, but only applies if you were covered by an employer plan. If you used software and entered your W-2 correctly it should have handled this; if not, did you read the instructions correctly and follow them? (If you are married and you weren't covered but your spouse was, there is a higher limit.) Even if you now can't make deductible contributions you can still hold the trad; you can have both trad and Roth, and using one custodian for both can be simpler. Mar 10 at 4:56
  • You are correct, I was able to get the full deduction because my current workplace doesn't provide 401k. The new one will and my income will be above threshold so I'll no longer be able to get any deduction in the future. My understanding from online research is that since I can't get the tax preferential treatment of tIRA, a Roth would make more sense since any earning will be tax-free.
    – Michele
    Mar 10 at 14:40
  • @Michele: "since I can't get the tax preferential treatment of tIRA, a Roth would make more sense since any earning will be tax-free." Well, you already got the preferential treatment for the Traditional IRA contributions you have already made, and you can leave it there and let it grow. Your making Roth IRA contributions in future years does not affect that. Do you mean that you will need to make backdoor Roth IRA contributions in the future, and thus pre-tax amounts in Traditional IRA will be a problem?
    – user102008
    Mar 11 at 8:18
  • @user102008: Correct, I'll be making backdoor Roth in the future (due to having a 401k) so having a mix of pre and post-tax money in the account makes me feel less comfortable when filing taxes. I could potentially leave this year contribution in the tIRA as-is and only convert the future yearly contribution to Roth (e.g. 6.5k 2023 IRA -> 6.5k 2023 Roth converted -> 0 tax) but that would leave the 2022 contribution "stuck" in the IRA. This is perfectly legal, just don't see the value. I'll probably end up doing the re-characterization described by dave_thompson_085 and re-amend my return.
    – Michele
    Mar 11 at 16:07
  • @Michele: You can't just convert the future post-tax contribution because the pro-rata rule forces you to convert both pre-tax and post-tax amounts pro-rata (and the pre-tax part will be taxed on conversion). However, since you will have a 401k, you can see if you can rollover the pre-tax amounts in the Traditional IRA into the 401k. (The IRS allows it, but not all 401k plans allow it, so you need to check with the 401k.) If you can, you would be able to do the backdoor Roth IRA contributions with no complications.
    – user102008
    Mar 11 at 16:25

2 Answers 2

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In focussing on the question as asked, I forgot to offer an alternative you may prefer.

But first, to be clear, the Roth limit is not a cutoff at 144k, it is phased in from 129k to 144k (for 2022; anyone finding this in a future year must use different numbers).

If your MAGI (for 2022) was under 129k, you could recharacterize your trad contribution as Roth. This can in general be done by moving the contribution plus allocable earnings to a different (Roth) account, but in your case since this account contains only contributions for one year you can recharacterize the whole account if the custodian supports that. Recharacterization is treated as if you originally made the contribution to Roth, and includes the earnings, unlike conversion (including backdoor) which treats them separately.

This would mean you can't take a deduction for 2022, so (just like the backdoor method) you need to amend again to remove it and pay back the refund you got for the deduction. You are supposed to complete a recharacterization by the filing date including any extension, and you didn't get an extension so that's April 18, but there is a procedure where you can do it up to the date to which you could have extended (Oct. 16), see pub 590A.

If you are between 129k and 144k, technically you could recharacterize as Roth the part that fits under the limit, and leave the rest in trad for tax year 2022, either converting it in 2023 or later, or simply keeping the trad (as I noted in my comment). But this would be more complicated even than making it nondeductible trad and converting it with reporting of the earnings, so I don't think it's a solution here.

Note the custodian(s) needs to handle a recharacterization specially in order to report it correctly and not put you at audit risk. Don't try to just move the money yourself; contact them or look on their website for specific instructions (perhaps a different form) to use for this case. (In contrast the custodian does not need to be informed about whether you treat a trad IRA contribution as deductible or not, although you need to report it on form 8606.)

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  • This is a great idea, I found the process explained here and it seems like the best solution. I'll ask Fidelity to handle the recharacterization so everything is above board and re-amend my return to give back my deduction.
    – Michele
    Mar 10 at 22:37
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It’s actually not complicated at all! In fact, this isn’t a back door Roth, which is when somebody over the Roth limit makes nondeductible tIRA contributions and then rolls them into a Roth. It’s an ordinary traditional to Roth conversion and they’re simple and common. If you make the conversion this year without revising your 2022 return, your IRA broker will send you appropriate tax forms recording the distribution and you’ll pay this year’s tax rate on that amount.

That said, you might save some money by revising your return anyway since your 2022 marginal rate was presumably lower than your 2023 rate will be.

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    Thanks! I will have to go the backdoor Roth route in the future ( MAGI above threshold and 401k to get tIRA deductions). I'll re-amend my return since that'll save me future taxes due to higher marginal rate. Considering I also want to fully contribute for this year (2023 - 6.5k$), should I do that before or after the conversion? If my return is amended and the whole balance (6k$+6.5k$) is non-deductible, I should just be able to do a conversion now and just start doing backdoor Roth in the future.
    – Michele
    Mar 10 at 15:21
  • @Michele The timing of the conversion versus contribution won’t affect anything that I can think of. Mar 10 at 16:14

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