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During last year (2022), I wanted to do a typical backdoor Roth IRA. I made a full $6,000 post-tax contribution to my Traditional IRA, waited for the transfer to settle, and then immediately converted the funds to a Roth IRA.

I was reading around and came across an article that described a "common mistake." Specifically it stated...

Mistake #2: Forgetting to invest your Traditional IRA contribution. This is a common mistake. If you contribute to a Traditional IRA then do an immediate backdoor Roth conversion, it might be seen as a red flag by the IRS. If your contribution has been sitting in a money market fund, you can consider investing it in a diversified fund before doing the backdoor Roth conversion.

I checked my brokerage history and this is indeed exactly what I did. I funded the default money market of my Traditional IRA, converted those funds to my Roth IRA, and then invested it. Essentially, I didn't invest it before converting it to the Roth IRA.

Because this happened last tax year, I'm not sure what I can do now (2023). Is this actually a mistake and what can I do about it now?

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    It can technically trigger the step-transaction doctrine, but it has apparently never happened with the BDR conversion, and with TCJA 2017, Congress and the IRS basically gave these the green light. Yes, safer to invest and wait some period, but even some CPAs go for the same-day conversion.
    – Stan H
    Mar 22 at 2:30

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Don't worry about it. In my opinion, the article that you cite is raising unnecessary fears, but if you are really concerned about the matter, from 2023 onwards, do the investments etc. Just be aware that the investment might decline in value during the time you are holding it in your Traditional IRA waiting for the IRS to forget about monitoring your shenanigans, which is something that the article forgot to mention. Also, what if you had high enough income to be ineligible to make a tax-deductible contribution to your Traditional IRA, and so made a nondeductible contribution to your Traditional IRA in a past year? If so, you have a basis in your Traditional IRA which opens up another can of worms to worry about.

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  • Appreciate it, I do plan on converting the funds as soon as the money settles so ideally minimizing the chance of change in value.
    – Brian
    Mar 22 at 4:08
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    I don't understand the second half of the answer starting with "Also, what if you had high enough income to be ineligible to make a tax-deductible contribution," isn't that the point of a backdoor roth?
    – stannius
    Mar 22 at 16:06
  • @stannius ""isn't that the point of a backdoor Roth?" Errr no, the backdoor Roth is a way to make a Roth IRA contribution when one is ineligible (because of high income, 401(k) coverage etc) to make a Roth IRA contribution directly. Those whose income is high enough that they are ineligible to make a tax-deductible Traditional IRA contribution can choose to make a nondeductible contribution to a Traditional IRA account and backdoor it into a Roth IRA account. There is hardly any tax due here since the money being back-doored into the Roth IRA is post-tax money. But (continued)
    – Dilip Sarwate
    Mar 22 at 18:32
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    how is any plan that involves "waiting for the IRS to forget about your shenanigans" not tax evasion? If it wasn't tax evasion, you wouldn't need them to "forget" anything.
    – user253751
    Mar 22 at 20:11
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    @user253751 Doing a backdoor Roth IRA is not shenanigans of any kind except in the mind of the writer of the article cited by the OP. Not tax evasion either. I think that doing a same-day conversion as some CPAs seem to be advising (cf. the comment by Stan H on the main question) is a little risky because with money-market mutual funds, all transactions are recorded as having occurred at the end of the day and are not necessarily ordered chronologically w.r.t. the exact time of the day when the transactions were submitted. It is better to wait a day or two between contribution and backdoor
    – Dilip Sarwate
    Mar 23 at 1:27

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