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What does one do with the interest accrued ( ~$1) in the money market account in the traditional IRA that shows up before doing the backdoor Roth IRA conversion?

I noticed this amount and it puts me above the limit. The answers provided here seem to be different.

The $1 of earnings while in the traditional IRA will add $1 to your taxable income when converted to Roth. The taxable amount will be calculated on Form 8606.

versus

you have to convert the whole thing to keep your backdoor roth strategy working in future years

How can I perform the conversion without having any issues with IRS?

2 Answers 2

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This:

you have to convert the whole thing to keep your backdoor roth strategy working in future years

is an over-simplification.

You don't want large amounts of money in your Traditional accounts if you're planning to do backdoor Roth conversions, but a few dollars is not a problem.

If you just leave the "extra" in the Traditional account, you must perform the pro-rating calculations. But even $10 "extra" against $6500 being backdoored means the conversion is 99.8% untaxed. You'll pay maybe a few extra pennies in tax.

You can simply also convert all the extra and pay the tax (still trivial), and then your Traditional balance will be back to zero for the future.

What you want to avoid, if you're doing backdoor Roth conversions, is a large (thousands of dollars) Traditional balance.

If you maintain a large (thousands of dollars) Traditional balance over the years from pre-tax contributions or any growth, that weighs much more heavily against the backdoor amounts, making the backdoor strategy less effective.

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Not sure I understand your confusion. If you don't want to deal with prorating the conversions, you need to convert the total balance of your traditional IRA.

Say you had $0 in traditional IRA, and then you contributed $1000 non-deductible to the IRA, and it earned $1 interest. Your total balance is now $1001. You convert $1001 to Roth, and on the form 8606 Part II you enter:

  • Line 16: $1001 (total conversion amount).
  • Line 17: $1000 (total nondeductible contributions - your basis) - also put it in line 1 of Part I.
  • Line 18: $1 (the difference), which goes to add to taxable income on your 1040.

There are additional things you need to fill on that form, so read the instructions carefully.

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  • 1
    I think OP is saying that the $1 of interest puts them over the $6,500 contribution limit. But as you noted, only the original contribution counts towards the contribution limit and everything else is earnings, and there's no limit to the amount that can be converted.
    – Stan H
    Nov 19, 2023 at 23:42
  • @StanH is correct about the contribution limit. Nov 20, 2023 at 13:18
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    The $1 is earnings, not a contribution, so it does not affect the limit. You can convert 6501 without having to worry about the contribution limit. litteadv is right.
    – D Stanley
    Nov 20, 2023 at 14:17
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    @heretoinfinity that's right, earnings and losses inside the IRA don't affect the contribution limits
    – littleadv
    Nov 20, 2023 at 19:27

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