Can I Do a Backdoor Roth for 2022 in 2023?

Many individuals whose income exceeds direct Roth IRA contribution limits seek alternative strategies to access Roth IRA benefits. The backdoor Roth IRA is a financial maneuver designed to bypass these income restrictions. It allows high-income earners to indirectly contribute to a Roth account, leveraging its tax-free growth and withdrawals in retirement.

The process involves two steps. First, an individual makes a non-deductible contribution to a Traditional IRA. This contribution uses after-tax money, and no tax deduction is claimed. This initial step establishes a basis in the Traditional IRA, important for subsequent tax calculations.

The second step involves converting these non-deductible Traditional IRA funds into a Roth IRA. This moves the after-tax money into the Roth account, where it grows and can be withdrawn tax-free in retirement. Conditions like the five-year rule and reaching age 59½ must be met. This approach allows individuals to benefit from Roth IRA advantages despite income restrictions.

Contribution and Conversion Timing

For the 2022 tax year, individuals had until April 18, 2023, to make Traditional IRA contributions. This deadline applied even if a tax filing extension was obtained. Therefore, a 2022 non-deductible Traditional IRA contribution could be made in early 2023, up to this deadline.

Following the contribution, funds can be converted to a Roth IRA at any point. There is no specific deadline for the conversion itself. A 2022 tax year contribution made in early 2023 could be converted immediately or later. The conversion timing dictates which tax year it is reported in.

For example, a non-deductible Traditional IRA contribution made on April 10, 2023, for the 2022 tax year, could be converted to a Roth IRA on April 15, 2023, or in 2024. If converted in 2023, it is reported on your 2023 tax return. If converted in 2024, it is reported on your 2024 tax return.

The Pro-Rata Rule and Aggregation

The pro-rata rule is a consideration when executing a backdoor Roth IRA. This rule states that if an individual holds both pre-tax and after-tax money across all Traditional, SEP, and SIMPLE IRA accounts, any Roth conversion will be a proportional mix. The IRS aggregates all such IRA accounts, meaning one cannot convert only the after-tax portion if pre-tax funds exist elsewhere.

The aggregation rule treats all an individual’s non-Roth IRAs as one for determining the taxable portion of a Roth conversion. For instance, if an individual has $94,000 in a pre-tax rollover IRA and contributes $6,000 non-deductibly to a separate Traditional IRA, a conversion of that $6,000 would be only 6% after-tax. The remaining 94% would be pre-tax and taxable upon conversion.

This aggregation rule prevents selective conversion of non-deductible contributions while leaving pre-tax amounts in other IRA accounts. If substantial pre-tax IRA balances exist, a backdoor Roth conversion could result in a significant taxable event, potentially making the strategy less advantageous. Understanding this rule is crucial for assessing the tax efficiency of the backdoor Roth strategy.

Reporting Your Backdoor Roth IRA

Properly reporting a backdoor Roth IRA on your tax return avoids double taxation on after-tax contributions. IRS Form 8606, “Nondeductible IRAs,” tracks your basis in Traditional IRAs and reports Roth conversions. This form must be filed with your federal income tax return for the year the non-deductible contribution was made and the year the conversion occurred, if different.

Part I of Form 8606 reports non-deductible Traditional IRA contributions. You list the amount contributed for the tax year, ensuring the IRS is aware these funds are after-tax. This establishes your basis in the Traditional IRA, determining the tax-free portion of future distributions or conversions. Accurately completing this section maintains a record of your non-deductible contributions.

Part II of Form 8606 addresses the Roth conversion. You report the amount converted from your Traditional IRA to your Roth IRA. Information from Part I, detailing your non-deductible basis, flows into Part II to calculate the tax-free portion of your conversion. This ensures only pre-tax amounts, if any, are subject to tax. Completing Form 8606 accurately ensures compliance and prevents double taxation of after-tax money.