A Safer Retirement and Environment – What We’re Implementing to Help Keep You Safe: READ MORE

Here at Donato Wealth Management, we are adhering to state and local guidelines in order to protect both the health and safety of clients and staff. Keeping our clients and staff safe is our highest priority and we’re taking all appropriate measures to ensure a safe environment. Should you prefer to not meet face-to-face, we are continuing to serve our clients through virtual settings such as Zoom or phone calls.

We look forward to continuing to help individuals and families achieve their ideal retirements.

Donato Wealth Management
(512) 833-6557

CLOSE

ROTH CONTRIBUTIONS AND ROLLOVERS: TODAY’S SLOTT REPORT MAILBAG

By Andy Ives, CFP®, AIF®
IRA Analyst

Question:

Hey Ed-

Long time reader and listener of yours…and have bought a few copies of your latest book to share with clients! Prior to us being involved, my client made a Backdoor Roth contribution in 2021. He did this despite his income being below the threshold limits. Also, he had existing IRA balances. Is there anything he can do? Are the 2018 recharacterization rules such that he is stuck with any tax implications?

THANK YOU!!

Graham

Answer:

Graham,

There is still time for a possible fix. Can your client deduct the 2021 contribution he made to the traditional IRA? If so, take the deduction for that contribution and do not claim the basis. (Do not file Form 8606.) Then, the “Backdoor Roth” conversion he did will just be a regular taxable conversion. Assuming he has no other basis (after-tax) dollars in his IRA, he will not have to worry about the pro-rata rule.

As for recharacterization, that is no longer available for conversions. It cannot be undone. Also, since the conversion is complete, he will not be able to recharacterize the original contribution. If he is NOT eligible to deduct the 2021 contribution, then he should file Form 8606 to claim the basis. Now we have the pro-rata rule to think about to determine how much of the conversion is taxable. By not paying attention to the Roth phase-out limits, he has certainly created some complications.

Question:

Hello there! I’ve come across your website while searching for support on a very specific problem I’m encountering. In January 2021 I left my previous employer and since I didn’t have a new 401(k) established at my new job, I asked my 401(k) provider to initiate a rollover. My 401(k) consisted of both pre-tax and Roth funds, but I only had a Roth IRA at the time.

Long story short, despite me asking the IRA custodian to facilitate a conversion of the pre-tax funds so they could go into my Roth IRA, the custodian deposited both amounts directly into the Roth IRA (rather than opening up a traditional IRA then doing the conversion). It is only now while preparing my tax return that I realize they have done this incorrectly, and again “long story short,” they are refusing to accept ownership of the error or help to resolve it, beyond saying the only mitigation I can take is to file an ‘IRA Recharacterization’.

This form looks fairly complicated since the funds have been in positions since they were deposited at the start of last year. I’m also concerned by some statements in the Tax Cuts and Jobs Act, and I’m concerned some rollover dates may be violated as a result of performing a fix.

I’ve reached out to a few CPAs online but I’m struggling to find any who specializes in this issue just yet. I’m hopeful you might be able to support me in rectifying this issue.

Kind regards

Jonathan

Answer:

Well, Jonathan, that is a long story long! Good news is that there is no problem with the transaction you outlined. Former pre-tax 401(k) dollars are allowed to be rolled over directly to a Roth IRA. This is a valid conversion. The funds do NOT have to be routed through a traditional IRA first. No need to reverse any transactions, no need to try to recharacterize anything, no need to push back on the custodian. No errors were made. Enjoy tax-free earnings in your Roth IRA, and congrats on a proper conversion from your 401(k)!

https://www.irahelp.com/slottreport/roth-contributions-and-rollovers-todays-slott-report-mailbag

Ready To Take

THE NEXT STEP?

 

For more information about any of our products and services, schedule a meeting today.

Or give us a call at (512) 833-6557

Investment advisory services are offered through Foundations Investment Advisors, LLC and is a SEC registered investment advisor.

Investment advisory services are offered through Donato Wealth Management and is a SEC registered investment advisor.