I am confused and I would love to hear what you would do. I have a feeling the accountant we hired messed up our Backdoor Roths.
Background: My spouse and I hired an accountant to complete our 2022 taxes (Accountant A) after we filed an extension.
Timeline:
1.) In September of 2023 (due to extension), while Accountant A was helping us finalize our 2022 taxes, we learned that we were over the income limit to contribute to the Roth but Accountant A said, "no problem, just do a Roth Backdoor." We had no idea what we were doing (mistake #1) but between him and Schwab's help, we completed the paperwork to move the $7K (both 50+) in cash for each of us from the Roth to the Traditional.
2.) We were surprised when Schwab actually transferred ~$7600 for each of us. I'm still not 100% sure why (Schwab says that's "just what's required"). I now have a feeling it has to do with the pro-rata rule because we have around $600K (ME) & $135K (Spouse) in our Schwab traditional IRAs. It's just really confusing because I have a much higher balance so I don't know why we had a similar amount.
3.) Again Accountant A says no problem just transfer all ~$7600 back to the Roth so we did that in late 2023.
4.) Accountant A says we should file the 8606 with 2023 taxes because this all movement happened in 2023. Note: The original contribution was made in 2022 and remained in cash which is why we were surprised about the $7600 because we didn't have any earnings on the money.
5.) For 2023, we are using a different accountant (Accountant B). He sent us this message which we forwarded to Accountant A to see if we need to amend 2022.
"Form 1099-R #4 has a distribution code R indicating a recharacterization in the current year of a contribution made in a prior year. This income should be reported on the prior year return. Return to Form 1099R #4 and delete the Form 1099-R that has code R. File an amended return for the tax year which the recharacterization applies, as needed. On the prior year amended return, code R should be replaced with code N for proper calculations" This is the alert I am getting for both the Roth 1099 R distributions with code R in box 7. The meaning is we need not report them in 2023.
6.) Accountant A insists it's not a 2022 tax form issue and that we need to include it in 2023 taxes.
7.) So, I embarked on a quest to become an expert accountant and try to figure it out for myself which is when I started to learn about the prorata rule which is super confusing to the newbie of the group but, if I understand correctly, both mine and my spouse's IRAs are now completely screwed up because we didn't know to transfer the entire balance by the end of 2023 so we had zero in our accounts when doing the backdoor. Accountant A didn't tell us anything about that.
Questions:
A.) What have we screwed everything up because of the pro-rata rule? How would you fix it now? I still don't really understand the impact of what we've done but I do know that we don't want to convert $735K to a Roth while in the 24% tax bracket so I don't know what options we have now. As a matter of fact, we were preparing for a conversion strategy in the lowest tax bracket in a few years when we retire so I hope we haven't messed that up.
B.) I guess depending on the answer to A, should we transfer all our current Traditional IRAs to our 401ks before we contribute for 2023? We haven't contributed yet until we sort this mess out so it would be easy to do this to now perpetuate the problem.
C.) If Accountant A steered us terribly wrong with this backdoor strategy, would you ask for any compensation or at the very least some sort of refund for the thousands they charged us to file our taxes (we had a rental property so we had extra schedules).
D.) Also, is Accountant B correct that we would file the 8606 for 2022 with our 2022 taxes because that was the original contribution and/or contribution year? If yes, do we need to amend or simply send the form with a note (I've read that in other posts on here)? Or is Accountant A right and would we file the 8606 with 2023 taxes because we executed the Backdoor strategy in 2023.
E.) Would we have avoided Schwab transferring more than the $7K if we had transferred our traditional balances to our 401k? It's confusing because how does Schwab know whether we have additional IRAs anywhere else (we don't, by the way, but just curious) or what if we had transferred the balance to a 401k after, then they should have only transferred the even $7K.
Thanks for your patience with the newbie. I have learned so much in the short time I've been on these boards. I look forward to learning even more and contributing. Thanks for any advice!
Background: My spouse and I hired an accountant to complete our 2022 taxes (Accountant A) after we filed an extension.
Timeline:
1.) In September of 2023 (due to extension), while Accountant A was helping us finalize our 2022 taxes, we learned that we were over the income limit to contribute to the Roth but Accountant A said, "no problem, just do a Roth Backdoor." We had no idea what we were doing (mistake #1) but between him and Schwab's help, we completed the paperwork to move the $7K (both 50+) in cash for each of us from the Roth to the Traditional.
2.) We were surprised when Schwab actually transferred ~$7600 for each of us. I'm still not 100% sure why (Schwab says that's "just what's required"). I now have a feeling it has to do with the pro-rata rule because we have around $600K (ME) & $135K (Spouse) in our Schwab traditional IRAs. It's just really confusing because I have a much higher balance so I don't know why we had a similar amount.
3.) Again Accountant A says no problem just transfer all ~$7600 back to the Roth so we did that in late 2023.
4.) Accountant A says we should file the 8606 with 2023 taxes because this all movement happened in 2023. Note: The original contribution was made in 2022 and remained in cash which is why we were surprised about the $7600 because we didn't have any earnings on the money.
5.) For 2023, we are using a different accountant (Accountant B). He sent us this message which we forwarded to Accountant A to see if we need to amend 2022.
"Form 1099-R #4 has a distribution code R indicating a recharacterization in the current year of a contribution made in a prior year. This income should be reported on the prior year return. Return to Form 1099R #4 and delete the Form 1099-R that has code R. File an amended return for the tax year which the recharacterization applies, as needed. On the prior year amended return, code R should be replaced with code N for proper calculations" This is the alert I am getting for both the Roth 1099 R distributions with code R in box 7. The meaning is we need not report them in 2023.
6.) Accountant A insists it's not a 2022 tax form issue and that we need to include it in 2023 taxes.
7.) So, I embarked on a quest to become an expert accountant and try to figure it out for myself which is when I started to learn about the prorata rule which is super confusing to the newbie of the group but, if I understand correctly, both mine and my spouse's IRAs are now completely screwed up because we didn't know to transfer the entire balance by the end of 2023 so we had zero in our accounts when doing the backdoor. Accountant A didn't tell us anything about that.
Questions:
A.) What have we screwed everything up because of the pro-rata rule? How would you fix it now? I still don't really understand the impact of what we've done but I do know that we don't want to convert $735K to a Roth while in the 24% tax bracket so I don't know what options we have now. As a matter of fact, we were preparing for a conversion strategy in the lowest tax bracket in a few years when we retire so I hope we haven't messed that up.
B.) I guess depending on the answer to A, should we transfer all our current Traditional IRAs to our 401ks before we contribute for 2023? We haven't contributed yet until we sort this mess out so it would be easy to do this to now perpetuate the problem.
C.) If Accountant A steered us terribly wrong with this backdoor strategy, would you ask for any compensation or at the very least some sort of refund for the thousands they charged us to file our taxes (we had a rental property so we had extra schedules).
D.) Also, is Accountant B correct that we would file the 8606 for 2022 with our 2022 taxes because that was the original contribution and/or contribution year? If yes, do we need to amend or simply send the form with a note (I've read that in other posts on here)? Or is Accountant A right and would we file the 8606 with 2023 taxes because we executed the Backdoor strategy in 2023.
E.) Would we have avoided Schwab transferring more than the $7K if we had transferred our traditional balances to our 401k? It's confusing because how does Schwab know whether we have additional IRAs anywhere else (we don't, by the way, but just curious) or what if we had transferred the balance to a 401k after, then they should have only transferred the even $7K.
Thanks for your patience with the newbie. I have learned so much in the short time I've been on these boards. I look forward to learning even more and contributing. Thanks for any advice!
Statistics: Posted by lynnist — Mon Mar 11, 2024 11:35 pm — Replies 1 — Views 417