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DO I HAVE TO PAY TAX ON A BACK DOOR ROTH CONVERSION
AI accountant’s answer:
When you perform a backdoor Roth conversion, you're indirectly contributing to a Roth IRA by first contributing to a traditional IRA and then converting the funds to a Roth IRA. There may be tax implications during the conversion process depending on the funds in your traditional IRA. If your traditional IRA contribution was made with after-tax (non-deductible) money, you generally wouldn't owe taxes on the conversion. However, if your traditional IRA has pre-tax funds, such as deductible contributions or gains on those investments, you'll be liable for taxes on the portion of the conversion that's attributed to those pre-tax funds. This is based on the pro-rata rule, which looks at the overall mix of pre-tax and after-tax funds across all your traditional IRAs. For example, if 80% of your total traditional IRA balance is pre-tax money and you convert $10,000 to a Roth IRA, you'd owe taxes on 80% of the conversion, or $8,000. So, the tax implications of a backdoor Roth conversion depend on the nature of the funds in your traditional IRA. It's a good idea to carefully review your financial situation and consider talking to a tax professional to understand the potential tax impact of the conversion.
Comment from reviewer
Michael Eaton, CPA
Not Correct.
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