February 2025
Financial Planning

Financial Planning Tip: Avoiding Taxable IRA Distributions on Your Backdoor Roth Conversion

We often see clients who’ve done a Backdoor Roth IRA conversion get a surprise when preparing their taxes: a "taxable" IRA distribution showing up, even though it shouldn't be taxable. This typically happens due to miscommunication about how the conversion is reported.

Why Does This Happen?

When you contribute to a Traditional IRA and convert it to a Roth as part of the Backdoor Roth strategy, the conversion should be tax-free—as long as there are no pre-tax funds in the IRA. The issue usually arises when the non-deductible (after-tax) contributions aren’t properly reported.

How to Avoid Taxable Distributions

1. Communicate with Your Tax Preparer: If you’ve done a Backdoor Roth, be sure to clearly inform your tax preparer. They’ll need to know you made non-deductible contributions to a Traditional IRA and then converted them to a Roth. This ensures they properly complete Form 8606, which tracks the after-tax contributions and avoids unnecessary taxes.

2. Track Your Non-Deductible Contributions: Keep accurate records of any non-deductible contributions to your Traditional IRA. Your tax preparer will need this information to ensure only the correct portion of your conversion is reported as taxable.

By making sure your tax preparer understands your Backdoor Roth conversion and ensures Form 8606 is filed correctly, you can avoid unexpected taxes and keep your conversion tax-efficient! If you have questions, please contact us.

MARKET UPDATE
401(K) ALLOCATION

To download the February 2025 Newsletter: CLICK HERE

Copperwynd Financial, LLC is a registered investment adviser. Advisory services are only offered to clients or prospective clients where Copperwynd Financial, LLC and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Copperwynd Financial, LLC unless a client service agreement is in place.

Copperwynd Financial, LLC provides links for your convenience to websites produced by other providers of industry related material. Accessing websites through links directs you away from our website. Users who gain access to third party websites may be subject to the copyright and other restrictions on use imposed by those providers and assume responsibility and risk from use of those websites.

This commentary reflects the personal opinions, viewpoints and analyses of the Copperwynd Financial, LLC employees providing such comments and should not be regarded as a description of advisory services provided by Copperwynd Financial, LLC or performance returns of any Copperwynd Financial, LLC client. Investments in securities involve the risk of loss. Past performance is no guarantee of future returns.

The S&P 500 Index or the Standard & Poor’s 500 Index is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies. The S&P 500 is a float-weighted index, meaning company market capitalizations are adjusted by the number of shares available for public trading. Note: Investors cannot invest directly in an index. These unmanaged indices do not reflect management fees and transaction costs that are associated with most investments.