Howdy,

I opened a traditional IRA with Fidelity for the first time this week with the intention to convert it to a backdoor Roth IRA.

I funded it with $6K in nondeductible contributions (post tax from bank account) and then purchased 1 share of AMZN and 1 share of GOOGL. I still have $1617 of nondeductible cash in the account available for trading.

Here is where I realized I messed up the process.

I realized that I should have left the nondeductible contribution as all cash, and then initiated the backdoor Roth IRA conversion before purchasing stock holdings.

Questions -

Do I need to sell the two stock holdings in my Traditional IRA, and then convert the cash to the Roth?

Are the AMZN and GOOGL stock holdings in my Traditional IRA still considered a nondeductible contribution/asset?

If they are, can I just request a transfer of the stock holdings and the rest of the nondeductible cash balance without any tax penalty? Does this have to be an "In-Kind Transfer" even though it is from Fidelity to Fidelity?

Note: As of closing I am -$20.38 on AMZN and +$33.38 on GOOGL. Not sure if that is relevant or not.

What would you do to fix my mistake?

I could be wrong, but pretty sure it has to be cash to do the conversion. Call Fidelity. You haven't done anything that can't be corrected.

You can convert as is. You have to have cash to contribute, but can convert investments.

that is a distribution in kind and is ok

How do the taxes work on this conversion - specifically if you do not qualify to contribute to a Roth IRA traditionally?

This is what I was concerned about as well and I am in the same boat as you.

I know that if you open both a traditional and Roth IRA account, fund the traditional with nondeductible cash, and then call your broker to initiate the transfer to Roth (backdoor), there are no tax on the conversion.

What I am unsure about is since I purchased stock holdings in my traditional before transferring, will I be taxed on the gains during the conversion.

This can be confusing, so always verify your particular situation before proceeding.

Two ways a tax can hit. The gain. The contribution.

A conversion can creat a tax if there is a gain from when you invested it. Contribute 6k and invest - convert to Roth and say 6200 is converted. There will be a tax on the $200. It will be taxed at income rate levels. For most, this shouldn't stop you from converting, unless you are in a very high bracket and expect to be in a lower one later.

Some of 6k contribution will be taxed if you have a traditional/rollover IRA, SIMPLE, or SEP IRA. This would be in a addition to the gains. It is taxed at the income rate level. If you do not have any of the above, make a non deductible traditional IRA contribution, then convert it, then there won't be a tax on the contribution.

Harkrider 93 said:

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A conversion can creat a tax if there is a gain from when you invested it. Contribute 6k and invest - convert to Roth and say 6200 is converted. There will be a tax on the $200. It will be taxed at income rate levels. For most, this shouldn't stop you from converting, unless you are in a very high bracket and expect to be in a lower one later.

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This is my situation. I contributed $6K and now have $6,162 in the Traditional IRA account I am about to convert to Roth.

Roth convert the entire account. You will only owe taxes on the amount over 6000, so about $60-70 in taxes

On the tax form it will ask how much was converted (6160) how much was posttax (6000) and what the balance of the account was at the end of the year (0). Then you then divide the posttax amount by the conversion plus the year end balance to get the ratio of tax free distributions. So in this case 6000/(6160+0) = 97.4% and thus pay tax on 2.6% of the conversion.

Thank you! I called Fidelity this morning again and got a much better rep. He said to call back on the 19th when the account is fully funded and cleared and then they will convert.

He did mention that the tax on the conversion will be immediately withheld at the time of the conversion based on the closing prices of my holdings. Does that sound right?

I know with mine withholding tax is optional on my part. I wouldn't worry about to much since if they withhold too much you will just get it right back with your refund. They will give you a 1099R for this conversion and the withheld amount will show up there and balance out in whatever tax program you use.