Are year-end balances all that matter when it comes to Roth IRA conversions?
My wife is in the process of transferring a retirement account from her previous job into a Traditional IRA. Once it is transferred, I know any Roth IRA conversions would also take into account the amount transferred into the Traditional IRA.
The question is: if we do a Backdoor Roth IRA contribution now, before the funds are transferred into the Traditional IRA, would we miss having to include the new Traditional IRA funds in the conversion equation? Or, as I suspect, would the state of things at the close of the tax year actually govern the tax on the conversion?
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Yes, only the amounts at the end of the year matter. And yes, the funds from the rollover into the Traditional IRA later in the year does affect the proportion of the Roth IRA conversion you do now that is taxable.
You can experiment by filling out Form 8606, which is the form that calculates how much of the conversion is taxable.
If your wife might potentially do backdoor Roth IRA contributions, she should not rollover funds from her Traditional 401(k) to Traditional IRA, and keep any Traditional funds in 401(k) only.
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