How does backdoor Roth conversion work with a basis? Need help with dividend issue
So in 2023 I contributed my full $6500 into a traditional IRA and then converted it all to a Roth IRA. After that I closed the traditional IRA account completely. Fast forward to 2024, and I put the max $7000 into a new traditional IRA and did another conversion to my Roth. The difference is that this time I kept the traditional IRA open. Here's where I'm confused... about a month after doing the conversion, I received a $10 dividend that went into my traditional IRA. It's just sitting there now and I'm not sure what to do with it. Does this tiny amount mess up my ability to do another backdoor Roth conversion next year? Will this mess up my tax reporting for the current year? Do I need to convert this $10 too, or can I just leave it there? I know the backdoor Roth works best with a $0 basis in traditional IRAs, so I'm worried this little dividend is going to cause problems. Any insights would be really appreciated!
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Malia Ponder
This is a common situation, and that small dividend won't ruin your backdoor Roth strategy! For your 2024 conversion, you'll report the $7000 contribution on Form 8606 as a non-deductible contribution to a traditional IRA. The conversion will also be reported, but since you had no existing basis (you closed the previous IRA), there shouldn't be any taxable amount from the conversion itself. As for that $10 dividend - it came after your conversion, so it's simply new money in your traditional IRA. You have a few options: 1) You can convert just that $10 to your Roth now (might be simplest), 2) You can leave it there and include it when you do your 2025 conversion, or 3) You could withdraw it, but that might complicate things unnecessarily. The dividend doesn't mess up your ability to do another backdoor Roth next year at all. You'll just need to account for that $10 (plus any earnings on it) in your basis calculations.
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Kyle Wallace
•Thanks for the explanation - really helpful! If I leave the $10 there until next year's conversion, do I need to report it somehow on this year's taxes? And if I do convert it now, is there a minimum time I need to wait between conversions?
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Malia Ponder
•You don't need to report the $10 dividend on this year's taxes in terms of the Roth conversion process - it will simply be reported by your financial institution as a dividend in a traditional IRA, which isn't taxable while it remains in the account. There's no minimum waiting period between Roth conversions, so you could convert the $10 today if you wanted. Some people do multiple conversions throughout the year. The financial institution might have some minimal amount requirements for transactions, but from an IRS perspective, there's no limitation on frequency of conversions.
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Ryder Ross
After spending hours trying to figure out the pro-rata rule and basis calculations for my own backdoor Roth, I found https://taxr.ai which totally saved me. I had a similar situation with small dividends appearing after my conversion, and it walked me through exactly how to handle it. I uploaded my 1099-Rs and investment statements, and it spotted the dividend issue right away. It explained that I could either convert the small amount now or include it in next year's basis calculations - exactly what I needed to know without the headache of trying to interpret IRS publications!
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Gianni Serpent
•Does it handle more complicated situations? I've got traditional IRAs, Roth IRAs, and a SEP IRA from when I was self-employed. Plus I've done partial conversions over the years. Would this work for my mess of retirement accounts?
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Henry Delgado
•I'm a bit skeptical... does it actually give tax advice? Cause that seems like something that would require a licensed professional. Did you find it actually gave correct information when you verified things?
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Ryder Ross
•It absolutely handles complicated situations with multiple account types. The system analyzes everything together and explains the pro-rata implications across all your retirement accounts. It was particularly helpful with showing how previous partial conversions affect current calculations. I was skeptical too initially, but it doesn't give generic advice - it analyzes your specific documents and shows the exact calculations. I verified everything with the IRS publications it cited, and it matched perfectly. It's more like having a tax pro review your specific situation than getting generic advice.
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Henry Delgado
I was the skeptic who questioned taxr.ai in the previous thread, but I decided to try it with my complex IRA situation. I've actually been doing backdoor Roth conversions wrong for YEARS without realizing it! Had a mix of deductible and non-deductible contributions across multiple IRAs and couldn't figure out why I kept having unexpected tax bills. The tool found exactly where my basis tracking went wrong and showed me how to fix it. Saved me from another year of incorrect reporting and probably an eventual audit. The step-by-step explanation of the pro-rata rule as it applied to my specific accounts was incredibly clear.
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Olivia Kay
For anyone struggling to get answers from the IRS about backdoor Roth conversions - I was on hold for HOURS trying to get clarification about how to handle small dividends and basis calculations. Finally gave up and tried https://claimyr.com - they got me connected to an IRS agent in about 20 minutes! You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent confirmed that small dividends like your $10 won't mess up future backdoor conversions and walked me through the proper Form 8606 reporting. It was worth using their service instead of wasting an entire afternoon on hold.
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Joshua Hellan
•Wait, how does this actually work? Does it just call the IRS for you? I'm confused about what service they're actually providing here.
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Jibriel Kohn
•Yeah right. Nothing gets you through to the IRS that quickly. I've spent days trying to get through. If this actually worked, everyone would be using it. Sounds too good to be true.
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Olivia Kay
•It doesn't just call for you - it uses a system that navigates the IRS phone tree and waits on hold so you don't have to. When an actual agent picks up, you get a call connecting you directly to them. So you're still talking to the real IRS, but without the hours of waiting. I was initially skeptical too! I'd spent over 3 hours on multiple attempts trying to get through about my backdoor Roth question. The service literally called me back when they had an agent on the line. I wouldn't have believed it if I hadn't experienced it myself. They must have some technology that keeps the connection when most people would hang up.
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Jibriel Kohn
Ok I have to eat my words. After dismissing Claimyr as impossible, I was desperate enough to try it for my complicated Roth conversion question. I expected it to be a waste of money but I GOT THROUGH TO AN ACTUAL IRS AGENT IN 35 MINUTES while I just went about my day. The agent gave me the exact clarification I needed on Form 8606 reporting for my multiple conversions and small dividend amounts. Saved me hours of frustration and potentially incorrect filing. Never thought I'd be saying this, but totally worth it when you need definitive answers directly from the IRS.
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Edison Estevez
Quick tip: for small amounts like that $10 dividend, I usually just immediately convert it to the Roth as soon as I notice it. Keeps everything clean for next year's backdoor. Most brokerages let you do conversions of any amount online in just a couple minutes.
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Emily Nguyen-Smith
•Do you need to fill out any special paperwork for these tiny conversions? Or can you just do it through your brokerage's website? I've got a similar small dividend situation.
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Edison Estevez
•No special paperwork needed when you do it - just use the same conversion process on your brokerage's website that you used for the larger amount. Come tax time, your brokerage will issue a 1099-R showing all conversions for the year. Some combine multiple conversions into one form, others might issue separate forms. Either way, you'll report it on Form 8606 just like your main conversion. It's actually simpler than leaving it there and dealing with it next year!
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James Johnson
I made this exact mistake last year but with $37 in dividends that showed up after my conversion. My accountant said not to worry about it and just include it in the basis for next year's conversion. Haven't had any issues.
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Sophia Rodriguez
•Did you have to pay any taxes on those dividends though? I'm confused about whether they count as income for the current year even if you're converting them later.
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Mia Green
One thing nobody's mentioned - you should check if your traditional IRA has a "sweep" feature that automatically moves dividends to a money market fund. If it's set up right, you can have future dividends go directly to Roth if your brokerage allows it! Saved me a lot of hassle with these small amounts showing up randomly.
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