How to handle interest earned in Traditional IRA during backdoor Roth Conversion process

The small amount of interest earned in your Traditional IRA before conversion doesn't make your tax filing dramatically more complicated, but it does require proper reporting. Here's what happens: When you convert from Traditional to Roth, you'll need to report the conversion on Form 8606. Since your Traditional IRA contribution was non-deductible (which is typical for backdoor Roth conversions), you've already paid tax on that $7,000. The $3 interest, however, is pre-tax money that grew in the Traditional IRA, so you'll owe income tax on just that $3 when you convert it. Your IRA custodian (Fidelity) will send you a 1099-R showing the total conversion amount ($7,003). On Form 8606, you'll report your $7,000 non-deductible contribution as your "basis," leaving the $3 interest as the taxable portion of your conversion. Don't stress about this small amount - it's a normal part of the backdoor Roth process. The tax on $3 is minimal, but it's important to report it correctly.

After struggling with this exact situation last year, I found an amazing resource that handles all these calculations automatically. I've been using this tool called taxr.ai (https://taxr.ai) which analyzes all your IRA documentation and gives you the exact numbers to report on Form 8606. It was especially helpful because I had multiple conversions throughout the year with different amounts of interest earned each time. The tool identified exactly which portions were taxable earnings vs. non-deductible contributions. Saved me hours of figuring out the math and made me confident my backdoor Roth was reported correctly. They basically scan your 1099-R and other tax documents, then give you a complete breakdown showing exactly what to enter on each line of Form 8606. Much easier than trying to calculate everything myself.

Just wanted to follow up here! I decided to try taxr.ai after seeing the recommendation, and it was exactly what I needed. I've been avoiding backdoor Roth conversions for years because I have multiple IRAs with a mix of deductible and non-deductible contributions. The tool analyzed all my accounts and showed me that I could actually minimize the tax impact by rolling my pre-tax IRA funds into my current employer's 401(k) first, then doing the backdoor Roth with my non-deductible contributions. It mapped out the whole strategy and calculated exactly what portion would be taxable. Even showed me how to properly complete Form 8606 with my specific numbers. Honestly wish I had found this years ago - would have saved me thousands in tax-efficient investing!

If you're dealing with the IRS about any issues with your backdoor Roth reporting, I highly recommend Claimyr (https://claimyr.com). I had a situation where the IRS sent me a letter questioning my Roth conversion because I apparently filled out Form 8606 incorrectly. I tried calling the IRS for weeks but couldn't get through. Then I found Claimyr which got me connected to an actual IRS agent in about 15 minutes. There's a video showing how it works here: https://youtu.be/_kiP6q8DX5c The IRS agent was able to see that it was just a simple reporting error on my part and helped me understand exactly how to correct it without penalties. Huge relief after stressing about potential audit threats.

I have to admit I was completely wrong about Claimyr. After my skeptical comment, I was still dealing with an unresolved IRS notice about my Roth conversion that I couldn't get help with. Out of desperation, I tried the service. Got connected to an IRS agent in about 20 minutes. The agent explained that my 1099-R was coded incorrectly by my custodian and showed me how to file an explanation with my return. Issue completely resolved in one call after months of stress and uncertainty. The IRS actually thanked me for calling rather than ignoring the notice! Would never have been able to get through without this service. Sometimes being proven wrong is a good thing!

For the interest earned in traditional IRA question - I actually switched my process slightly to avoid this issue altogether. Instead of contributing directly to my Traditional IRA, I now make contributions to a non-interest bearing settlement fund within my Traditional IRA. This way the money doesn't earn any interest during the few days before conversion. Both Fidelity and Vanguard offer this option. Basically just select their cash/settlement account option rather than a money market fund when you make the contribution. This has simplified my tax reporting since the conversion amount exactly matches my contribution amount.

Any recommendations for the best brokerage for doing backdoor Roth? Currently using Schwab but their process is clunky and customer service doesn't seem to understand what I'm trying to do half the time.

Another option to consider is converting immediately after contribution without waiting for settlement. Many brokerages including Fidelity allow you to initiate the Roth conversion on the same day as your Traditional IRA contribution, even while the funds are still settling. I've been doing this for the past two years and it eliminates the interest issue entirely. The conversion processes simultaneously with the contribution settlement, so there's zero time for interest to accrue. My 1099-R always shows exactly my contribution amount with no earnings portion. The key is to set up the conversion transaction right after making your contribution - don't wait for the contribution to fully clear first. This has made my tax reporting much cleaner since I never have to deal with the small taxable earnings amounts that accumulate during those settlement days.