Understanding tax implications of earnings during Recharacterization and backdoor Roth conversion process?

Thanks for the explanation! I'm still a bit confused though. So the earnings aren't counted against my annual contribution limits? I thought the max you could put in a Roth for 2023 was $6,500 total (whether direct or backdoor). Does that mean the earnings are like a bonus amount you can get into your Roth?

The contribution limits ($6,500 for 2023 and $7,000 for 2024) only apply to the amounts you actually contribute - not to any earnings that grow inside the account. When you recharacterize and then convert, the earnings aren't counted toward your contribution limit. Think of them as growth that happened inside your accounts that you're now paying tax on to move to the Roth environment. This is actually one of the benefits of the backdoor Roth strategy - any growth between contribution and conversion can make it into the Roth, you just pay taxes on it in the year of conversion.

How accurate is this tool? I'm dealing with a similar Roth conversion mess but I'm worried about getting bad advice and then getting hit with penalties. Does it like, connect with a real tax professional, or is it just an algorithm?

I'm confused about the timing here. If I did a recharacterization in 2024 for a 2023 contribution, then immediate conversion back to Roth, do I report all of this on my 2024 taxes or is some of it supposed to go on my 2023 taxes? The deadline for filing 2023 is coming up soon so I'm kinda stressed.

The tool uses actual tax professionals who review your documents, not just an algorithm. It analyzes your specific situation including all the forms and statements you upload. I was skeptical at first too, but they showed me exactly how to handle both the recharacterization and conversion forms correctly. They also have a review service where they can double-check your forms before filing. For the timing question, the recharacterization basically makes it like you made a Traditional IRA contribution for 2023 in the first place, but the conversion to Roth in 2024 is a 2024 tax event. So the conversion and associated tax on earnings will go on your 2024 return, not 2023. The recharacterization itself is generally not a taxable event, so nothing new to report for 2023 except that you now have a Traditional IRA contribution instead of a Roth contribution.

How does that even work? The IRS phone lines are always jammed. Is this legit or is it some kind of scam? I've been trying to get through to them for weeks about my own Roth conversion questions.

I don't believe this works. I've tried EVERYTHING to get through to the IRS and there's no magic solution. They've been underfunded for years and there's simply not enough agents to handle the call volume. I'll bet this service just autodials and then charges you for something you could do yourself.

It's completely legitimate - they use a call technology system that navigates the IRS phone tree and waits on hold for you. When an actual agent picks up, they connect the call to your phone so you can speak directly with the IRS. You're never giving them any personal tax information, they're just getting you to the front of the queue. The system actually does work - I was skeptical too until I tried it. The difference is they have automated systems dialing and waiting through the hold times, and they can notify you right when you're about to be connected. I tried for days on my own before using this and kept getting disconnected after hours of waiting.

Thanks for pointing this out! So I'll need to file Form 8606 for both tax years then? For 2023 to show the $5,000 nondeductible contribution, and then again for 2024 to show the conversion including the earnings? Will I also get some kind of tax statement from my brokerage showing all of this or do I need to track it myself? I'm worried about messing up the numbers.

Yes, you'll need to file Form 8606 for both years. For 2023, you'll only complete Part I to establish your nondeductible contribution and basis in your Traditional IRA. Then for 2024, you'll complete Parts I and II to report the conversion. Your brokerage will send you 1099-R forms that show the recharacterization and the conversion, but they won't specifically break out your basis vs. earnings in a way that directly maps to Form 8606. That's why keeping good records is important. The 1099-R for the conversion will show the full $5,450 as a distribution, but you'll use Form 8606 to identify that $5,000 of that is your nondeductible basis (not taxable) and only the $450 in earnings is taxable income.

It's because Roth IRAs were originally designed as a retirement vehicle for middle-income people. The tax benefits are pretty significant since all growth is tax-free, so Congress limited them based on income. The backdoor method exists because there's no income limit on Traditional IRA contributions (though there are limits on deductibility), and there's no income limit on conversions from Traditional to Roth. This loophole has been known for years but Congress has never closed it, essentially making it an approved method. It's definitely more paperwork, but for high-income earners, getting money into a Roth is usually worth the extra steps.

Thanks for explaining, that makes sense. It's just frustrating how everything in the tax code seems designed to create extra hurdles. I get limiting the tax advantages, but this seems like it just creates work for no reason since the backdoor option exists anyway.