Here are a few steps you can take to simplify your annual backdoor Roth conversion
- Leave a couple of dollars in the account to keep it open so you won’t have to open a new account every year.
- Always file a Form 8606 for the year you convert to your Roth. Not filing these can mean that you lose the “basis” in your Roth conversion. If you haven’t been filing them, you can amend and “catch up” for the last 3 years.
- Double-check the Form 8606 for accuracy. Pages 1 and 2 should be completed. Tax preparers unfamiliar with this process often make mistakes on Form 8606.
- You can convert investments or cash. Conversion of investments is called an “in-kind” conversion.
- Wait a few days (but not longer) to convert. This avoids any future “step transaction” issues. Waiting longer in a volatile market could mean you have less to convert or have to pay taxes on any income generated.