Did You Make a Roth IRA Contribution This Year? Tell Your Accountant.
Roth IRAs can be an excellent retirement savings tool, offering the potential for tax-free qualified withdrawals in retirement. However, one of the most common misconceptions taxpayers have is that “Roth” automatically means “nothing needs to be reported on the tax return.”
In reality, even transactions that generate little or no tax may still require reporting. That’s why it’s important to keep your accountant informed about any IRA activity that occurred during the year.
Why IRA Activity Matters
Your tax professional needs a complete picture of your retirement account transactions to ensure your tax return is accurate and all required forms are filed correctly.
If you had any activity involving an IRA during the year, be prepared to provide documentation and discuss the details with your accountant.
This includes:
- Roth IRA contributions
- Traditional IRA contributions
- Roth IRA conversions, including “backdoor Roth” transactions
- Rollovers between retirement accounts
- Recharacterizations or returned contributions
- IRA withdrawals or distributions
- Traditional, SEP, and SIMPLE IRA balances
- IRS Forms 1099-R and 5498
- Prior-year Forms 8606, if applicable
Understanding the Backdoor Roth Strategy
A “backdoor Roth IRA” is not a special type of account. Rather, it is a strategy commonly used by higher-income taxpayers who may not qualify to make direct Roth IRA contributions.
The strategy generally involves two separate steps:
- Making a contribution to a traditional IRA, often as a nondeductible contribution.
- Converting some or all of that traditional IRA balance to a Roth IRA.
Although the transaction may seem straightforward, both steps can have tax reporting consequences.
The IRS generally requires taxpayers to report Roth conversions and nondeductible IRA contributions on Form 8606. Failure to properly report these transactions can create issues with tracking after-tax basis and may result in paying tax twice on the same dollars in the future.
Learn more about Form 8606 on the IRS website:
Don’t Forget About the Pro Rata Rule
One of the most frequently overlooked aspects of a backdoor Roth strategy is the IRS pro rata rule.
When calculating the taxable portion of a Roth conversion, the IRS does not allow taxpayers to isolate only their after-tax contributions. Instead, it generally views all of a taxpayer’s traditional, SEP, and SIMPLE IRA assets as one combined account for tax purposes.
As a result, if you have pre-tax IRA balances elsewhere, part of your conversion may be taxable, even if you only converted a recent nondeductible contribution.
For example, you might contribute $7,500 to a traditional IRA and immediately convert that amount to a Roth IRA, believing the conversion is tax-free. However, if you also have other pre-tax IRA funds, the IRS calculation may require a portion of the conversion to be treated as taxable income.
This is one reason why your accountant needs to know about all IRA accounts you own, not just the account that was converted. Even seemingly minor transactions can affect future tax years, particularly when after-tax basis is involved.
IRA Contribution Limits and Income Restrictions
For 2026, the combined contribution limit for all traditional and Roth IRAs is generally:
- $7,500 for individuals under age 50
- $8,600 for individuals age 50 or older
In addition, Roth IRA contributions are subject to income-based eligibility limits. Depending on your filing status and income, your allowable Roth contribution may be reduced or eliminated entirely.
For current IRS guidance, see:
Tax-Free Doesn’t Mean Reporting-Free
A common mistake is assuming that if a transaction is tax-free, it doesn’t need to be reported. That’s not always the case.
Certain rollovers, Roth conversions, nondeductible contributions, and IRA distributions may still require disclosure on your tax return, even when little or no tax is ultimately due.
The IRS receives information from financial institutions through forms such as Form 1099-R and Form 5498, making accurate reporting especially important.
Additional IRS information about IRA rollovers can be found here:
The Simplest Rule to Follow
If you did anything with an IRA during the year, tell your accountant.
You don’t need to determine whether a transaction is taxable or whether special reporting rules apply. Simply provide your IRA statements, Forms 1099-R and 5498, and any prior Forms 8606 you may have.
Your tax professional can determine the proper treatment and help ensure that contributions, conversions, rollovers, and distributions are reported correctly.
When it comes to IRA activity, it’s always better to disclose too much information than too little.
Want to find out more? Contact us today to see how we can help!
Written By: Madeline Mann
Disclaimer: IRA contribution limits, income thresholds, and tax rules can change from year to year. The tax consequences of IRA transactions depend on your individual circumstances. Consult with a qualified tax professional regarding your specific situation.