After-tax earnings before completing backdoor Roth IRA (2023)

[sethmachine]

In 2023 I completed the backdoor Roth IRA:

• I moved the full amount of after-tax money into a Traditional IRA
• I then moved all the Traditional IRA money into my Roth IRA

Sometime after that transaction posted, my brokerage added about $0.80 in interest earnings. That interest is taxable since it was made with after-tax contributions. I cannot move it to my Roth IRA because I would be over the contribution limit for 2023.

I also did the mega backdoor Roth IRA in 2023.

What do I do with the remaining amount in the Traditional IRA? It's after tax earnings, so I know at the very least I need to pay taxes on the interest earnings. Can I keep it in the Traditional IRA, or do I need to move it back to my brokerage, and apparently pay a 10% withdrawal penalty?

Ideally I could keep it in the account and use it to make the 2024 backdoor Roth IRA. Unsure if this will work?

[srblanco7]

I also do a backdoor Roth IRA. I make my conversion each month for the contribution + accrued interest in my Traditional IRA acount. My view is that the funding of the non-qualified Traditional IRA is subject to a contribution limit but that the move from Traditional to Roth is a conversion and therefore not subject to the limit. I believe this thinking aligns with those, for example, who do Roth conversions in early retirement - that is, conversions are not subject to an annual contribution limit.

[Like2Plan]

Yes, what srblanco7 said. The earnings can (and should be) converted.
Hopefully, you can do the conversion for that small amount today (fairly soon). I don't think it will impact your overall taxes for 2023, but it would be more of a nuisance.
When you till out the paperwork--you need to have a zero balance in your traditional ira(s), otherwise you have to do all sorts of nuisance math to figure out the pro rata basis of the conversion. .80 would be rounded up to a dollar. But, pro rata, I expect it to be rounded down to zero taxable. (I haven't run the numbers--but, with everything else you have converted it would have to be a pretty small number)

I don't know if this is the first time you have done this or not. If not, have you reviewed the paperwork (Form 8606) that you will have to fill out for your 2023 taxes? I've found this resource helpful:

https://thefinancebuff.com/the-backdoor-roth-ira-a-complete-how-to.html

https://thefinancebuff.com/backdoor-roth-tax-return-made-easy.html