This is a great breakdown of the pro-rata calculations! I want to emphasize one important timing consideration that could affect your situation: make sure you complete this reverse rollover before making any new IRA contributions or conversions in 2025. The pro-rata rule looks at your IRA balances at the end of the tax year, so if you're planning to do another backdoor Roth conversion in 2025, you'll want to get that pre-tax money out of your IRAs first. Otherwise, you'll be back to dealing with the same pro-rata complications. Also, since you mentioned your rollover IRA has grown to $85,000, double-check that your 401(k) plan doesn't have any limits on incoming rollover amounts. Some plans cap rollovers at certain dollar amounts or have waiting periods between rollovers. One last thing - keep detailed records of this entire transaction. The IRS sometimes gets confused about partial rollovers from mixed IRAs, and having clear documentation of your basis calculation and the specific amounts transferred can save you headaches if they ever question it during an audit.

Just wanted to add another perspective on the calculation method since I see some great advice here already. You're absolutely correct to go with Option 2 - the basis remains at the fixed dollar amount of $6,825. Here's a simple way to think about it: when you paid taxes on that $6,825 during your backdoor Roth conversion, you essentially "bought" that amount as your after-tax basis in traditional IRAs. Market gains and losses don't change what you already paid taxes on - they just affect the overall account value. One thing I'd recommend is calling your 401(k) plan administrator before initiating the rollover to confirm: 1. They accept partial rollovers from IRAs (as others mentioned, some don't) 2. Their process for handling the pre-tax designation 3. Any paperwork they need from you to properly code the incoming funds Also, when you request the rollover from your IRA custodian, be very specific that you're rolling over "$78,175 of pre-tax funds, leaving $6,825 of after-tax basis in the IRA." Some custodians will try to do a proportional distribution if you're not crystal clear about your intent. This reverse rollover strategy will definitely clean up your future backdoor Roth conversions - you'll essentially have a "clean slate" IRA situation going forward!

Just a quick tip - if you're doing a large Roth conversion, consider splitting it between tax years (December 2025 and January 2026) to spread the tax impact. Might help with your cash flow for tax payments. I did this last year and it was way easier to manage the tax hit. Especially helpful since the safe harbor rules reset each tax year.

Great question about catch-up payments! I went through something similar last year. You absolutely can make a catch-up payment to help with safe harbor, but keep in mind that the IRS calculates underpayment penalties on a quarterly basis. So if you make a larger payment now, it will help you avoid penalties for Q3 and Q4, but won't eliminate any penalties that may have already accrued for Q1 and Q2 if you underpaid those quarters. For your Roth conversion strategy, you're on the right track. If you can hit that 110% safe harbor threshold through your regular estimated payments (including any catch-up you make), then yes, you can wait until April 15, 2026 to pay the additional tax from the conversion without penalty. One thing to consider - since you mentioned your income fluctuates with the Roth conversion happening later in the year, you might also want to look into the annualized income method when you file. It can sometimes work out better than the equal payment safe harbor, especially when you have a large income spike late in the year. The key is making sure your total payments (withholding + estimated) hit 110% of last year's tax liability. Whether you get there through equal quarterly payments or a catch-up payment, the IRS is generally satisfied as long as you meet that threshold.

I've been a tax preparer for over 15 years and see this confusion every tax season! You're experiencing what we call the "pay-as-you-go" vs "annual reconciliation" disconnect. The IRS operates on the principle that taxes should be paid throughout the year as income is earned, not in one lump sum at filing time. The CP30A penalty is assessed because your withholding and/or estimated payments during 2023 didn't meet the minimum threshold (typically 90% of current year tax or 100% of prior year tax, 110% if your prior year AGI exceeded $150K). However, when you filed your return, the total of all your payments (withholding + any estimated payments) exceeded your actual tax liability, resulting in the refund. Here's what you should do: 1. Cash the refund check immediately - that's your money 2. Pay the CP30A penalty (it will accrue interest if ignored) 3. For 2024, use the IRS withholding estimator mid-year to adjust your W-4 One thing many people don't realize: you might be able to reduce or eliminate the penalty by filing Form 2210 if you qualify for certain exceptions, like if your income was uneven throughout the year. Worth checking before paying the full amount!

As someone who's dealt with this exact situation before, I want to emphasize what others have said - definitely cash that refund check! It's your money and you earned it. The CP30A penalty is frustrating but it's actually pretty common. What helped me understand it was realizing that the IRS essentially wants you to "prepay" your taxes throughout the year rather than settling up all at once in April. Even though you ultimately paid more than you owed (hence the refund), you didn't pay enough during the actual tax year itself. One thing I'd add that I haven't seen mentioned: make sure to pay the penalty promptly if you can't get it waived through Form 2210. The IRS charges compound daily interest on unpaid penalties, and it adds up faster than you might think. I learned this the hard way when I delayed dealing with a similar notice. For next year, consider having a bit more withheld from each paycheck or making a small quarterly estimated payment if your withholding is consistently falling short. The peace of mind is worth not getting these confusing notices again!

dont forget about state taxes too! My state (california) has different rules about startup expenses than federal. I deducted my startup costs correctly on federal but messed up on state and got a nasty letter from the franchise tax board. Make sure you check your state tax rules too!

Great question! You're definitely on the right track thinking about this carefully. Based on what you've described, you would NOT file a Schedule C for 2024 since your business wasn't operational yet (no income, no active business operations). The IRS considers startup costs to be deductible in the tax year when your business "begins" - which sounds like 2025 in your case when you actually started generating income and conducting business activities. So your $4,700 in startup expenses from 2024 would be claimed on your 2025 Schedule C. You can deduct up to $5,000 in startup costs immediately in your first year of business operations (2025), and since your costs are under that limit, you should be able to deduct the full $4,700 on your 2025 return. Just make sure to keep detailed records of all those expenses with receipts and documentation showing they were legitimate business startup costs incurred before you began operations. One thing to double-check though - if any of those expenses were equipment purchases (computers, tools, etc.), those might qualify for Section 179 depreciation instead of being treated as startup costs, which could be more beneficial tax-wise.

Great thread! I went through this exact decision process last year with my Florida LLC. One thing I'd add is that while everyone's focusing on the election mechanics (which are all correct), don't overlook the operational side of maintaining TTS qualification. The IRS looks at four main factors: substantial trading activity (you've got this with 200+ trades), regularity and continuity of trading, holding periods (should be short-term focused), and profit motive from price swings rather than dividends/appreciation. I kept detailed logs of my daily trading hours, market analysis time, and trading strategy notes. This documentation became invaluable when my CPA prepared my return and helped justify the TTS claim. The single member LLC structure worked perfectly - no need to convert to S-Corp just for these elections. Also consider opening a separate business checking account for all trading-related expenses if you haven't already. Makes the expense tracking much cleaner and reinforces the business nature of your trading activity.

This is exactly the kind of comprehensive discussion I needed to see! I'm in a similar situation with my trading LLC and was getting overwhelmed by all the conflicting advice out there. One additional consideration that might be worth mentioning - if you're planning to scale up your trading operation significantly, you might want to think about the self-employment tax implications. With a single member LLC and TTS status, your trading income will be subject to SE tax, which can add up quickly on larger profits. This is where the S-Corp election could potentially save you money down the road - you can pay yourself a reasonable salary (subject to payroll taxes) and take the rest as distributions (not subject to SE tax). But that's more of a consideration for when you're consistently profitable at higher income levels. For now, sounds like your single member LLC with TTS and Section 475 elections will serve you perfectly well. The flexibility and simplicity are huge advantages when you're still building your trading business.