Retirement tax questions

AnnetteB6,

My initial question concerned providing the FMV of my IRA to the IRS. However, I now question why it is I need to complete Form 8606 Part I at all.

Form 8606 comes in three parts, and I’ll address each part on its own merits.

Part I instructions state "Complete this part only if one or more of the following apply." The Form lists three bullet points and at least one must apply to my situation for me to be required to complete Part I. I'll address each bullet point on its own merit.

Bullet #1: I have never made nondeductible contributions to my IRA - not in 2020, not ever. Therefore, this bullet point does not apply; Bullet #2: This bullet point comes in two parts and is separated by the word "and" which the IRS put in bold text for emphasis. In other words, for this bullet point to apply two conditions must be met: (1) taking a distribution from an IRA for, among other things, a "conversion." This condition does not apply to me; (2) "and you made nondeductible contributions to a traditional IRA in 2020 or an earlier year" (emphasis on the original by the IRS). This condition does not apply to me because it has never happened, not in 2020 or "an earlier year. Therefore, this bullet point does not apply; Bullet #3: This bullet point also comes in two parts and is separated by the word "and" which the IRS put in bold text for emphasis. In other words, for this bullet point to apply two conditions must be met: (1) converting part, but not all, of an IRA to a Roth IRA. This condition applies to me; (2) "and you made nondeductible contributions to a traditional IRA in 2020 or an earlier year" (emphasis on the original by the IRS). This condition does not apply to me because it has never happened, not in 2020 or "an earlier year. Therefore, this bullet point does not apply.

Thus, Part I, and by default line 6, does not apply to my situation and, therefore, my understanding is I am not required to provide the FMV of my IRA.

Part II, which may apply to me, has three lines: Line 16 comes in two parts: (1) If I completed Part I then I enter line 8 amount on line 16. This condition does not apply because I do not believe Part I applies to my situation; (2) Enter the amount I converted from traditional to Roth in 2020. This condition applies to me, but only the amount I converted. For illustration I’ll use a fictitious amount of $100.00, and would enter that amount on line 16. Line 17 also comes in two parts: (1) If I completed Part I then I enter the amount on line 11. This condition does not apply because I do not believe Part 1 applies to my situation; (2) “enter your basis in the amount on line 16.” The IRS defines basis as “the total of all your nondeductible contributions and nontaxable amounts included in rollovers made to these IRAs minus the total of all your nontaxable distributions, adjusted if necessary.” In my case, there were no non-deductible contributions, no nontaxable amounts, and no nontaxable distributions. Thus, it’s my understanding the basis would be $0.00, and it is that amount I would enter on line 17. Line 18 requires that I subtract line 17 from line 16 and enter any amount greater than $0.00 on 1040 line 4b. In this illustration, I would enter $100.00 on my 1040 line 4b.

Part III is specific to “Distributions From Roth IRAs.” This does not apply to me and, by default, I am not required to complete.

Given all the above, it is my understanding that while I am required to complete Part II of Form 8606, Parts I and III do not apply to me and, by default, there is no requirement to provide the FMV of my IRA to the IRS.

Admittedly, though, I am not a tax expert like you. Therefore, if you still believe (1) I am required to complete Form 8606 Part I and/or Part III, and (2) provide the FMV of my IRA, please reply and inform me where I erred in understanding.

Thank you for your patience and advice.