Having trouble with a backdoor roth on form 8606

derekappelt · ‎May 31, 2019

I'm finding conflicting information on the internet so I'll ask here. First some background:

1. My wife is a high income earner and has a 401k at work. She has no IRAs except for $5500 that we put in a Trad non deduc ira and then immediately converted to a Roth. no gains, no losses.

2. I am a parent and now carry a $13,700 rollover IRA from previous employer as my only other IRA. It has grown to $16,500 due to investments. A spousal contribution of $5500 was put into a Trad non deduc ira and then immediately converted to a Roth also.

The problem I'm having is with line 2 of our 8606's. I'm not sure what the cost basis of each should be as the $5500 was already taxed previously and isn't in the Trad IRA account any longer.

Thanks to all for any assistance !

macuser_22 · ‎May 31, 2019

A so-called “back-door Roth” method ONLY works if you have NO OTHER Traditional IRA accounts. If you do, then the non-deductible part must be spread over ALL accounts and cannot be withdrawn by itself. Only if you started with NO Traditional IRA and ended up with a zero amount in ALL Traditional IRA accounts will this Roth conversion not be taxable.

In your case the $5,500 basis must be prorated over the entire value of all Traditional IRA accounts as of Dec 31, 2016 which was probably $16,500. About $1,375 of the bases would reduce the tax on the $5,500 Roth conversion leaving $4,125 as basis in the account to be prorated against future distributions. You can *never* only withdraw the basis - it is always prorated over the entire value of all existing IRA's. The taxable amount of the $5,500 Roth conversion would also be about $4,125 since only $1,375 would be tax free.

First you must enter your Traditional IRA contributions (if there were 2016 contributions).

IRA contribution
Federal Taxes,
Deductions & Credits,
I’ll choose what I work on (if that screen comes up),,
Retirement & Investments,
Traditional & Roth IRA contribution.

Be SURE to answer the follow up that the are choosing to make this contribution NON-DEDUCTIBLE - if that screen comes up. (DO NOT say that you moved (recharacterized) the money to a Roth) – this is a conversion, not a recharactorazition.

Then enter the 1099-R that shows the distribution.

Federal Taxes,
Wages & Income
I’ll choose what I work on (if that screen comes up),,
Retirement Plans & Social Security,
IRA, 401(k), Pension Plan Withdrawals (1099-R).

Answer the follow-up questions answer the question that you moved the money to another retirement. The screen will open up with choices of where it was moved. Choose you converted it to Roth IRA.

When asked if you have made any non-deductible contributions say " "yes" if you did then enter the non-deductible contributions made for tax years before 2016. (Usually zero unless you also made a 2015 or earlier non-deductible contribution).

Enter the 2016 year end value of your Traditional IRA a "0" (zero) - if it is in fact zero - this tax free Roth conversion will not work if it is not zero.

The non-deductible amount of your contribution will be subtracted from the taxable amount of the conversion on then 8606 form and enter on line 15a of them 1040 form and a zero taxable amount on line 15b if you did it right.

Also see this website that has some screenshots of the procedure
http://thefinancebuff.com/how-to-report-backdoor-roth-in-turbotax.html

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**

View solution in original post

macuser_22 · ‎May 31, 2019

Edited above to correct the year.

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**

derekappelt · ‎May 31, 2019

Thank you so much for your quick and thorough response! A couple of quick piggyback questions if you don't mind. Does me holding $ in a trad ira affect my wife's tax free conversion if we're filing jointly? Second question: Wouldn't it benefit me to convert $5500 of my existing rollover IRA in future years rather than putting in an additional $5500 of our money to convert? Taxes would be higher on it now of course, but when the balance is reduced in the future, a Roth conversion would have no other IRAs to be a part of. Correct? Thanks for letting me take up your time!

macuser_22 · ‎May 31, 2019

An IRA ("I"individual Retirement Account) is just that.  Your IRA and your spouses IRA are *totally* separate and would be reported as separate contributions to that spouses IRA and distribution on a 1099-R form reported for the spouse that the IRA belongs to.  The basis in one spouses IRA has no effect on the other spouses IRA.

In your above question, if the $5,500 contribution was to your spouses IRA and she had no other Traditional IRA then the basis would only apply to her own IRA.   The value of *your* IRA would be immaterial and the back-door conversion would be tax free if the year end value was zero.

Whether to contribute to a Traditional IRA or convert to a Roth should be discussed with your financial advisor.   There are differing opinions on that depending on your age and how long to retirement.  Conversions from a Traditional  IRA usually work best if the tax can be paid from other funds and not from the distribution which reduced the amount that can grow tax free.

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**

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