Contribution to a traditional IRA then immediately converted to ROTH for 2016 tax year. 1099-R showing taxable distribution of $6500. Can I file 2016-Form 8606 now?

[meibei2]

I made a non-deductible contribution to a traditional IRA and converted to ROTH immediately for 2016 tax year.  I didn't include this in the 2016 return and did not file Form 8606.  Can I file 2016 Form 8606 now to avoid paying excess tax?

[dmertz · Accepted solution]

If you made a nondeductible traditional IRA contribution for 2016, it must be reported on a 2016 Form 8606.  If your 2016 tax return did not include this, you'll need to file the late Form 8606.

Assuming that your Roth conversion was done in 2017, the amount from line 14 of your 2016 Form 8606 will carry forward to line 2 of your 2017 Form 8606 to be used in determining the taxable amount of your 2017 Roth conversion.  If the Roth conversion was instead done in 2016, it will be included on your 2016 Form 8606 Part II.

[meibei2]

Thank you dmertz.  Conversion was done in 2017 but it was for the 2016 year. Is the conversion still considered tax year 2017 regardless of the intend that it was to convert the contribution meant for tax year 2016?  Thank you so much for your help.

[dmertz]

Roth conversions are done *in* a particular year, not *for* a particular year.  The Roth conversion is reportable on the tax return for the year in which the distribution from the traditional IRA is made.

[b1430048]

Hi dmertz,

I have a related problem regarding this Roth conversion.

If I made an non-deductible "excess" contribution to Traditional IRA and then converted everything from IRA to Roth IRA. It appears that there is no penalty to the excess contribution because the line 17 on 5329 says that the penalty is 0.06 * min(excess contribution, value of trad IRA), and the value of tradition IRA is zero(!) because everything is converted to Roth IRA.

What exactly is the correct way to report this excess contribution?

[dmertz]

b1430048, how is it that your contribution to the traditional IRA was an excess contribution?

Regardless, this is a messy situation to correct.   I assume that this was all done in 2018.  The excess that was in the traditional IRA was not eligible to be converted to Roth, so converting this excess to Roth results in an excess contribution to the Roth IRA.  In the past one was permitted to recharacterize back to a traditional IRA and then obtain a return of the excess contribution from the traditional IRA.  However, recharacterizations of Roth conversions are no longer permitted.

I haven't seen any recent guidance from the IRS on how to handle this situation.   Since a Roth conversion consists of a distribution from the traditional IRA and a rollover to a Roth IRA,  I would treat the distribution from the traditional IRA as a return of contribution by indicating to TurboTax in the Deductions and Credits section that you had the traditional IRA contribution returned.  I would then enter a substitute Form 1099-R with code 8 (and code 1 if you are under age 59½) instead of entering the code 2 or 7 Form 1099-R that you received for the conversion distribution from the traditional IRA.  I would then enter the conversion amount as a regular Roth IRA contribution, telling TurboTax that you have an excess contribution to the Roth IRA. 

If you requested a filing extension by the April 15 deadline or timely filed your 2018 tax return, you can request a return of excess contribution from the Roth IRA before the due date of your 2018 tax return to eliminate the excess in the Roth IRA and avoid any excess contribution penalty.  It will take some convincing of the Roth IRA custodian that this actually constituted a regular contribution to the Roth IRA because it was a conversion of an amount not eligible to be converted.  If you obtain a return of this contribution before the due date of your tax return, you'll tell TurboTax that you had the regular Roth IRA contribution returned.  You'll then need to enter the code JP 2019 Form 1099-R if the amount returned had gained in value and therefore had attributable earnings distributed.  For all of this you'll need to provide explanation to the IRS on the explanation statement(s) that TurboTax prompts you to prepare.