Correcting mistakes in IRA Reporting

Forum|Forum|4 years ago
March 4, 2022
1 reply
77 views

Hello,

During the course of preparing my 2021 returns, I realized that I have been stupid and naive about IRA tax reporting. I am hoping you can help me figure out how best to correct the mistakes I have made. Below are the details of my situation:

1. I opened my first traditional IRA account in 2016 prior to the 2015 tax deadline. I then added a non-deductible contribution of $5500 (max limit in that tax year) for the 2015 tax year: I however failed to report that using Form 8606.

2. In 2016, I switched jobs. Not wanting to maintain multiple 401K accounts, I rolled over 100% of my 401K money with my old company (a) partly into the IRA account I opened in 2016 and (b) rest in my new company's 401K. Please don't ask me why I did this...I was a complete tax/finance idiot at that time. So at this point, my IRA account has a mix of deductible and non-deductible contributions.

3. I received a 1099-R from my old company's 401K account documenting the rollover distribution, which I then reported in my 2017 taxes.

4. I opened my 2nd traditional IRA account in 2021. I made 2 non-deductible contributions (a) $6000 for Tax year 2020: again failed to report that in Form 8606 and (b) $6000 for Tax year 2021, which I will be reporting this year.

5. I converted 100% of funds in my 2nd IRA account into a Roth in 2021.

So far I have figured out how to handle #4 and #5: I will be doing a late submission of Form 8606 documenting my 2020 non-deductible IRA contribution. I know what to do for my 2021 taxes as well.

What I am very confused about is how do I go about correcting/documenting my transactions from 2017 and earlier? Should I:

1. Submit a 2015 8606 documenting the $5500 non-deductible contribution?

2. Report the $5500 as the basis on my 2020 8606? I am assuming that my pre-tax rollover funds should not be considered as part of the basis.

3. Report $5500 + $6000 as the basis on my 2021 8606 (handled by Turbotax...I don't intend on manually filling in 8606 for my 2021 taxes).

I would really appreciate the advice here. Didn't realize how much I had ignored reading basic information about the IRA before venturing into it. Lesson learned and will be applied 2022 onwards.

Many thanks!

Avi

FangxiaL

Level 10

Here is what you should do regarding Form 8606:

File all the missing 8606 forms by themselves without amending your prior years' returns
Explain to the IRS what happened and ask for penalty relief if lucky (reasonable cause defense)

Regarding your Roth IRA conversion:

A separate IRA account won't make all of the conversion tax-free, because all your IRA accounts are aggregated
If you have a 401(k) with your current employer, ask if the plan accepts rollovers from your IRA account. Try to roll over the old 401(k) money out of your IRA so that you can convert after-tax IRA contributions to your Roth IRA in the future, otherwise, a chunk of your rollover is taxable.

Here is a link to all prior years' 8606 forms.

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psychoanalystAuthor

Level 4

Thanks so much. I will mail in the prior year 8606 forms.

Did I get the details of filling the 8606 forms correct?

Regarding my 1st IRA: I understand that that funds will get taxed post retirement.....I will take a closer look at it after I am done with taxes this year.

dmertz

Level 15

Yes, 1, 2 and 3 are all correct. The $5,500 that results on line 14 of the 2015 Form 8606 carries forward to line 2 of the 2020 Form 8606 to be added to that year's nondeductible contribution and the $11,500 result on that form's line 14 carries forward to line 2 of your 2021 Form 8606 to be combined with the $6,000 nondeductible contribution for 2021 and used in calculating the taxable amount of your Roth conversion.

Since you apparently still had some funds in a traditional IRA at the end of 2021, only some of your basis in nondeductible traditional IRA contributions will be applied to the Roth conversion with the remainder of the basis to be applied to subsequent distributions from your traditional IRAs. If the amount rolled over from the 401(k) to your traditional IRAs was greater than $17,500 and all pre-tax, more than half of your 2021 Roth conversion will be taxable.