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
Here is what you should do regarding Form 8606:
Regarding your Roth IRA conversion:
Here is a link to all prior years' 8606 forms.
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.
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.
Not sure if it makes a difference, but the $5500 in my first traditional IRA account remains in that IRA account...I never converted that to a Roth.
"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."
It was greater than $17,500. But again....I have left that money in my traditional IRA and never converted that.
I have basically left my first IRA as is as I really didn't to deal with the tax gymnastics of a Roth conversion. Instead, I am doing that with my 2nd IRA acount.
With regard to the tax treatment, your traditional IRAs are all treated together as if they were a single account. It doesn't matter which one received nondeductible contributions and which one a Roth conversion is done from, the taxable result is the same.
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.
I am not sure how to account for this when I do taxes this year.
Just answer all of TurboTax's questions carefully and accurately without overthinking them. TurboTax will automatically prepare 2021 Form 8606 to determine the taxable amount of your Roth conversion. Line 14 of that form will carry forward to line 2 of the next Form 8606 that you next need to file when you take another traditional IRA distribution in the future.
Be sure to click the Continue button on the page that lists the Forms 1099-R that you have entered, otherwise you might not have reached all of the questions needed to obtain the information needed to complete Form 8606.
"
I just realized that...after accounting for my earlier IRA, I just went from a refund due to an amount owed.
Since my first IRA has a combination of 401K and non-deductible $ and the funds have been growing since 2016, how do I specifically roll over my 401K money separate from my non-deductible funds?
I think I understood everything.
I will ask my brokerage if they can do a reverse roll over from my IRA to a 401K of my pre-tax $$ and then attempt a Roth conversion of my post-tax $$s. Although I am not clear how I can sort between pre and post tax $s in my IRA since I invested both.
Either way, I think I am screwed for the 2021 tax year since I had a substantial balance in my IRA as of Dec 31 2021 and pro rata comes to bite me. But if I can do the above, I can still hopefully clear up my basis going forward.
Serves me right for not doing proper due diligence before getting into backdoor conversions!
The pre-tax balance in your traditional IRAs is the amount by which your total balance in traditional IRAs exceeds your basis in nondeductible traditional IRA contributions. Your basis is the number that appears on line 14 of your 2021 Form 8606.
Right, nothing you can do about 2021 now.
You guys are just amazing to patiently walk me through this! Really really appreciate it and thanks to you, the situation is becoming clear to me. I am glad I caught the mistake now when my IRA balance is still < $50K.....had this continued (since I plan on doing a back door Roth every year going forward), pro rata would have really screwed me over.
I am going to work my company brokerage now to start the process of emptying out my first IRA (the one that has the combination of pre and post tax $$).
One remaining question. I now know how to calculate the % of my IRA that is composed of pre and post tax money. If I do the 401K rollover today, I am assuming the amount of the rollover will be based off the total balance of all my IRAs today.
Here are my rough numbers as of today:
1. Total IRA balance: $44000 in my first IRA (mix of pre and post tax) + $6000 (2022 after-tax IRA contribution ear-marked for Roth conversion...I paused on the conversion because I caught the mess I am in) in my second IRA = $50000. The first IRA is the one I want to zero out right now.
However, since the $44000 is invested, the exact number is going to fluctuate...that is part of my confusion.
2. Total of all my after-tax dollars: $5500 from 2015 IRA + $6000 from 2020 IRA + $6000 from 2021 IRA + $6000 from 2022 IRA = $23, 500.
3. Current basis of my IRA : I just manually filled in 2021 8606 and Line 14 = $13,924. Link to my 2021 8606 is here.
4. Pre-tax balance in my IRAs that I should roll-over into my 401k today: $50000-$13,924 -$6000 = $30, 076
Is this correct?
The percentage basis is your current basis (Line 14 of your 2021 Form 1099-R plus the amount that you've contributed for 2022) divided by your current total balance in traditional IRAs. However, you don't need to calculate the percentage. You just need to move the pre-tax amount (total balance minus basis) to the 401(k). You are not permitted to move any of the basis to the 401(k), so on the day of the distribution that is rolled over to the 401(k) you must leave an amount in your traditional IRAs that is equal to the amount of your basis.
If your current basis in traditional IRAs is $13,924 and your current balance in traditional IRAs is $50,000, yes, the pre-tax amount in your traditional IRAs is currently $50,000 - ($13,924 + $6,000) = $30,076.
I think I am almost there.
Here is my plan:
I think this resets everything and makes my backdoor Roth conversions in the future indeed 100% tax-free. To confirm that, I filled a mock 2022 8606 here. I would really appreciate it if you could review it and confirm that everything looks ok.
Also: as I understand it, my IRA balance has to be $0 as of Dec 31st of the conversion year. So I could technically execute the above steps later (but well before Dec 31st of course) since all this is only relevant when I do my taxes again in 2023?
The good 'ole "Backdoor Roth" does not work unless you start with a zero balance in your Traditional IRA and end with zero balance in your traditional IRA.
Otherwise your just doing a conversion.
hmm....I have already contributed in an account that already had a non-zero balance.....is that a problem?
Or I am good as long as I don't convert it to a Roth before I zero out the balance? Not sure I understood it though since Form 8606 only asks for the balance of your IRAs as of Dec 31st and as long as that is 0 on Dec 31st, I thought I am ok.
It is not a problem.
If you want to convert Traditional IRA to Roth IRA, expect to pay income tax.
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If you are doing a Backdoor Roth over two tax years, then yes your balance will not be zero until completion.
If you are doing rinse- and-repeat you should have this down pat by now and not be confused.
I am using my 2021 basis to "separate out" the pre-tax and post-tax portions of my IRA. I will be moving the pre-tax to my company 401K and the post-tax I will do a Roth conversion on.
This will 0 out my IRA balance and reset everything. So going forward, pro rata is taken care of.....hopefully.
Earlier I think you said that you had already made a $6,000 nondeductible traditional IRA contribution for 2022. If so, that $6,000 plus the amount shown on line 14 of your 2021 Form 8606 would be your present basis.
Correct. The $6000 contribution towards my 2022 IRA is captured in my 2022 8606.
My 2021 8606 is here .
My 2022 8606 (using 2021 forms since 2022 forms are not available yet) is here.
Hopefully the following checks out. I plan to talk to my brokerage tomorrow to initiate the rollovers.
IRA Balance as of 03/08/2022 | Amount |
IRA#1 | 44,000.00 |
IRA#2 | 6000 |
TOTAL | 50,000.00 |
Present basis = 2021 Line 14 + 2022 non-deductible contribution | 19,924.00 |
Pre-tax balance in IRA#1 + IRA#2 | 30,076.00 |
Pre-tax balance in IRA#1 (for 401 k rollover) | 24,076.00 |
Post-tax balance in IRA#1 (for Roth conversion) | 19,924.00 |
Many thanks!
It appears you have the correct outcome and your basis is reduced to zero after the 2022 filing due to your backdoor Roth conversion. You have the information on the forms as outlined by Tax Expert @dmertz.
awesome...thanks for checking.
next step is to sell my funds in the IRA and convert everything to cash and then initiate the rollover/conversion.
@psychoanalyst your custodian can move your holdings in-kind into the Roth to avoid selling everything.
@fanfare : yes...I spoke to Fidelity yesterday and they did offer the option, but I think I want to avoid doing that because of the daily fluctuation of the balance. I think converting it to cash minimizes the day to day fluctuation of the balance and at least in my mind, makes the separation and rollovers/conversions at lot more straightforward.
There are no fees associated with any of the transactions, so I am not seeing an obvious advantage of moving the holdings in kind to a Roth.