Do I File Form 8606?

[dannytran01]

Hello, 

I have the downloaded software TurboTax Premier and I'm trying to deal with this issue with Backdoor Roth and a Rollover IRA. 

So my scenario is this:

1. In 2020, I found out I no longer qualified for contribution to Roth IRA based on the income limit.

2. I re-characterized $3,000 of my Vanguard Roth IRA to a new Vanguard Traditional IRA, added $3,000 more post-tax dollars, then did a backdoor ROTH IRA conversion of all $6,000 on Vanguard.

3. Being new to Backdoor, I found out about the Pro-Rata rule and thought it didn't apply to me since my Vanguard Traditional IRA had zero value.

4. However, I failed to notice that I had a Rollover IRA in Fidelity (rolled over from an old 401k in 2015 at the value of $2,746.69 with no post-tax contribution to this day.  The ending value at 12/31/2020 is $5,742.35).

5. I plan to move this rollover IRA to my current company's 401k, but it's already 2021. 

I was about to start filling in my IRA Basis with $2,746.69 (assuming the original rollover value as IRA basis input), however, I stopped short after reading this from the TurboTax Help pop up on the "Learn more" link in the "Let's Find Your IRA Basis" section. 

It said: "Your IRA is the total of all your nondeductible IRA contributions (and for all of your traditional IRA accounts, if you have more than one). Contributions do not include rollovers."

That statement above contradicts what I have read on online forums. But I maybe reading it wrong. Would someone be able to help explain if I still need to file the form 8606? despite the statement: "Contributions do not include rollovers"? If so, would the IRA basis be the original rollover value: $2,746.69 or the value at 12/31/2020 ($5,742.35)?

Thank you!

[DanaB27]

Yes, you will have to file Form 8606 because you made nondeductible contributions of $6,000 to your traditional IRA.

TurboTax is asking about the basis in your traditional IRA in 2019 and prior. Unless your rollover had also a basis (nondeductible, post-tax amount, nontaxable amount) you will not include the rollover amount in your basis. You stated there were no post-tax contributions in the IRA until you made the nondeductible contributions in 2020. Therefore, your basis will be $0 for 2019 and prior years.

When TurboTax asks about the value on December 31,2020 then enter the value left in the traditional IRA on December 31, 2020.

From The IRS:

Basis:

 Your basis in traditional, SEP, and SIMPLE IRAs is 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 (see the instructions for line 2, later). (IRS Basis Form 8606)

Line 2:

Generally, if this is the first year you are required to file Form 8606, enter -0-. Otherwise, use the Total Basis Chart to find the amount to enter on line 2.

However, you may need to enter an amount that is more than -0- (even if this is the first year you are required to file Form 8606) or increase or decrease the amount from the chart if your basis changed because of any of the following.

• You had a return of excess traditional IRA contributions (see Return of Excess Traditional IRA Contributions, earlier).

• Incident to divorce, you transferred or received part or all of a traditional, SEP, or SIMPLE IRA (see the last bulleted item under Line 7, later).

• You rolled over any nontaxable portion of your qualified retirement plan to a traditional, SEP, or SIMPLE IRA that wasn’t previously reported on Form 8606, line 2. Include the nontaxable portion on line 2. (IRS Line 2 8606)