Forgot about SIMPLE IRA last year during first ever backdoor Roth. Do I need to amend last year's return?

[cantdrive55]

It seems my taxes get more complicated every year.  But much of it seems to be self-inflicted from trying to recover from mistakes originating from unknown unknowns that turn into known unknowns when I go into tax mode in the early part of the year and discover all the things I did wrong.  Why is our tax system so complicated?  I digress...

The question I'm now (early 2022) facing is whether I need to amend my 2020 tax return because I did not include my wife's SIMPLE IRA balance when filing form 8606 for a 2020 non-deductible IRA contribution that was converted to a Roth IRA in 2021.  Her SIMPLE IRA is from a previous job and I just simply forgot to consider it when filing my 2020 taxes last year.

So before I get too far, the facts:

• Calendar Year 2020
  • Maxed out Roth IRA contributions for both of us for Tax Year 2020
• Calendar Year 2021
  • Realize we've hit 2020 Roth IRA income contributions limits
  • Realize that scheduled transfers to Roth IRA account have already added some 2021 Roth contributions
    • [Uh oh] Stop scheduled transfers
    • Decide that I'll deal with excess 2021 contributions in 2022 the same way I deal with the excess 2020 contributions in 2021.
  • Recharacterize excess 2020 Roth contributions to newly created Non-Deductible Traditional IRAs
  • Convert the whole balance (now with gains) of new Traditional IRAs to our Roth IRAs
  • File 2020 Tax Return with form 8606 explaining non-deductible IRA contribution
    • Lines 1,3, and 14 show the amount recharacterized
    • Both of our Line 2 (your total basis in traditional IRAs) shows zero
• Calendar Year 2022
  • Try and figure out how to enter 1099-Rs into TurboTax and properly pay taxes on gains from the original 2020 contributions.  (I think I have a handle on that part)
  • Realize that I forgot about my wife's SIMPLE IRA balance last year when filing taxes (oops)

So, now, my uninformed thought process on the situation and what I should do...

1. As I recall, one of the first questions in the "Enter your traditional IRA" workflow is to enter the balance of any existing IRAs (which would include the SIMPLE IRA).  If I answered that question for the 2020 tax year, I would have put zero, which seems like it would be wrong in hindsight (for my wife, at least).
   1. Is TurboTax even asking about IRAs other than my non-deductible IRA here?
2. However, looking at the Form 8606 that was filed for 2020, I'm not sure it would look any different if I were to account for the SIMPLE IRA balance. Reasoning below:
   1. Explanation for 8606 Line 2 (basis in traditional IRAs) says "Generally, if this is the first year you are required to file Form 8606, enter -0-"  Which leads me to believe that this is only relevant if I've previously filed an 8606 (or fall into the other criteria it mentions, which we don't)
   2. The directions in Line 3 say "In 2020, did you take a distribution from traditional, SEP, or SIMPLE IRAs, or make a Roth IRA conversion?".  The answer for both of us is "No" since the Roth conversion happened in 2021, and it's our first.  If "No", it says "Enter the amount from line 3 on line 14. Do not complete the rest of Part I." And if Part 1 is skipped, I don't see any questions in Part 2 or 3 that would include the SIMPLE IRA balance.
3. I've done enough research to know that I'm going to get hit with some Pro-Rata taxes somewhere.  My assumption is that since I did the Roth conversion in 2021, I'll pay those taxes when filing our 2021 taxes.
   1. Luckily, her SIMPLE IRA balance is not big, but the Pro-Rata rule (as I understand it) means (as of the conversion), because the SIMPLE IRA balance is non-zero, her non-Roth IRA balances are now a combination of deducted and non-deducted funds (yuck)
4. Finally, if I want to "fix" this, it seems like the best path would be to:
   1. Not amend my 2020 return???  What would change? Or would I?
   2. In the 1099-R TurboTax interview, in the question about "Value of Traditional SEP, and SIMPLE IRAs on December 31, 2021", put the value of the SIMPLE IRA on that date
   3. Recharacterize 2021 Roth over-contributions to Traditional IRA (same thing I did last year)
   4. Make new 2021 tax year non-deductible contributions to meet the maximum 2021 IRA contribution
   5. File my 2021 taxes with new 8606 showing non-zero in Line 6 for my wife
   6. Later, but in 2022, move/rollover her SIMPLE IRA balance over to her [previously entirely non-deductible] Traditional IRA.  This also consolidates the money at one financial company, which is nice.
   7. Also in 2022, convert the whole balance of her Traditional IRA (with rollover included) to her Roth
   8. Pay taxes on the conversion of the deducted portions of the balance on my 2022 taxes.  God help me at tax time 2023, but at least I think that resets things in my non-deductible traditional IRA?

Sorry, that's a lot.  But I really want to find out if I'm either on the right track or need to rethink this.  Any information is greatly appreciated.  And hopefully this post will help somebody else out there in a similar situation.  Thanks!

[DanaB27 · Accepted solution]

1. No, you do not need to amend your 2020 tax return. It seems that your 2020 Form 8606 is correct since it shows the correct new basis (from the recharacterization), provided that your wife did not have any basis in her SIMPLE IRA (or you had a basis in any other traditional IRA, SEP, or SIMPLE IRA). You didn't have to enter the value since you did not convert any funds in 2020.

2. Yes, on your 2021 tax return for the value on December 2021you will combine the value of all your traditional IRA, SEP, and SIMPLE IRA and enter this (do the same for your wife). You stated that you recharacterized the 2021 in 2022 therefore be sure to enter the amount under "Outstanding Recharacterizations" on the "Tell Us the Value of Your Traditional IRA" screen

3. Yes, you will recharacterize 2021 Roth over-contributions to Traditional IRA. To review instructions please see Option 1: Recharacterize the Roth IRA contribution. (To verify, you entered the recharacterization like this on your 2020 tax return as well.)

4. Yes, you will make the traditional IRA contribution non-deductible since you are converting them to Roth.

5. Yes, you and your wife should have a value on line 6 (you had an outstanding recharacterization)

6-8. Yes, you will have to pay taxes on part of the 2021 conversion because your wife had deductible contributions in the SIMPLE IRA and if you had any earnings. The rest of the portion will be taxable in 2022 with the 2022 conversion.

[cantdrive55]

@DanaB27, thanks for the detailed reply.  It's very helpful.  I have a couple clarifying questions if that's ok.

No, you do not need to amend your 2020 tax return. It seems that your 2020 Form 8606 is correct since it shows the correct new basis (from the recharacterization), provided that your wife did not have any basis in her SIMPLE IRA (or you had a basis in any other traditional IRA, SEP, or SIMPLE IRA).

I think I'm getting tripped up over nomenclature.  I had thought "basis" just means any non-zero balance.  Her SIMPLE IRA has been around now for several years, so it definitely had a non-zero balance in 2020.  But my intuition now is that "basis" means something specific in the IRA context to denote how much of a traditional IRA balance has been deducted vs not deducted.  And since our first Roth conversion happened in 2021, and neither of us had previously made any non-deductible contributions, we did not have a "basis" in 2020...?

You stated that you recharacterized the 2021 in 2022 therefore be sure to enter the amount under "Outstanding Recharacterizations" on the "Tell Us the Value of Your Traditional IRA" screen

I'm glad you mentioned this.  I had interpreted that to mean outstanding recharacterizations from Traditional/SEP/SIMPLE IRAs only.

[DanaB27]

Basis in an IRA means that you had nondeductible/after-tax contribution in the account. 

Yes, you had a basis in your 2020 accounts because you stated "Recharacterize excess 2020 Roth contributions to newly created Non-Deductible Traditional IRAs". The recharacterization has to be entered on your 2020 tax return despite it happening in 2021. Also, you stated that line 14 (basis) on Form 8606 had the recharacterized amount. Therefore, you seemed to have entered it correctly (as long as you didn't have any other nondeductible contributions in any of your IRAs).

Yes, you will have to enter the amount you recharacterized from Roth to traditional IRA under "Outstanding Recharacterizations" on the "Tell Us the Value of Your Traditional IRA" screen.