Help: I think I screwed up my backdoor Roth conversion.

[DarthCoder]

Background:
In the past, at the start of the year, I'd make post-tax contributions to my Traditional and then a month or so later convert to Roth.
Jan 2019: I made my usual Traditional IRA contribution (it had a zero balance before the contribution)
Mar 2019: I [backdoor] converted the account to a Roth IRA.
Jun 2019: I moved my 401k from my prev employer to the same Traditional IRA
(I should have rolled it into my new employers plan ASAP, but I didn't)

EDIT: Fixed typo... I meant 2019, not 2018.

The problem:
When I do my taxes this year, TurboTax tells me that I don't owe any taxes on the $6000 I contributed to the Traditional IRA.
However, line 4b shows a taxable amount of $4800
Based on the fact that the 401k rollover amount was $24000, it seems like I owe taxes AGAIN on 6000/(6000+24000) = $4800

How do i resolve this? Will this work out eventually in my 2020 taxes?
I had completed the backdoor conversion BEFORE the 401k rollover even was initiated.

If I can't fix this, does this mean that my rollover sitting in my Traditional IRA now has 80% pre-tax and 20% post tax contributions?

Thank You.

[MikeinSC]

First, just to be sure I have the facts correct:

1) you made a non-deductible IRA contri of $6,000

2) you transferred $6,000 to your Roth from this IRA - effectively zeroing out this account

3) you then added to this IRA from your 401k from a former job

I don't see anywhere that the timing of #3 affects the calculation of the taxability of the Roth Conversion.  It is based on balances at 12/31.

Because of this you have basis in your IRA for the year of $6,000 before any distribution.  You have a total IRA of $30,000.  This is 20%.  The Roth conversion of $6,000 times 20% is $1,200, so that amount is not taxed, the difference is $4,800 which is taxed.

Going forward, you have $24,000 in your IRA with a tax basis remaining of $4,800 (you started with $6,000 then used $1,200 in basis in the distribution, leaving basis of $4,800.)

[DarthCoder]

Thank You, Michael.

I think I understand the math.

Question 1: Does this mean that now that I have moved the rolled over 401K to my new employer, thereby bringing my Trad IRA balance back to zero, it's a mix of pre and post tax contributions? I'm trying to understand if I am setting myself up for double taxation (if I haven't already 🙂

Question 2: (please ignore if this is soliciting tax advice) Should I just sit 2020 out and let the Traditional IRA's FMV stay $0.00 till 12/31/2020 to simplify things when I do my 2020 taxes next year?

[dmertz]

"TurboTax tells me that I don't owe any taxes on the $6000 I contributed to the Traditional IRA."

No, that's not what it says.  TurboTax says that code 2 means that you don't owe any "additional taxes," meaning that you are not subject to the 10% excise tax on early distributions.

If your 2018 Roth conversion was not treated as taxable on your 2018 tax return, your 2018 tax return is erroneous.  The rollover of the 401(k) to the traditional IRA made your 2018 Roth conversion and nay future Roth conversions largely taxable, with only a portion of your basis in nondeductible traditional IRA contributions being nontaxable each year, with your basis only being recovered when your traditional IRA distribution result in a year-end balance of zero in all of your traditional IRAs.

You are not owning taxes again on your basis, the amount of basis that is not permitted to be applied to this year's traditional IRA distributions remains in your traditional IRAs to be applied proportionately to future distributions to make them partially nontaxable instead of fully taxable.

[dmertz]

Yes, by rolling your pre-tax money that had been in the traditional IRA over to a qualified retirement plan, you will be able to apply all of your basis in any year that you have a zero year-end balance in traditional IRAs.

I'm concerned, though, that it seems that you have impermissibly rolled over to the 401(k) some of your basis in nondeductible traditional IRA contributions.

[DarthCoder]

Sorry dmertz. I meant 2019. 
I fixed the post.
Prior to 2019 I used the Trad IRA only to do the backdoor conversion (fund it in Jan, convert it all in Feb, $0 FMV at the end of the year).

"I'm concerned, though, that it seems that you have impermissibly rolled over to the 401(k) some of your basis in nondeductible traditional IRA contributions."
I guess I'll cross that bridge in Feb 2020.

Thanks again.

[dmertz]

As I understand it, you moved the money from the traditional IRA to your new employer's 401(k) in 2020, so it still seems that you impermissibly moved $4,800 of basis in nondeductible traditional IRA contributions to the new employer's 401(k).  Unless that gets corrected by a return of excess contribution from the 401(k) and roll it back into the traditional IRA in a timely fashion, that $4,800 will end up getting taxed again.

[DarthCoder]

I'm not sure what I should do at this time other than just doing my 2019 taxes since IRS and TurboTax are handling my faux pas correctly.

The source IRA transaction description says "DIR ROLL TO QUAL PLN IRA CHK"
The destination IRA transaction description says "Contribution - Rollover" for the same amount.

I'll call the source brokerage and see what action I need to take.

Thanks again guys!

[dmertz · Accepted solution]

The source brokerage will be of no help.  Your IRA custodian has no way to know if the amount distributed includes any basis in nondeductible traditional IRA contributions.  That's entirely determined on your tax return with Form 8606.  What you have described is a situation where your traditional IRA at 2019 year end contained $24,000 with $4,800 of that being basis in nondeductible traditional IRA contributions.  If you moved all of that $24,000 to the new employer's plan, you have impermissibly moved $4,800 of basis to the new employer's plan that needs to be removed from the plan by a return of excess contribution with the $4,800 rolled over to a Roth IRA.  (Any earnings that accompany the returned excess contribution are not eligible for rollover and will be taxable on your 2020 tax return.)  To avoid the new-employer's plan becoming at risk for disqualification, the plan must make the corrective distribution upon you informing them of the amount impermissibly rolled into the plan.

If there is concern about the plan being able to complete the distribution of the excess contribution in time to be able to complete the rollover of the $4,800 to a Roth IRA, you could substitute other funds to do that rollover and then use the return of excess contribution to replace those other funds.

Because the entire amount rolled over from the traditional IRA will be reported on a code G Form 1099-R with the IRA/SEP/SIMPLE box marked, this Form 1099-R will not reflect the actual amount rolled over to the new plan and your 2020 tax return will likely require entering a substitute code G Form 1099-R showing only the net amount rolled over with the $4,800 reported on a separate substitute code 1 Form 1099-R with the IRA/SEP/SIMPLE box marked for reporting the rollover to the Roth IRA.  As you can see, rolling over basis from a traditional IRA to an employer's qualified retirement plan creates a substantial mess to clean up.

[DarthCoder]

Lesson Learnt. Clean house every December.

Is it possible, in retirement, for me to file Form 8606 (TT has been filing it for me the past few years, I think) just to ensure that my post-retirement distributions are split in the right ratio of pre and post tax?

Another thing to remember when I get older but is that an alternative?

[dmertz]

If you have basis in nondeductible traditional IRA contributions, you are required to file Form 8606 to determine the nontaxable and taxable amounts of any distribution from a traditional IRA.

[DarthCoder]

Got it.

Form 8606 is for IRAs, and has nothing to do with post retirement qualified DC plan distributions.

https://www.irs.gov/forms-pubs/about-form-8606

Use Form 8606 to report:

Nondeductible contributions you made to traditional IRAs.

Distributions from traditional, SEP, or SIMPLE IRAs, if you have ever made nondeductible contributions to traditional IRAs.

Conversions from traditional, SEP, or SIMPLE IRAs to Roth IRAs.

Distributions from Roth IRAs.

I'll call ADP (the current plan administrator/custodian).

Thanks again.