Non-deductible IRA clarification

[psychoanalyst]

I created a traditional IRA account for the first time last year and am confused about the finer details of tax treatment and filing my returns this year. 

This is my scenario:

1. Opened Traditional IRA account AFTER I filed my 2020 returns (I did this before the tax deadline in April) : I did this with after-tax dollars. 

2. I added a total of $12,000: $6000 for 2020 (late contribution) and $6000 for 2021. 

3. Did a Roth conversion on the entire $12,000 in 2021. 

4. The 2021 portion of that (contribution + conversion) I think I got figured out....I have a 1099-R and I am simply following the corresponding prompts in Turbotax. 

5. It's the 2020 portion I am a bit confused about. I did NOT submit a Form 8606 in 2021 as part of my 2020 returns. 

What should I be doing here? If I submit a standalone 2020 8606 to the IRS right now , is that sufficient? 

Would appreciate the advice. 

Thanks!

[MinhT1]

Form 8606 is part of your tax return. So you cannot submit a stand alone 2020 form 8606.

In your case you must amend your 2020 tax return to include a form 8606.

[psychoanalyst]

I just found this: https://ttlc.intuit.com/community/after-you-file/discussion/late-filing-of-form-8606/01/1301639#M304...

According the response above, we can submit a stand-alone 8606 w/o amending the return. I am not sure i follow why my return has to be amended given that there are no tax implications here since the funds are after-tax and the Roth conversion did not happen in the 2020 tax year....or maybe I have this completely wrong? 

[ThomasM125]

The instructions to form 8606 say to file it with your tax return if you are required to file a tax return. Otherwise, you can file it separately. That is open for interpretation, but it does indicate that it can be filed separately in some circumstances.

I would probably by OK to file it separately by certified mail so you have a record of having filed it.

@psychoanalyst

[psychoanalyst]

One additional question. 

What are the implications of a late conversion? What if I made a non-deductible contribution in a traditional IRA in say 2021, left the money sitting there all year uninvested (so there is now growth/gains) and then converted in 2022. Are there are tax implications? 

[dmertz]

Nondeductible traditional IRA contributions are reported on the Form 8606 for the year for which the contribution is made.  Separately, Roth conversions are reported on the Form 8606 for the in which the distribution that is converted to Roth is made.  If you make a nondeductible contribution and do not convert or otherwise distribute it in the same year, the entire amount of the nondeductible contribution will be included on Form 8606 line 14 for carryforward to line 2 of the Form 8606 for the future year in which the the Roth conversion is eventually done.  If there are no investment gains or losses and there are no other amounts in your traditional IRAs, the entire amount of the basis in nondeductible contributions will be applied to reduce the taxable amount of the conversion to zero no matter how may years you wait.

Let's say that you begin with no money in traditional IRAs, then in 2022 you make a $6,000 nondeductible traditional IRA contribution for 2021, make a $6,000 nondeductible traditional IRA contribution for 2022, then convert the entire $12,000 to Roth in 2022.  Your 2021 Form 8606 will have $6,000 on lines 1, 3 and 14.  Your 2022 Form 8606 will have $6,000 on line 1, $6,000 (from the 2021 Form 8606) on line 2, $12,000 on lines 3, 5, 13, 16 and 17, $0 on line 14 and taxable amount of $0 on line 18.

[psychoanalyst]

"Let's say that you begin with no money in traditional IRAs, then in 2022 you make a $6,000 nondeductible traditional IRA contribution for 2021, make a $6,000 nondeductible traditional IRA contribution for 2022, then convert the entire $12,000 to Roth in 2022.  Your 2021 Form 8606 will have $6,000 on lines 1, 3 and 14.  Your 2022 Form 8606 will have $6,000 on line 1, $6,000 (from the 2021 Form 8606) on line 2, $12,000 on lines 3, 5, 13, 16 and 17, $0 on line 14 and taxable amount of $0 on line 18."

This is exactly what I wanted to confirm. Thanks so much.

The only slight difference in my scenario is I did all the contributions in 2021 (for 2020 and 2021), but converted the whole amount in 2022 instead of 2021. Going forward I will rectify that to keep things simple: contribute for the year and convert all in the same year.

[dmertz]

In that case line 14 of your 2020 Form 8606 carried forward to line 2 of your 2021 Form 8606 to be combined with the amount on line 1 with the entire sum appearing on line 14.  Line 14 of the 2021 Form 8606 will carry forward to line 2 of your 2022 Form 8606 to be used in calculating the taxable amount of your 2022 Roth conversion(s).  If you make a nondeductible traditional IRA contribution for 2022 and also convert that in 2022, those amount will also be included on your 2022 Form 8606.

[psychoanalyst]

Is this the right entry in Turbo-tax to cover the 2020 non-deductible contribution?

Technically, I only opened the IRA account in 2021, but since I had a 2020 contribution, I would still enter the basis as of Dec 31, 2020 as $6000 I am assuming? 

[dmertz]

Correct.  2021 TurboTax is asking for the amount from line 14 of your 2020 Form 8606 (which will already be present in 2021 TurboTax if the 2020 tax file that was transferred in to start your 2021 tax return included this 2020 Form 8606).

[psychoanalyst]

My bad there. I never filed Form 8606 for my 2020 contribution and since I opened the IRA AFTER I filed 2020 taxes, no software has the info either.

I am going to submit a stand-alone paper copy of the 8606 for my 2020 contribution.