Non deductible IRA tracking - form 8606

[capristar]

I am totally confused by this.  I am trying to get my basis corrected and file the correct 8606 forms.  Here's the history:

I rolled over a traditional IRA in 2007 that I received in my divorce and had no activity until 2016 when I recharacterized a 2015 contribution of 6,500 from the traditional to my Roth.  Basis would then be 6,500 at 12/31/16?

2017 contribution made to Roth only

2018 contribution of $6,500 made to Roth then on 4/19/19 fax recharacterization request to custodian requesting it be recharacterized as a 2018 contribution to traditional since income was too high for 2018.  Took deduction for 2018.  Later discovered custodian reported as 2019 contribution and refused to change it even though my cpa said we had until the extension due date that was filed to make the recharacterization.  That's a side issue, currently corresponding with IRS to straighten out.

2019 contribution of 7k made to traditional then converted to Roth for 2020.  12/31/19 basis 13,500?

2020 contribution of 7k made on 4/21/21 then converted to Roth for 2021.  12/31/20 basis 20,500?

What a mess!  I'm confused about the prorating and why there is tax on it when the whole contribution was converted each time except for the beginning rollover balance which has remained there.  The IRS instructions are not very helpful.  Why do they ask for the total value and what exactly does that mean?  The total balance in the account including the rollover?  That seems to trigger the proration.

I filed a 2020 extension and paid the estimated amount but would like to finalize my return with the correct amounts and file any corrected 8606 forms needed asap.  Any help would be greatly appreciated!

[macuser_22]

You are confusing the basis in the Roth and the basis in a Traditional IRA.   Roth basis are your contributions to a Roth and are not tracked on a 8606.  You must keep track of  Roth basis yourself.   Once you are age 59 1/2 Roth basis no longer matters.

Your 2016  contribution that was switched to a Roth creates a basis in the Roth  and is not reported on a 8606.

2018 is not clear.   If you first made a Roth contribution and switched to a Traditional IRA in 2019 then in Jan of 2020 you would have received a 2019 1099-R reporting that.   

What code was in box 7?     

Regardless, if you took a deduction, then it would not create a basis in the Traditional IRA and not go on a 8606.

For 2019, did you report the $7K contribution as non-deductible on a 2019 8606 line 1?   Your 12/31/20 basis in the Traditional IRA would be $7K

For 2020,again if the $7K was also non-deductible reported on a 2020 8606 line 1 with the carry forward $7K basis on line 2 for the total basis of $14K on line 3.

The problem seems to be whether the 2018 contribution was actually recharactorized or not depending on what the box 7 code and how it was reported.

You cannot convert only the non-deductible basis.    Any Traditional IRA distribution is always a mix if before tax and after tax money.     So when you do the conversion it must know the year end value of ANY existing Traditional IRA accounts so the basis can be pro-rated over the distribution and total  year end value.  as in the example below:

=================================

You can NEVER withdraw ONLY the nondeductible part - it must be prorated over the entire value of ALL Traditional IRA accounts which include SEP and SIMPLE IRA's. (For tax purposes you only have ONE Traditional IRA which can be split between as many different accounts as you want, but for tax purposes they are all added together).

For example using rough figures: if you had $60K of nondeductible contributions in an IRA with a total value of $600K (10:1 ratio), then when you take a $60K distribution from any IRA account $6,000 would be nontaxable and $54,000 would be taxable (same 10:1 ratio) , with the remaining $54K of basis staying in the IRA for future distributions. As long as there is any money in the IRA, there will be some basis.

TurboTax will ask for your non-deductible "basis" and then the *Total Value* of *all* Traditional IRA, SEP and SIMPLE accounts as of Dec 31, of the tax year. That is so the prorating of the basis can be properly proportioned between the current years distribution and the remaining IRA value. That is done on the 8606 form.

[capristar]

Thank you for your quick response macuser_22.  I realize I don't need to keep track of my Roth basis but I guess I wasn't sure if recharacterized contributions done in subsequent years counted toward the traditional non deductible basis on the 8606 for the current year.  I gather they do not from your response.

For 2018, yes I did receive a 2019 1099-R with 6500 in box 1 and code R in box 7.  I also received a 2019 5498 with 7k contribution in box 1, 6500 recharacterized contrib. in box 4, total cash balance (FMV) in box 5, and IRA box marked in box 7.

For 2019, I did report the 7k on line 1 of the 8606, however, I did not report a distribution or total value because I was not aware when I filed that the recharacterization would be reported as 2019 instead of 2018 as I thought it should have been.  Did you mean to say 12/31/19 basis would then be 7k or is 12/31/20 correct?  

For 2020, I will report as you stated but also enter the total value info since a conversion to Roth was done in 2020, correct?

Thanks so much for your help and the proration explanation.  Much clearer now.

.  

[macuser_22]

If you received a 2019 code R 1099-R then what they told you was incorrect.  They did indeed report it as a 2018 characterization so it really was a 2018 contribution and reported that way.