Backdoor Roth IRA conversion for 2018 & 2019 converted in 2019

[macuser_22]

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@correctax wrote:

Thanks. Do I need to tax amend 8606 for my 2018 tax year return then?

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If you did not deduct the 2018 contribution and have no other reason to amend then just mail a 2018 8606 by itself with the non deductible contribution on line 1, 3 & 14 (unless you have a 8606 form prior years, then the lat filed 8606 line 14 goes on line 2 of the 2018 8606).

2018 form:  https://www.irs.gov/pub/irs-prior/f8606--2018.pdf

2018 instructions: https://www.irs.gov/pub/irs-prior/i8606--2018.pdf

https://www.irs.gov/filing/where-to-file-addresses-for-taxpayers-and-tax-professionals-filing-form-1...

[Pattmark11]

I accidentally put too much money in a Traditional IRA in 2018 (didn't realize I didn't qualify for the full $7k due to amount of income over threshold on worksheet) , and realize I didn't get the advantage of pretax contribution (and don't want to be double taxed), and have prepared to send in a late 8606. I have other Traditional IRAs, so I don't think I can do a back door IRA.

1) will I need to pay $50 to file a late 8606, Or should I just see if the IRS sends me a bill?

2)The non-deductible portion is approximately $5000 of a $10000 Traditional IRA. I am 60 . Is there anything I can do other than withdraw it in say 1 or 2 years? Is it complicated to take a traditional IRA and identify it as a prorated amount deductible/ non-deductible? Are there any references you can provide me that I could review? I'm guessing there is nothing I can do to convert this to a roth, unless maybe I were to combine my traditional IRA accounts , if even that would work? should I figure out my IRA's value before and after the deposit for proration purposes? I'd also prefer not to resubmit an amended return for 2018, and have it scrutinized

[macuser_22]

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@Pattmark11 wrote:

I accidentally put too much money in a Traditional IRA in 2018 (didn't realize I didn't qualify for the full $7k due to amount of income over threshold on worksheet) , and realize I didn't get the advantage of pretax contribution (and don't want to be double taxed), and have prepared to send in a late 8606. I have other Traditional IRAs, so I don't think I can do a back door IRA.

1) will I need to pay $50 to file a late 8606, Or should I just see if the IRS sends me a bill?

2)The non-deductible portion is approximately $5000 of a $10000 Traditional IRA. I am 60 . Is there anything I can do other than withdraw it in say 1 or 2 years? Is it complicated to take a traditional IRA and identify it as a prorated amount deductible/ non-deductible? Are there any references you can provide me that I could review? I'm guessing there is nothing I can do to convert this to a roth, unless maybe I were to combine my traditional IRA accounts , if even that would work? should I figure out my IRA's value before and after the deposit for proration purposes? I'd also prefer not to resubmit an amended return for 2018, and have it scrutinized

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#1 Send the 8606 and ask for a waiver of the penalty.  Any reasonable reason should be accepted.

#2. 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.

[Pattmark11]

Thank you for the rapid response- Amazing. So would there be a benefit to me filing an amended return that could help me clean what sounds like an accounting nightmare? or could combining My traditional IRA's allow me to do a back door Roth IRA? Or just taking distributions on all my Roth IRA's over a condensed period of time, say 2-3 years?

[Pattmark11]

one last question- I'm guessing this wouldn't impact my wife's Traditional IRA's when she takes distributions...

[macuser_22]

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@Pattmark11 wrote:

Thank you for the rapid response- Amazing. So would there be a benefit to me filing an amended return that could help me clean what sounds like an accounting nightmare? or could combining My traditional IRA's allow me to do a back door Roth IRA? Or just taking distributions on all my Roth IRA's over a condensed period of time, say 2-3 years?

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There is really nothing to amend.  It it too late to just get a return of contribution. Just file the late 8606 form.   Why 2-3 years?  You do not need to take any distributions if you do not have it.

Your IRA is totally separate from your spouse.

[Pattmark11]

Does the non-deductible IRA portion of the Traditional IRA function more or less like a Roth IRA, except that you can't isolate it but merely prorate it? Should I get in the habit of getting end of year numbers in case I want to  get a distribution the following year, or is the basis based on the original ratios in 2018...  noticed I don't get 5498s identifying FMV at year end unless I make a contribution for that year. Your responsiveness is amazing, and you are quite the asset to this community! 

[macuser_22]

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@Pattmark11 wrote:

Does the non-deductible IRA portion of the Traditional IRA function more or less like a Roth IRA, except that you can't isolate it but merely prorate it? Should I get in the habit of getting end of year numbers in case I want to  get a distribution the following year, or is the basis based on the original ratios in 2018...  noticed I don't get 5498s identifying FMV at year end unless I make a contribution for that year. Your responsiveness is amazing, and you are quite the asset to this community! 

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The non-deductible amount called "basis" simply reduces would would be the taxable amount for ANY Traditional IRA distribution in proportion to the years distribution and the total year end value of all existing Traditional IRA accounts.    

For example, if in 2020 you take a $5,000 distribution and your basis is $3,000 and the total  December 31, 2020 year end value of all IRA's is $50,000,  then the taxable amount would be $4,727 and the non-taxable amount due to the basis $273, leaving $2,727 of the basis remaining for future distributions.

[Pattmark11]

So it seems making a non-deductible contribution is quite a bad deal compared to making a roth contribution, looks like the formulas only allow you 50% of the tax benefit if a Roth were made instead. would there be any benefit to just convert the entire Traditional IRA early before the traditional IRA becomes more valuable? or wait until later when taxes are low? or do so during a stock market crash? Is there any rationale that IRS used in developing the formulas that you are aware of as I am trying to understand intent. I only noticed I had a non-deductible in last years taxes when I saw I wasn't getting any benefit for traditional contribution this year, so recharacterized to a Roth, and checked last years and saw I wasn't getting a benefit. I used to see it easier by inspection on the 1040, but I missed it on schedule 1 last year. Thanks!

[macuser_22]

It is not 50%, that is just my example.  It simply pro-rates the basis between the distribution and the remaining IRA value.   It is not a Roth replacement.   

After Roth IRA's can into existence there is very little reason to intentionally put after-tax money into a Traditionally IRA as an investment, unless are doing so to get the money into a Roth as a "Backdoor Roth", but that ONLY works if the total year end value of ALL Traditional IRA accounts is zero.

[BlueSpace71]

Thank you so much.  This solved 90 minutes of frustration.  I knew the ultimate result, but couldn't get there until I read your solution.  

[Pattmark11]

That was great information. I sent a request for waiver from fees for late filing of a 2018 8606 along with an 8606 in April 2020, and haven't had any other non-deductible TRAD-IRA's as this was an error on my part. IRS said they received and associated the form 8606 with my account. the went on to say that "a form 1040x is required to amend my return."  Amending my return would do nothing to change my taxes for 2018. do I need to amend my 2018 return? I didn't think I needed to if there was no impact. IRS didn't state whether there would be a late filing fee for the 8606, or if it would be waived. I reached the threshold in 2018 and my tax reporting software didn't warn me of it, or I would have recharacterized it.

[dmertz]

If the IRS asks for Form 1040-X, provide them with Form 1040-X.  This will show the IRS that there is indeed no change to your income or tax liability.  Some IRS examiners ask for Form 1040-X even when it should be apparent from the $0 taxable amount calculated on Form 8606 that the Form 1040-X will show that there are no other changes to your tax return.  These examiners apparently want this indication of no change to be explicit rather than implicit.

[ira2021]

Hello @macuser_22 

I read your post couple of times and it seems my situation is similar. But I do still have a question. Here is my scenario:

In year 2017, my spouse had made a one-time "deductible" contribution of ~$4K to traditional IRA.

Then last year in 2020, she did a backdoor $6000 "non-deductible" contribution to traditional IRA and then immediately converted $6000 to Roth IRA. Her form 5498 for year 2020 shows a IRA contribution of $6000, but it also shows a fair market value of $4.5K (its not zero). Now in turbotax, we followed all the steps to do backdoor roth, but we see a taxable distribution of ~$2500. What is this amount and what are the various options to make it $0? Can she convert her entire traditional IRA balance to Roth in 2021 to avoid this tax? Is there any other option to avoid this tax? Or is it too late?

[macuser_22]

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@ira2021 wrote:

Hello @macuser_22 

I read your post couple of times and it seems my situation is similar. But I do still have a question. Here is my scenario:

In year 2017, my spouse had made a one-time "deductible" contribution of ~$4K to traditional IRA.

Then last year in 2020, she did a backdoor $6000 "non-deductible" contribution to traditional IRA and then immediately converted $6000 to Roth IRA. Her form 5498 for year 2020 shows a IRA contribution of $6000, but it also shows a fair market value of $4.5K (its not zero). Now in turbotax, we followed all the steps to do backdoor roth, but we see a taxable distribution of ~$2500. What is this amount and what are the various options to make it $0? Can she convert her entire traditional IRA balance to Roth in 2021 to avoid this tax? Is there any other option to avoid this tax? Or is it too late?

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The "Backdoor Roth" does not exist in tax law. It is a procedure used by some to take advantage of a quirk in tax law that allows making a non-deductible contribution to a Traditional IRA when one cannot contribute to a Roth IRA, and the immediately converting the Traditional IRA to a Roth IRA, thereby getting the money into the Roth via "backdoor" tax free.

That "procedure" can only work of all these requirements are met:
1) No Traditional IRA account whatsoever can exist (that includes any SEP or SIMPLE IRA accounts) at the start. If existing IRA's contain any before-tax money or earnings then it will be partly taxable.
2) The Tradition IRA contributions must be reported on a 8606 form as non-deductible.
3) The conversion to a ROTH must be shortly after the contribution to avoid taxable gains.
4) The entire Traditional IRA value must be zero that the end of the year of conversion.

Otherwise the conversion will be partly taxable.

The reason for #1 & #4 is the following:

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.