Correcting mistakes in IRA Reporting

[psychoanalyst]

hmm....I have already contributed in an account that already had a non-zero balance.....is that a problem? 

Or I am good as long as I don't convert it to a Roth before I zero out the balance? Not sure I understood it though since Form 8606 only asks for the balance of your IRAs as of Dec 31st and as long as that is 0 on Dec 31st, I thought I am ok. 

[fanfare]

It is not a problem.

If you want to convert Traditional IRA to Roth IRA, expect to pay income tax.

--

If you are doing a Backdoor Roth over two tax years, then yes your balance will not be zero until completion.

If you are doing rinse- and-repeat you should have this down pat by now and not be confused.

[psychoanalyst]

I am using my 2021 basis to "separate out" the pre-tax and post-tax portions of my IRA. I will be moving the pre-tax to my company 401K and the post-tax I will do a Roth conversion on. 

This will 0 out my IRA balance and reset everything. So going forward, pro rata is taken care of.....hopefully. 

[dmertz]

Earlier I think you said that you had already made a $6,000 nondeductible traditional IRA contribution for 2022.  If so, that $6,000 plus the amount shown on line 14 of your 2021 Form 8606 would be your present basis.

[psychoanalyst]

Correct. The $6000 contribution towards my 2022 IRA is captured in my 2022 8606. 

My 2021 8606 is here .

My 2022 8606 (using 2021 forms since 2022 forms are not available yet) is here. 

Hopefully the following checks out. I plan to talk to my brokerage tomorrow to initiate the rollovers. 

IRA Balance as of 03/08/2022	Amount
IRA#1	44,000.00
IRA#2	6000
TOTAL	50,000.00
Present basis = 2021 Line 14 + 2022 non-deductible contribution	19,924.00
Pre-tax balance in IRA#1 + IRA#2	30,076.00
Pre-tax balance in IRA#1 (for 401 k rollover)	24,076.00
Post-tax balance in IRA#1 (for Roth conversion)	19,924.00

Many thanks!

[DianeW777]

It appears you have the correct outcome and your basis is reduced to zero after the 2022 filing due to your backdoor Roth conversion. You have the information on the forms as outlined by Tax Expert @dmertz.

[psychoanalyst]

awesome...thanks for checking.

next step is to sell my funds in the IRA and convert everything to cash and then initiate the rollover/conversion.

[fanfare]

@psychoanalyst   your custodian can move your holdings in-kind into the Roth to avoid selling everything.   

[psychoanalyst]

@fanfare : yes...I spoke to Fidelity yesterday and they did offer the option, but I think I want to avoid doing that because of the daily fluctuation of the balance. I think converting it to cash minimizes the day to day fluctuation of the balance and at least in my mind, makes the separation and rollovers/conversions at lot more straightforward.

There are no fees associated with any of the transactions, so I am not seeing an obvious advantage of moving the holdings in kind to a Roth. 

[psychoanalyst]

clarification regarding my calculations: 

Do the gains on my IRA investments have to be treated separately when separating pre and post tax money or just using my current basis inherently accounts for the gains? 

[dmertz]

Gains are simply part of the balance.  Your basis applies to your traditional IRAs in aggregate.

[psychoanalyst]

@dmertz 

How does the situation change if I went ahead and converted the $6000 in 2022 non-deductible contributions to a Roth? 

I revised the tables for both the situations. The post-tax numbers don't change, but there is a difference in pre-tax. 

Line	IRA Balace as of 03/11/2022	Amount	Calculation
1	IRA#1	$   44,000.00
2	IRA#2	$      6,000.00	For Roth
3	TOTAL	$   50,000.00	Line 1+Line 2
4	Basis reported in 2021 8086	$   13,918.00
5	Non-deductible IRA contribution made for 2022	$      6,000.00
6	Present basis = 2021 Line 14 + 2022 non-deductible contribution	$   19,918.00	Line 4+ Line 5
7	Pre-tax balance (for 401K)	$   30,082.00	Line 3-Line 6
8	Post-tax balance (for Roth)	$   19,918.00	Line 7- Line 2

Line	IRA Balace as of 03/11/2022	Amount	Calculation
1	IRA#1	$   44,000.00
2	IRA#2	$                   -	Converted to Roth
3	TOTAL	$   44,000.00	Line 1+Line 2
4	Basis reported in 2021 8086	$   13,918.00
5	Non-deductible IRA contribution made for 2022	$      6,000.00
6	Present basis = 2021 Line 14 + 2022 non-deductible contribution	$   19,918.00	Line 4+ Line 5
7	Pre-tax balance (for 401K)	$   24,082.00	Line 3-Line 6
8	Post-tax balance (for Roth)	$   19,918.00	Line 7- Line 2

[dmertz]

Your second table seems to imply that you do two Roth conversions in 2022, one for $6,000 and the other for $19,918.  With only $19,918 of basis to apply to $25,918 of Roth conversions, $6,000 would be taxable.  The taxable amount is the pre-tax money that was not rolled over to the 401(k) but instead converted to Roth.

[psychoanalyst]

yes! I realized that immediately after I sent the message. 

So what I am going to do is rollover the $6k to my 401K (total of $30,082) and do the Roth conversion on $13918 instead of $19,918. 

That should even everything out. 

Many thanks! 

[dmertz]

Why would you not convert $19,918 to Roth after rolling over $30,082 to the 401(k)?  Converting only $13,918 to Roth seems to say that you will be leaving $6,000 (all basis) in your traditional IRAs.  Or do you mean that are you going to make a $6,000 nondeductible traditional IRA contribution and convert it to Roth later in 2022?