I forgot to calculate basis in Rollover IRA when reporting Roth Conversion for last year's return. How do I correct?

[sandy4042]

Some years ago my spouse consolidated his 401k plans and rolled them over to a Fidelity Rollover IRA.  Last year he did his first Roth conversion of a portion of it.  I forgot that for his first employer after-tax contributions were included in his 401k.   And so left Line 17 of Form 8606 (basis on the amount converted) blank, when as I understand it now, it should have been a pro-rata amount (i.e, after tax amt/IRA current value x conversion amount), which is then subtracted from the Roth conversion to obtain the taxable amount of the Roth conversion.

Should I enter a amended return for 2019 or can the overpayment of taxes on the first Roth conversion simply be used to adjust the basis of the remaining Rollover IRA? If I need to do the first alternative (amended return for 2019), do I need to do that before filing 2020's return which will have a Roth conversion?

[dmertz]

You must amend the 2019 tax return to obtain any refund of the excess taxes paid or to have it credited toward your 2020 tax liability.  You must also amend 2019 to properly calculate the reduced basis that carries forward from 2019 Form 8606 line 14 to 2020 Form 8606 line 2.  This amendment also need to include an explanation of the adjustment that you must make to the amount on line 2 of the 2019 Form 8606 to account for the after-tax basis that his IRAs acquired from the 401(k).

Using TurboTax, the amendment to the 2019 tax return must be done before beginning your 2020 tax return in 2020 TurboTax so that this carryforward will be correct by transferring in from the amended 2019 tax return to begin the 2020 tax return.  If you instead try to adjust the carryforward amount in 2020 TurboTax after beginning the 2020 tax return by transferring in the original 2019 tax file, 2020 TurboTax will ask for an explanation statement for the adjustment to IRA basis to be included with your 2020 tax return.  This is inappropriate since the the adjustment and explanation statement are required to be part of the 2019 tax return, not the 2020 tax return.

Failing to file an amended 2019 tax return does not permit you to carry forward to 2020 the basis that was to be applied to the 2019 Roth conversion; you are not permitted to choose what years you use the basis.  The basis was reduced by the 2019 Roth conversion whether included on the 2019 tax return or not.  I suppose you could do the adjustment on the 2020 tax return without amending 2019, but line 2 of the 2020 Form 8606 must be the reduced basis amount whether you amend or not and your explanation statement required to be included with the 2020 tax return would be more complicated than the one that would be required with the 2019 amendment.  Failing to amend the 2019 tax return would simply mean that you would have paid more tax for 2019 than necessary with no way to recover that.

[sandy4042]

I am just beginning to understand the implications of the nondeductible contributions, or basis, so please bear with these novice questions.  So each year that you take out a distribution or do a partial Roth conversion of an IRA, the basis will be reduced by the portion that you calculated is nontaxable? Thus line 14 from the previous year becomes line 2 of the next year?  And Turbotax automatically will prefill line 2?

Husband also has a solo 401(k) plan.  Does it require any entries in Form 8606?  Is it inter-related with the IRA with RMDs and Roth conversions?  Or is it an entire separate issue, and separate form?

In general how hard is it to file an amended return with Turbotax, can it be e-filed and is acceptance as quick as it is with the original filing?   You mention attaching an explanation, is this something I'd do in Forms mode?  Also if I have a document from rollover of employer plan to the IRA which shows the starting basis, will that be required by the IRS?  Can I simply enter that amount in line 2 of my amended 2019 return (first year taking a distribution)? And it would be great if Turbotax incorporates the amendment in the tax data file so when I start my 2020 return it will have the correct basis, and then for subsequent years will carry it over.

I probably will be seeking a CPA since I'm feeling like I'm only discovering the tip of the iceberg and see that we will need guidance in the distribution/management stage of retirement income.   You've given me a good starting point for informed discussion, thanks.

[dmertz · Accepted solution]

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So each year that you take out a distribution or do a partial Roth conversion of an IRA, the basis will be reduced by the portion that you calculated is nontaxable? Thus line 14 from the previous year becomes line 2 of the next year?  And Turbotax automatically will prefill line 2?

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All correct.

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Husband also has a solo 401(k) plan.  Does it require any entries in Form 8606?

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Form 8606 only applies to IRA contributions and distributions.  It has nothing to do with anything that happens with a 401(k) other than the fact that you need to do an adjustment on line 2 for any basis rolled over from a qualified retirement plan like a 401(k), which you have discovered.  There is no similar form for qualified retirement plans since the calculation of the nontaxable portion is done by the plan administrator, not the participant.

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In general how hard is it to file an amended return with Turbotax, can it be e-filed and is acceptance as quick as it is with the original filing?   You mention attaching an explanation, is this something I'd do in Forms mode?  Also if I have a document from rollover of employer plan to the IRA which shows the starting basis, will that be required by the IRS?  Can I simply enter that amount in line 2 of my amended 2019 return (first year taking a distribution)? And it would be great if Turbotax incorporates the amendment in the tax data file so when I start my 2020 return it will have the correct basis, and then for subsequent years will carry it over.

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You appear to be using the CD/download version of TurboTax, so amending your 2019 tax return is relatively straightforward.  Start by making a copy of your 2019 tax file and amending with that file rather than altering the file that you used to file the original 2019 tax return.  That way you can always start over.

1. When you start 2019 TurboTax there's a button to click to say that you want to amend an already filed tax return.
2. Click that and select the copy of the tax file that you made.  (Click "Find a Tax File" if necessary.)
3. Indicate that you need to change a 1099-R,
4. click the Continue button on the Your 1099-R Entries page,
5. answer Yes when asked if your husband made and tracked nondeductible contributions to his IRA,
6. click the EasyGuide button on the next page,
7. continue to where you can mark the box that says that he transferred money from an employer's retirement plan in 2019 or a previous year,
8. then enter the amount of after-tax money that transferred from the employer plan.

TurboTax will then prompt for the required explanation statement for this adjustment to basis where you'll describe the transfer of after-tax basis from the 401(k).  Continue through the remainder of the pages (which should require no changes), until you get back to the page asking if there is anything else that needs changing.  Click Done and complete any remaining items such as the reason you are amending (which will be to indicate that you are correcting to include Form 8606 showing the adjustment to the basis in nondeductible traditional IRA contributions.

At this point TurboTax will have prepares Form 1040-X, Form 8606 and the explanation statement.  I'm not sure where in step-by-step mode you can indicate whether or not you want to apply the refund to your 2020 tax liability, but you can do that directly on Form 1040-X in forms mode.

The amendment cannot be e-filed.  You'll need to print and mail the Form 1040-X, Form 8606 and the explanation statement describing the adjustment to basis which TurboTax has associated with the Form 8606.

You'll use the amended copy as the source of the transfer when you begin your 2020 tax return.  The amended copy will have the correct carryforward for line 2 of the 2020 Form 8606.

[sandy4042]

Thanks very much for your detailed reply, dmertz!  I think I could now tackle an amended Turbotax return with confidence.  I'm relieved I can set aside consideration of the 401K for now (if rolled over to an IRA, then I would need to add it to the total value of IRAs on the Form 8606).

I'm going to need to do more work on finding out if there are nondeductible contributions in the IRA.  Husband thinks that the after-tax monies that he took from his first company were not rolled over into his IRA, but they were simply savings that he withdrew from their savings plan.  I have my doubts since I remember differently though I didn't handle it first-hand. Going to go on a paper trail hunt of something that occurred 30 years ago and maybe Fidelity has some historical records (though they weren't the first IRA trustee).  Needless to say I will be glad if his IRA is all pre-tax money since it will simplify tax handling.

Thanks again for all your help, it is much appreciated.

[sandy4042]

dmertz, just wanted to update you, and this thread with the result that I found the basis for this rollover IRA.  The rollover was done in 2007 and I have a 2007 Form 1099-R from Fidelity showing the gross distribution and Box 5 with the employee contribution, which I assume is the basis.  I am wondering whether Fidelity would have kept track of this original basis  and have it accessible online when the account is brought up?  I'm going to get husband to get me access to his account and will check it out since I need also to get an exact amount for the FMV of his IRA as of Dec 2019 to calculate the basis for his converted amount.  Thanks again for getting us on the right track.

[dmertz]

Yes, the amount in box 5 of the Form 1099-R represents the after-tax basis that was included in that distribution and the amount of basis that transferred to his traditional IRAs if the entire gross amount was rolled over (as long as amount in box 1 is greater than the amount in box 5).

If less than the total gross amount was rolled over, say, because some was withheld for taxes and no other funds were substituted to make up the difference, the portion not rolled came first from basis.  However, I'm guessing that the Form 1099-R has code G indicating a direct rollover to the IRA of the entire gross amount.

[sandy4042]

Right you are, dmertz, there is a "G" in the distribution code.  We looked at the IRA online in the Fidelity website and saw no place where they show the original basis, and in fact the history is limited.  I also was looking for the Form 5498 pdf for 2019 because I recall seeing "FMV" as one of the descriptors in past 5498's, but didn't see it online.  Husband called Fidelity and they said it is only issued if there is a contribution(s) for the year, but they said the  ending value shown on the Dec 31st statement would be equivalent (for calculating the pro-rata taxable value of the contribution).   Thanks again.