Made traditional IRA contribution for 2018 in 2019. Was I supposed to file 8606 form in 2019?

[Dundee669]

I am trying to properly file my ROTH conversion and found help in other discussions how to do it, but, apparently, I have a problem that was not addressed here (or, likely, just did not manage to find it).

In 2019 I made $6,000 contribution to traditional IRA. Fidelity "informed" me that I can make additional $5,500 contribution that will be counted as 2018 contribution. So, I went ahead and did it...

Now, when I file my 2019 return, I discovered that that $5,500, probably (as I understand it), should enter as "basis" since they ask only my 2019 contribution and 5,500 is "formally" 2018 contribution  (otherwise, TurboTax treat it as "excess" contribution). So, it looks like I was supposed to file 8606 form (looking at TurboTax help about that "basis" thing) as if I was supposed to know all those forms... (and as if IRS does not have all that info already...). I checked my Fidelity account and it does have properly filled 5498 form for 2019 (for 6,000 contribution) and for 2018 (for 5,500 contribution).

Do I understand the situation correctly? What do I do now? Go ahead and claim 5,500 basis now and fill late 8606 and pay the fine for late filing?

Thank you.

[macuser_22 · Accepted solution]

TurboTax will ask about your prior years "basis" which is the 2018 8606 line 14 value from the 8606 that should have been filed with your 2018 tax return.

You can file the 2018 8606 by itself and mail it in.

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

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

[Dundee669]

So, basically, my understanding is correct?  Thank you.

P.S. Because they allow to contribute de-facto after the tax return was filled (I made contribution in March... two months I filed my  2018 return), IRS/TurboTax could've allow to file that form the next year too. Otherwise, how the hell people are expected to know about that requirement?

[macuser_22]

I suspect what you are doing is the so called "Backdoor Roth" that is only allowed because of a "quirk" in the tax laws.  There are many pitfalls when not done properly.    All I can say is when trying to take advantage of a "loophole" in the tax law, one should first research it, to fully understand the law, so as not to make a costly mistake.

[Dundee669]

ROTH or not, "loophole" or "designed quirk" is irrelevant because my situation could have happened without any of it (never understood the "concept" of "loophole"... and how it could stay "open"... but that is a different discussion). It was indeed why I did it, BUT

if I just decided to stay with Traditional IRA, I'd have the very SAME problem. 

P.S. Too bad I always despised "quirkiness" of tax laws (contributed just to 401K max all my life) and just started to learn about all that when I sold my house. Otherwise, I'd invest max to ROTH (I did not know what it is until the last year) starting from my student years and would be ready to retire by now. This is the LOOPHOLE. When I develop math models for my clients, I try to make there lives as simple as possible. Bureaucracy, apparently, lives by the opposite principle. 

[macuser_22]

The ability to contribute to a IRA (either Traditional or Roth) for a tax year, up to the filing date of that tax year (usually April 15 of the next year) has existed almost as long as IRA's have existed - decades.   The whole point of doing that is so that it can be claimed on the  last years tax return.   That is not the quirk in the law that I was referring to.

Many people want to contribute to a Roth but their income is to high to allow it so they contribution to a non-deductible Traditional IRA instead that has no income limit.   Then they immediately convert the Traditional IRA to a Roth IRA which is allowed, thus getting the money into the Roth that they could not contribute directly.   That is called a "Backdoor Roth" that I thought you might be trying to do.  There are many pitfalls that can cause that not to work as expected if one does not fully understand the tax law that allows it.

[fanfare]

Just repair your missing steps and move on, your conversion will be tax free if you started and ended with a zero balance in all your traditional IRAs.

[fanfare]

You can retire on a Roth only if your Roth is self-directed, grows and does not collapse in the face of a corona virus.

If you put your Roth in CDs, as a lot of people do, you will get nowhere.

[Dundee669]

Thanks for your help. And I'll keep in mind that "that backdoor" it is sort of borderline lawful...

I did not refer to that deadline contribution extension for traditional IRA as "quirk", I referred to "backdoor" as "quirkiness". My point was if that deadline is extended, then the deadline for 8606 should be the next year. Because that's what happens: a person fill his return in January. Opens a brokerage account in February, where they told him/her that they actually can contribute to Traditional IRA not only for the current year, but for the previous one too. He happily (and clueless) does it, but then on his next return he finds out that he was supposed to fill some 8606 form that he had no way to be aware about. So, my issue is not about that "backdoor roll over" at all. I would be in the same shoes if I did not find about that possibility (that seems like every "advisors" online talk about).    

[Dundee669]

With corona so many people will find their retirement in ruins... It will kill so many people not directly, but with all that recession (and other problems) coming :(  

I cannot believe that somebody would use CD in Roth... What? You put away money for long time and picking the safest investment with lowest return?

I told my daughter that is supposed to go to college (and with corona I am definitely will not be able to afford her choice... ) that she should max her ROTH when she will just start to work. And pick some "growth" ETFs there. Even SP500 would do it if one wants to be on the "safe" side.

When I was a grad student I paid almost no taxes (being a teaching assistant means you are in the lowest tax bracket possible, lol), but manage to save couple thousands a year. SP500 for that time period would grow for me like 5 times, even with current corona. Now I am in the highest brackets... and not much in my retirement fund (corona did not help either with all my latest investment)… and four kids are starting to going to college one by one in 3-5 year intervals. BYW, it's another problem: if my kids went to college simultaneously, or in "pairs", I would be able to afford it no problems... but now I will be "screwed" for quite some time using much of my saving for another two decades for college payments. So, by the time I approach my retirement age, I will hardly have enough no matter what I do now... investing in ROTH while being young and poor is the way to do it. 

[Dundee669]

I think it is not enough now. macuser_22 , probably, has the right answer: I need to file 8606 for my previous return. Otherwise those 5,500 (as formally "2018" contribution) shows up as "excess contribution" and is fined.

[fanfare]

"Fidelity "informed" me that I can make additional $5,500 contribution that will be counted as 2018 contribution. So, I went ahead and did it..."

If you took an IRA deduction of $5,500 on your 2018 tax return,

which is basically what Fidelity was encouraging you to do,

you can't submit a 2018 8606 that says it was non-deductible.

So, which is it ? How did you file on the 2018 return?

[Dundee669]

I filed my 2018 as always. It was simple because I had my salary 401k, mortgage, bank, and that's pretty much it. It was someday in January. I opened an account with Fidelity in March. By then, I already got my Federal tax return (and State) check back and blissfully "forgot" about that "undue torture" (reading bureaucratic e̶n̶g̶l̶i̶s̶h̶ taxglish to figure out what they want) as all normal people do. Fidelity did not "encourage" me to file 8606 and amend my return in any explicit way. If it did, it was as convoluted and implicit as even the tax law language can not be.

Again, the tax law (as I understand, maybe I still miss something) does not connect filing return and contributing to the previous year in any way. You can do it in any order. And that's why filing 8606 must be allowed in the next year. But it is not. 

[macuser_22]

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@Dundee669 wrote:

. You can do it in any order. And that's why filing 8606 must be allowed in the next year. But it is not. 

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A 8606 has the year on it.   A non-deducible contribution *for* 2018 can ONLY be reported on a 2018 8606 that can be mailed by itself.    It cannot be reported on a 2019 8606.    There is  no way to file a 2018 8606 with a 2019 tax return. The IRS can disallow the basis reported on the wong year 8606 if the filed form does not match what the financial institution reports on the years 5498 form.

BTW there is a $50 venality for a missed 8606 but the IRS will usually waive that if you attach an explanation.

You can download the form as I posted above.

[Dundee669]

EXACTLY. That is my point. You are not allowed to file 8606 one year later. And that's, in my personal opinion, idiotic. Because what happens is people contribute for previous year AFTER they file the return. Because practically every broker/financial advisor REMINDs you that "you can contribute for previous year until April 15" without reminding that this REQUIRES filing 8606 form with previous year return.

I am almost done with my current return (thank you), and I'll print and fill those form with my explanation why I am late to try to avoid fine. Thank you.

P.S. The fact that one uses that "contribute for previous year" possibility means that he/she, most likely, used to have a simple tax situation and already filed your return (because it was simple). So, I think my problem is quite widespread among those who use brokers' bait to add previous year IRA contribution.    

Allowing