Roth Conversion

[Nellmcphillips]

We are both retired. In 2020 we moved money from a simple IRA to a Roth IRA.  This amount was included in the 1099-R and taxes were deducted at the time of the move. I have finished Turbo Tax for 2020 and do not understand why a form 8606 was produced to show we must pay taxes on it when we already did. Help please.

[BillM223]

Money in a traditional IRA is pre-tax; money in a Roth IRA is after-tax. This means that when you move money from a traditional IRA to a Roth IRA, you must include the money in your income in order to make it "post-tax".

When taxes are withheld on a form like 1099-R, this does not mean that your taxes on this transaction were paid. 

Instead, this withholding is set aside in your account at the IRS to be applied to whatever taxes you are determined to owe at the end of the tax return creation process. It can happen that too much was withheld in which case you get a refund, or it can happen that not enough was withheld, which means that at the end of the return process, you owe more tax.

Form 8606 is required to be generated and attached to your return whenever you do a number of transactions involving traditional IRAs and Roth IRAs, including your transaction. The reason that it is required is that if you had any "basis" (nondeductible contributions in a traditional IRA) in your traditional IRA, then it would not have been added to your income when you made this transfer to the Roth IRA.

Many (most?) taxpayers do not have nondeductible contributions in their traditional IRAs, so the whole amount of the transfer is usually taxable.

Make sense?

[Nellmcphillips]

Thank you for your reply. I know that taxes were paid on the conversion its just that the 8606 states I owe money on the conversion amount; yet I am getting a refund.  Seems a little confusing to me that I am getting a refund but I owe money. I will file and see how it goes. 

[BillM223]

"Seems a little confusing to me that I am getting a refund but I owe money."

Which is it? Are you owing money or getting a refund?

As I noted above, the amount withheld on any given form (W-2, W-2G, 1099-G, SSA-1099, and a slew of others) does not pay the tax on the income reported on that form; instead, all withholding goes into a pot from which your final tax will be paid. Thus any individual withholding may be too little or too much - withholdings are always an approximation of what you would owe from this income (and sometimes not a very close approximation).

And to be clear, the 8606 does not calculate tax, all it does is determine if you have additional taxable income.

[Opus 17]

Your tax is only calculated on your 2020 tax return, no matter what you might pay as estimated taxes.

A conversion from a SIMPLE IRA to a Roth IRA should be reported on form 8606 on lines 16-18.  The taxable amount of the conversion is transferred to line 4b of your form 1040 and added to your other income for the year.  Your total income tax is on form 1040 line 24.

Then, any tax that was withheld on the conversion will be reported on line 25b of your form 1040.  It will be added to any other payments or withholding, plus any credits, which equals your total payments on line 32.

If your payments are more than your tax, you get a refund.  The Roth conversion increases your income and increases the tax you owe, but you still might get a refund if your total payments are more than your total tax.