Calendar year 2016 was the first year that I was not covered by a retirement plan at work since I retired in 2015. In calendar year 2016 my wife and I initially contributed $2,000 each to traditional IRAs and then almost immediately converted the funds to Roth IRAs as we weren’t sure at the time that we would have enough earned income for us both to make the full contributions and conversions. Now in early 2017, as we are preparing our taxes, we realize that we can contribute the full amount. We do not want to make the contributions deductible for a number of reasons including wanting to convert the remaining $4,500 funds to Roths, so when Turbotax asked what portion we wanted non deductible we each selected $6,500. As an aside we have no other traditional IRA assets either deductible or non deductible. The non deductibles were converted to Roth IRAs in the years we made the non deductible contributions.
So here’s the issue, when we indicated in the Turbotax interview that the remaining $4,500/person is to be contributed between January 1, 2017 and April 18, 2017, line 4, of form 8606 shows $4,500 which makes sense. However, for line 5 (subtraction of line 4 from 3) shows $2,000. When you work your way through the form the $2,000 ends up being non taxable and the $4,500 taxable. Why isn’t all $6,500 non taxable if we each intend to convert the non deductible (self selected) $4,500/each to Roth IRAs by April 18th? Why do we end up with a $4,500 basis on funds that are non deductible and converted to Roths? In previous years when we did backdoor Roth conversions nothing was taxable and no bases were created. Finally, we modified the existing 1099-Rs to show $6,500 in boxes 1 & 2A of our 1099-Rs. When we eventually add the new 1099-R’s showing $4,500 each we back down the originals to $2,000.