topic Rollover IRA and Roth Conversion - is Form 8606 needed? in Retirement tax questions

Rollover IRA and Roth Conversion - is Form 8606 needed?

home_owner — Wed, 09 Jun 2021 12:33:09 GMT

Here is my situation:

- in 2020 converted an ex-employer 401(k) to rollover IRA (about $100K on Fidelity)

- in 2020 found out about backdoor Roth and opened Traditional IRA with $6K and converted to Roth IRA next day (on TD Ameritrade)

- previously contributed to Roth in 1998, 1999 ($2K each year) when my income allowed for Roth contribution but never filed 8606.

- Now I found out that since I have a rollover IRA, I should also be filing 8606 and there might have been no benefit in doing a backdoor Roth. Should I file 8606 for 1998, 1999 and 2020 when I made nondeductible contributions.

Can someone explain how I need to fix this. I do want to put $6K in backdoor every year but seems it doesn't make sense if you have a traditional IRA.

I am reviewing form 8606. What does line 2 mean - total basis of traditional IRAs? In my case, would this be total nondeductible contributions (2K in 1998, 2K in 1999 and $6K in 2020)?

Re: Rollover IRA and Roth Conversion - is Form 8606 needed?

Critter-3 — Wed, 09 Jun 2021 12:42:58 GMT

The backdoor rollover only really works if you have no basis in the traditional IRA.

In your situation if you make a non-deductible IRA contribution you add basis to the equation so now a form 8606 is required because only a portion of the basis can be used thus the rollover will be only partially tax free since you cannot just roll the new contribution.

Re: Rollover IRA and Roth Conversion - is Form 8606 needed?

home_owner — Wed, 09 Jun 2021 18:13:28 GMT

So pay taxes on amount I put in backdoor Roth which will almost be on 100% amount as my traditional IRA is a big nut. But I also wanted to take advantage of this and do 6K backdoor Roth every year. There is no point doing it if I have a traditional IRA. Is there a way to fix this so I can contribute 6K to Roth IRA every year and it is not taxed again?

Re: Rollover IRA and Roth Conversion - is Form 8606 needed?

Critter-3 — Wed, 09 Jun 2021 18:31:26 GMT

Ok I don't think you fully understand ... you never pay taxes twice. The amount you rolled from the 401K was all before taxes so when you convert the money to the ROTH it is a fully taxable transfer. Then if you make a non deductible contribution that amount is now a basis in the account. And the amount of the basis cannot be converted to the ROTH in a vacuum which is why what you are wanting to do is not really feasible or allowed.

For instance ... you had 100,000 rolled from the 401K in the IRA and then you put $5000 non deductible contributions in the IRA. At the end of the year you have $105,000 in the account ( ignoring any earnings at this time for this example) and you convert the $5000 to the ROTH then you have to allocate the basis which is what the form 8606 does ... https://www.irs.gov/pub/irs-prior/f8606--2020.pdf

Re: Rollover IRA and Roth Conversion - is Form 8606 needed?

home_owner — Wed, 09 Jun 2021 19:42:13 GMT

Thank you, that explains it. One thing I am still confused by - if I had not done a rollover of 401k than the entire amount converted to Roth would be nontaxable. Is this correct?

I believe the taxable situation is arising because I have a traditional IRA. If I had kept in 401k than I would not have this issue. Again I want to thank you for sharing your knowledge.