Backdoor Roth Conversion

[DianeW777]

Before you amend, double check your Form 8606 to see if there is a cost basis listed on Line 14.  Review the three actions below to decide if you need to do any of them for 2022.

1. If this cost basis occurred in a year earlier than 2022, and it was simply not entered on the 2022 return, and assuming there were no nondeductible contributions actually made in 2022, then an amendment is not necessary.  
2. If you should have filed one with your return in 2022, but failed to do so, or did not complete it correctly, you can file Form 8606 as a stand alone form.  It is a signature form and can be filed alone.  This eliminates a need to amend the entire tax return.
3. If your Form 8606 was filed in 2022 and it is correct, simply use the information to complete 2023.

A Form 8606 is not always required, specifically, in a year when there were no nondeductible contributions or any withdrawals.  The suggestion is to file it every year so that your cost basis is not lost but always current so that you can find it easily.

@state-taxes 

[state-taxes]

Hmm ok, could you help me with this particular case.

In 2021 - no contributions/conversions in this year, I did it in 2022. Only received a 5498 for 2021, no 1099-R for the conversion

In 2022 - contributed to traditional + converted to Roth for prior year (didn't take care of this in my 2021 return, is that ok?) 
In 2023 - Contributed to traditional (for prior year - 2022 and current year - 2023) and converted 12.5k to Roth.

My 8606 form in 2022 has a total basis of 0, did I do that correctly, or I'm assuming I didn't and it needs to have a basis of 6k. 

Thank you!

[DianeW777]

No, you did not do the 2022 correctly. 

Yes, you would have had a basis in 2022 of $6,000 due to nondeductible contributions before you converted the Traditional IRA to a Roth.

Assuming the traditional IRA was empty before the contribution for 2021:

• The 2021 Form 8606 line 14 should show the nondeductible contribution for 2021. This has to be entered on the 2022 return (2022 Form 8606 line 2).
• The 2022 Form 8606 line 14 should show the nondeductible contribution for 2022 ($6,000). This has to be entered on the 2023 return (2023 Form 8606 line 2).
• The 2023 Form 8606 line 14 should show be $0.

@state-taxes 

[state-taxes]

Ok, I think I'm getting closer to understanding, but still confused on a few things. 

2021 - no contributions between 1/1/21 -> 12/31/21. However, I did a prior year contribution for 2021 in early 2022. My 2021 tax forms never had a 1099 R, therefore I never even reported this. I only had a form 5498. Should this still be reported? If so, do I need to amend my 2021 tax return, by sending over an updated 8606?

Also, updating this form 8606 wouldn't increase any taxes I owe, correct?

2022 - Contributed for prior year, and converted to Roth (hence the 1099 R). I clearly didn't report this correctly, therefore I need to update my 8606 and mail it to the IRS, correct? This also should not increase any taxes for my 2022 year, correct?

2023 - I contributed for prior year (6k) + current year (6.5k) and converted all 12.5k. Using the total basis from my 2022 8606 (6k), my taxes this year should now be correct and I wouldn't owe any taxes on the 12.5k, correct?

Would love to hear your clarification on how I should go forward to fix 2021 + 2022, thank you.

[DianeW777]

Your questions and answers are shown below:

1. 2021 - Very important to file the 8606 now.  Here are the instructions again:
   1.  If you should have filed one with your return in 2022, but failed to do so, or did not complete it correctly, you can file Form 8606 as a stand alone form.  It is a signature form and can be filed alone.  This eliminates a need to amend the entire tax return.
2. 2022 - Double check your Schedule 1 to be sure you did not take any deduction for an IRA on your return.
   1. The 8606, if my understanding is correct, should carry the nondeductible cost basis forward with no other entry. Yes, you should also send an 8606 for 2022. On the 2022 Form 8606 it should have shown the 2023 contribution on line 1, then the cost basis from 2021 on line 2.  If this is not the case then you should mail a corrected form.
3. 2023 - Yes. Once the 8606s are filed for 2021 and 2022, showing your basis of $6,000, then include a contribution on your 2023 return in the amount of $6,500 (assuming there was no deductible portion, the full rollover to a Roth should be tax free since it is all nondeductible contributions, meaning your cost basis.

@state-taxes 

[Edited: 02/07/2024 | 9:59 AM PST]

[state-taxes]

Gotcha, I think for 2022 I would have to correct my 8606 as well because I did contribute for 2022 (in early 2023 via the past year contribution). Therefore there should be a 6k basis on my 2021 8606, which was converted to Roth in 2022.

Then there is also a 6k basis in my 2022 8606, which was converted to Roth in 2023. 

[DianeW777]

Yes, you are correct.  Since you contributed nondeductible amounts in both years (2022 for 2021 and 2023 for 2022), the 8606 should be completed for both years if they are not accurate as indicated.  Please see my updated information in my previous post - specifically 2022.

Again, be sure to check your returns to confirm there were no IRA contribution deductions in either year.

@state-taxes