Hi,
I changed employer last year (2021) and rolled over my 401k to a traditional ira. In the same year, I made a backdoor roth conversion by contributing $6k to a different IRA and converting the money. Since I did a roth backdoor conversion, I am required to file a form 8606.
In form 8606 line 6, it asks for the value of ALL of my traditional IRA accounts. Do I include the value of my converted 401k in this line? If I do, then form 8606 will treat the sudden increase of my IRA account value as capital gain from investment, and significantly shrink the non-taxable portion of my backdoor conversion.
To make the example more concrete - I have $6k cost basis from previous year, contributed $6k to traditional IRA in 2021 and immediately converted all the money ROTH IRA. This should be a non-taxable event. In the same year, I also converted $80k in 401k to traditional IRA because I changed jobs. This should be a non-taxable event. However, given how 8606 is structured, if I report $80k as my total IRA value at the end of 2021, then the form will treat the event as me starting at $6k cost basis, growing the money to $80k by the end of the year, and converting $6k of my huge account (totaling $80k in value) to ROTH. If I follow the form, I have $5.5k of taxable amount.
Anyone has any idea on how to report the two non-taxable event appropriately? Should I not include 401k conversion money in line 6 of 8606?
Yes, you will have to include the value of all your traditional/SEP/SIMPLE IRAs on December 31, 2021. And since you had pre-tax funds from your 401k rollover in your traditional IRA now the pro-rata rule applies. This means that with each distribution/ conversion you will have a taxable and nontaxable part. You can see the remaining basis on line 14 of Form 8606, this basis can be carried forward. Therefore each distribution/conversion in the future will have a taxable and nontaxable part until the basis is all used.
The Backdoor Roth only works if your traditional/SEP/SIMPLE IRAs are empty. If you plan to use this strategy in the future you might want to think about a reverse rollover where you rollover IRA money to a company plan, like a 401(k). Only pre-tax funds can be rolled from an IRA to a company plan. Therefore, you would isolate the basis and could start the Backdoor Roth procedure fresh. But it only works if your employer allows it, not all 401(k) plans do.
Yes, you will have to include the value of all your traditional/SEP/SIMPLE IRAs on December 31, 2021. And since you had pre-tax funds from your 401k rollover in your traditional IRA now the pro-rata rule applies. This means that with each distribution/ conversion you will have a taxable and nontaxable part. You can see the remaining basis on line 14 of Form 8606, this basis can be carried forward. Therefore each distribution/conversion in the future will have a taxable and nontaxable part until the basis is all used.
The Backdoor Roth only works if your traditional/SEP/SIMPLE IRAs are empty. If you plan to use this strategy in the future you might want to think about a reverse rollover where you rollover IRA money to a company plan, like a 401(k). Only pre-tax funds can be rolled from an IRA to a company plan. Therefore, you would isolate the basis and could start the Backdoor Roth procedure fresh. But it only works if your employer allows it, not all 401(k) plans do.