Form 8606 - What Amount to Report Rollover IRA to Roth IRA

[syoung123]

Hello, I am trying to figure out which amount to put on line 16 and line 18 on Form 8606 (Nondeductible IRAs):

line 16 says - "....enter the net amount you converted from traditional....IRAs to Roth...IRAs in 2023"

line 18 says "taxable amount - subtract line 17 (I have zero on line 17) from line 16.... also include this amount on 2023 From 1040..., line 4b"

I took out $60,000 from the rollover traditional IRA for conversion to Roth IRA in 2023.  The 1099R shows $60,000 in the gross distribution and taxable amount fields.  However, of the $60,000, I withheld $2,000 in Federal Income Tax, and $500 in State Income Tax, so only $57,500 went into the Roth IRA:

Net amount to the Roth account - $57,500

Fed Tax - $2,000

State Tax - $500

Total Distribution from traditional IRA (on 1099R) - $60,000

Per line 16 on Form 8606, "enter net amount you converted from traditional to Roth", it appears that I should put only $57,500 ($60,000 net of taxes) on line 16?  However, line 18 says "enter this amount on Form 1040 line 4b", and on Form 1040 line 4b, I am supposed to show the gross amount of $60,000 IRA distribution as taxable amount.  So the amount on Form 8606 line 18 ($57,500) would not match the amount on Form 1040 4b ($60,000). 

Using the TurboxTax Premier desktop software, in the1099R input section, I input $60,000 on box 1 gross distribution and 2a taxable amount, and $2,000 for FIT and $500 for state income tax.  On the next screen, I selected "current year conversion from traditional IRA to Roth IRS". Then on the screen "What did you do with the money", I selected 

"moved the money to another retirement account...."

"..did a combination of rolling over, converting, or cashing out the money" (because $2,000 and $500 were withheld from FIT and state tax)

Then, on "how much of the $60,000 moved to an IRA, 401K or other retirement account", I selected only the "amount converted to a Roth IRA account" button and input $57,500 ($60,000 net of taxes).  A note on the input screen also says "we'll assume everything that wasn't rolled over or converted was cashed out or wound up somewhere other than a retirement account"

Did I do this TurboTax input correctly?  With this input, TurboTax shows $57,500 on line 16 and line 18 on Form 8606, and $60,000 on line 4b on Form 1040 (which is the correct taxable amount reported on Form 1040).  However, Form 8606 line 18 says "include the amount" on this line on "Form 1040, line 4b", so per the TurboTax program, Form 8606 line 18 ($57,500) does not match with Form 1040 4b ($60,000).

So, what amount should be reported on line 18 on Form 8606?  Please advise.  Thank you.

[fanfare]

The amount converted is the amount that went into your Roth IRA.

The amount distributed is $60,000.

The taxable amount on Line 4b depends on any prior year's basis you may be carrying in your Traditional IRA.

If the basis in IRA is zero, the entire amount converted is included on Line 4b.

the amount withheld is also included on Line 4b.

When you have withholding you are allowed to adjust for that by making another deposit of that amount yourself into your Roth IRA. That increases the amount converted.

@syoung123 

[dmertz]

Yes, you did this correctly.  To have converted the entire gross distribution you would have to have substituted other funds for the $2,500 that was withheld for taxes and completed that portion as an indirect conversion within 60 days of the distribution.  Since you did not make that substitution, you converted only $57,500 and cashed out $2,500 for a total of $60,000 taxable.

You get the best benefit for a Roth conversion by converting the entire amount and using other funds to pay the taxes.

[fanfare]

when instructions say " include in Line x" that means in addition to any other amounts to be included.

[syoung123]

Thank you all for the replies.  To clarify my understanding, on Form 8606 line 18, the amount should be $57,500 ($60,000 IRA distribution minus $2,500 taxes withheld, so $57,500 was "converted" to Roth ), and line 18 says "include this amount on 1040 line 4b" means just to "add" this amount to other amounts (i.e, the $2,500 tax withheld) on 4b.  The amount on 1040 line 4b should be $60,000 ($57,500 to Roth and $2,500 for taxes).  So it is ok that the amount on line 18 is different from the amount on 4b.

[dmertz · Accepted solution]

Correct.

[syoung123]

thank you.