Tax Question concerning IRA's

[riskadverse]

I'm starting my taxes and have already run into a gray area which someone here may be able to answer. I have 3 types of IRA's.
1. Traditional (with some after tax contributions).
2. Rollover IRA (a former 401K with no after tax contributions)
3. Roth IRA (with all after tax contributions).

This year I made a conversion of 20K worth of the Traditional IRA to the Roth IRA. The tax program is calculating the percentage of the traditional IRA(s) that are pre tax and post tax. It is asking me the value of all my "simple" IRA's. My question is: Is the Rollover IRA considered one of my "simple" IRA's?

 

[2B]

Your first mistake was putting after tax money into an IRA. Your second mistake was asking this forum because I can assure you that you'll get several pieces of conflicting advice.

My advice (subject to other opinions) is to go to the IRS web site and read the pubication on IRA conversions. I am very sure they will tell you how to value your pre and post contributions.

I actually have an opinion on what you should enter but I won't tell you. I'm also sure it's wrong.

Don't pay any attention to anyone else except Martha. Most of the rest of us are tax idiots when something unusual comes up. Oh no, I called people "idiots" again.

 

[youbet]

No problem 2b. We don't mind being called idiots after you admit you are wrong!

 

[Martha]

Most likely the program at some point will want to know the amount of money in all your various IRAs, including traditional, SEPs, Simple IRAs, rollovers and ROTHs. It looks like you are at the point in the program where it is asking for the amount in Simple IRAs. It also looks like you don't have a Simple IRA.

Reading the instructions for form 8606, which keeps track of the taxable and non-taxable portion of you IRAs, will help too: http://www.irs.gov/instructions/i8606/ch02.html

To clarify my dance around the issue post, the answer is no. But at some point the program likely will want to know what is in your rollover IRA.

And don't believe everything I say either.

 

[Bikerdude]

Form 8606 is to track your IRA contributions that you already paid tax on so that when you start to withdraw your IRA you will not have to pay taxes again. The program needs to know the value of all your "traditional" IRA's to calculate the factor needed to determine how much of your withdrawal is tax free.

If I had to do it all over, I would never have made a non deductible contribution to my IRA. The paper work hassle is not worth it.

 

[Nords]

Your first mistake was putting after tax money into an IRA.

If I had to do it all over, I would never have made a non deductible contribution to my IRA. The paper work hassle is not worth it.

Hey hey hey, some of us didn't have a choice until we left the workforce and could let our spouse make the IRA contributions for both of us.

TurboTax makes form 8606 a lot easier than it used to be, and this year Fidelity did our partial Roth IRA conversion over the phone in about 10 minutes.

Riskaverse, the rollover IRA is not a SIMPLE... it's just a rollover hoping someday to become a Roth.

Another place to ask obscure, complicated IRA questions is Ed Slott's discusson board-- Bruce Steiner & Denise Appleby will be delighted to hunt down and resolve the most technical issues.

After my fourth or fifth batch of questions about a Roth IRA conversion, the answer I got was pretty much "Stop asking questions and just chug through Form 8606"...

 

[riskadverse]

I see my third mistake (thanks to 2B for pointing out my first two) is in thinking a "simple" IRA is a basic traditional IRA rather than a totaly different type of IRA - which I don't have (thank you Martha). In filling out Turbo Tax - which is doing the 8606 I imagine, I still am confused in where a 401K rollover IRA is catagorized. Is it a traditional IRA and therefore grouped with your standard traditional IRA, or is it another beast and not used in the computation of the value of your traditional IRA's? I could roll the 401K rollover IRA back into a 401K and thus exclude it from the calculation (in the future), so I can see why it might not be considered a traditonal IRA.

 

[2B]

A 401k that is rolled over into an IRA is "pure" pre-tax money. It has withdrawls taxed as ordinary income and I don't believe you have to worry about including it in the Roth conversion calculation unless you somehow combined all of your non-Roth IRA accounts. There's no benefit in rolling it back into a 401k and I also don't believe that it is possible to do that with the current rules.

Of course, I'm probably wrong so read the IRS publications carefully.

 

[Martha]

I'm with 2B, I wouldn't put the rollover back into a 401k, unless you specifically wanted a 401k for other reasons. As 2B says, because all the money in the rollover was pretax, it isn't going to effect the calculation. (unless you made post tax contributions in the 401k, which sometimes is the case, but it is rare).

Here is a link to form 8606: http://www.irs.gov/pub/irs-pdf/f8606.pdf

I linked to the instructions above but not the form.

As Nords said, just plug your way through the form and don't think about it too much.

 

[ChrisC]

Form 8606 is to track your IRA contributions that you already paid tax on so that when you start to withdraw your IRA you will not have to pay taxes again. The program needs to know the value of all your "traditional" IRA's to calculate the factor needed to determine how much of your withdrawal is tax free.

If I had to do it all over, I would never have made a non deductible contribution to my IRA. The paper work hassle is not worth it.

We made some modest nondeductible contributions to our IRAs in the early 80's or 90's; I'm not sure I have the form 8606's for those. We used these IRAs as stock trading accounts and they've grown decently over the years. I'm thinking of converting them to Roth IRAs in 2010 and beyond when we should be retired and in a lower tax bracket and when the income caps are removed for Roths. I'm not sure I have all the paperwork documenting the nontaxable contributions and I switched IRA custodians around 1998. Would my plan custodian have records establishing what contributions were nondeductible? If I can't figure this out, I guess I have to treat the entire amount in the IRAs as being funded with pre-tax, deductible funds. Anyone have any suggestions?

 

[2B]

We made some modest nondeductible contributions to our IRAs in the early 80's or 90's; I'm not sure I have the form 8606's for those.

Anyone have any suggestions?

Take your best guess if you can't find the records with either your original or current custodian. If it really is a small % of your account it may not be worth the hassle if you get audited.

I liquidated a bunch of my FIL's investments last year and he didn't have any documentation. I was amazed at how much the brokerage companies could come up with even after 20 years. I did have to guess at some purchase prices but it isn't a large amount. If audited, I'm more than happy to have the IRS tell me a better rational than what I used.

 

[Nords]

Would my plan custodian have records establishing what contributions were nondeductible?

Ha ha, that's pretty funny!

Even if you had the same custodian it's unlikely that they'd track something normally only reported on your tax returns. However you lose nothing by asking, and their records may trigger memories or give you enough info to reconstruct what was done back then.

If I can't figure this out, I guess I have to treat the entire amount in the IRAs as being funded with pre-tax, deductible funds. Anyone have any suggestions?

Technically there's a penalty for not filing form 8606 when it's required, so your old tax forms (if you still have them) may still include those copies. Even the 1040 may provide enough info to figure out if you took a deduction for an IRA contribution. And if nothing else you may be able to obtain copies of the info from the IRS' files, although they charge money to track down your old tax returns.

Treating the entire IRA as having a zero basis makes everything taxable but it's certainly a lot easier to do the paperwork. Essentially you're giving free money to the Treasury by doing this. Even if you decide to skip the Roth IRA conversion, the conventional IRA's basis will rear its ugly head again when you start taking RMDs and have to pay taxes on that income. Even if the IRS charges $100 for each copy of your old returns or 8606s, that may be cheaper than paying taxes that you don't necessarily owe.

Neither the problem nor its solution will get better with time. It's probably slightly easier and overall better to deal with it now, file a form 8606 to document the results, and then get set for a conversion.

 

[CyclingInvestor]

Determining basis for Roth conversions is the same as determining basis
for 72t withdrawals, which I did last year. Your total IRA $$ for the divisor
includes 401k rollover accounts, but not 401k's, which is why some people
roll them back into a 401k when doing the conversion.

Example : My 8606s show non-deductible contributions of $4k. I have a
contributory IRA of $800k (on Dec 31), a rollover IRA of $170k (on Dec 31),
and I withdrew (72t or roth conversion) $30k last year. My basis is :
30k * 4k/(800k+170k+30k) = $120.

An Excel spreadsheet makes it all easy to track.