Taxes after Roth conversion. Help!

[GreenER]

I did a partial conversion of an IRA to a Roth while the market was down in 2015. This is my first time doing a Roth conversion and I am now trying to do our taxes for 2015 and I am a little confused.

I understand that I should fill out form 8606. I think I only need to fill out page 2. Am I reading this right that I don't fill out the amount of the conversion on line 8 of page 1, because I would only have to fill out page 1 if I had also made a contribution to a traditional IRA?

On page 2, I am being thrown by the request to fill in the basis on line 17. For one thing this is an IRA that was from an old work 401k account from 20+ years ago. Actually, it's origins are frankly kind of lost in the mists of time. It was funded entirely with pretax money and has grown tax free, that much I do know. It has been transferred around enough that no one financial institute has the whole picture and much of the transferring was done before I was very savvy, so I have no record either. I think it was about $16,000 when it first was transferred to an IRA and it had grown to about $50,000. I thought I would be paying tax on the full amount of the conversion as they are all dollars that have never been taxed. So is my basis zero on line 17 of page 2 on form 8606. Aarrgg!! I hate taxes!

 

[Senator]

I would recommend using a program like TurboTax. Turbotax handles all of that for you.

 

[LOL!]

Your basis is zero.

A positive basis would have come from non-deductible IRA contributions which should have been reported on a Form 8606 in the years they were made. These are not the same thing as Roth IRA contributions.

A positive basis could also come from non-deductible 401(k) contributions rolled over to an IRA. These contributions might have been called "after-tax contributions" and are NOT the same thing as Roth 401(k) contributions.

TurboTax does not explain anything better than the IRS instructions. One still needs to understand the vocabulary and what is going on.

 

[GrayHare]

The term "basis" in this case refers to the total amount of money contributed to all your tIRAs as after-tax contributions. People who contribute to a tIRA during years in which their income was too high to qualify for the corresponding tax deduction are said to have made an after-tax contribution. The total of those contributions is their tIRA basis. IMO it's confusing to use the term "basis" and I wish the IRS simply called it "after-tax contributions".

 

[kaneohe]

Yes, as others have said, you only fill out Pt II, lines 16 & 18
if you never made any non-deductible contributions to TIRA.

Just to make things more confusing.....there is another use of basis.......basis in Roth IRAs ......which it might be useful to know about.

Did you make any withdrawals from the Roth in 2015? If not, read the instructions for pt III (on the form itself):

"Part III Distributions From Roth IRAs
Complete this part only if you took a distribution from a Roth IRA in 2015. For this purpose, a distribution does not include a rollover, one-time distribution to fund an HSA, recharacterization, or return of certain contributions (see
instructions)."

fyi........basis in a Roth is different from basis in a TIRA.
For a Roth, there is contribution basis (how much you contributed in annual contributions). There is also conversion basis (how much you converted from TIRA).
These would all be after-tax funds. F8606 is asking for those numbers so that it can know how much are untaxed earnings (total in Roth less basis) since earnings are treated differently. It only needs to know those things when you make withdrawals from the Roth so likely you don't need to do it now. However it would be good to keep track of your contributions and conversions so that you can fill that form out correctly in the future.

 

[bingybear]

I did a partial conversion of an IRA to a Roth while the market was down in 2015. This is my first time doing a Roth conversion and I am now trying to do our taxes for 2015 and I am a little confused.

I understand that I should fill out form 8606. I think I only need to fill out page 2. Am I reading this right that I don't fill out the amount of the conversion on line 8 of page 1, because I would only have to fill out page 1 if I had also made a contribution to a traditional IRA?

On page 2, I am being thrown by the request to fill in the basis on line 17. For one thing this is an IRA that was from an old work 401k account from 20+ years ago. Actually, it's origins are frankly kind of lost in the mists of time. It was funded entirely with pretax money and has grown tax free, that much I do know. It has been transferred around enough that no one financial institute has the whole picture and much of the transferring was done before I was very savvy, so I have no record either. I think it was about $16,000 when it first was transferred to an IRA and it had grown to about $50,000. I thought I would be paying tax on the full amount of the conversion as they are all dollars that have never been taxed. So is my basis zero on line 17 of page 2 on form 8606. Aarrgg!! I hate taxes!

I did my first Roth Conversion for DW this year and had to go through this. I use taxact .. and have for a number of years. Before that I used taxcut. I had tax basis (after tax contributions to both IRAs and non-Roth 401ks going back into the '90s. When I rolled my 401ks to IRAs long ago.. you put the tax basis (after tax contributions) on form 8606. This keeps a tally of tax basis record in your tax returns.
As I think you said that all your contributions were pre-tax.... then you have 0 tax basis.... thus the entire conversion is taxable.

Tax programs can be helpful.... You seem a bit more up tight with this than my experience. I would bet a shot of scotch will make it all work out better.

 

[GreenER]

Thanks for all of the help! You have all confirmed what I thought I was reading, but the usage of the word basis in this scenario threw me. We haven't yet gone to using a tax program but perhaps we should to save the frustration and to have more confidence that we didn't miss anything or screw anything up. I would hate to inadvertently encourage an audit. The complexity of tax language sometimes makes my head start to spin. I am ready but my husband's frugality has gotten in the way on this decision. I had that shot of whisky. That and confirmation from the forum and my tax demons have been exorcised!

 

[LOL!]

As for cheapness, HRBlock has tax software they pay you to use. The payment is in the form a gift card that you buy with your tax return, but you get an extra 10%, too. So if you pay $30 to buy HRBlock tax software and get a refund of $500, then you actually get $550 which is like getting the software for free (actually they pay you $20 to use the software $550-$30=$20).

 

[2017ish]

As for cheapness, HRBlock has tax software they pay you to use. The payment is in the form a gift card that you buy with your tax return, but you get an extra 10%, too. So if you pay $30 to buy HRBlock tax software and get a refund of $500, then you actually get $550 which is like getting the software for free (actually they pay you $20 to use the software $550-$30=$20).

Just a point of clarification--10% is if you use "Deluxe" or higher software. The barebones program gives you a 5% rebate. (I switched to Block this year because of this rebate--needed to keep my Amazon account topped off.)

 

[GreenER]

Thanks for the info on the H&R program deal. I'll see if aI can sell that to my husband. Do you have to buy a new program ever year then or do you get free upgrades.

 

[gauss]

If all the money is pre-tax (ie no non-deductible or after tax contributions) then the 8606 should be straight forward. 8606 is all about tracking basis and prorating amounts. [-]You will still probably need to fill out part 1[/-], but again the math should be easy - and part 2 which should be trivial.

Keep in mind if you have $0 basis, then the entire amount converted to the Roth should come out to be taxable. This is a check that you can use to make sure that you are filling out the form correctly.

Let us know if you have any questions on how to fill out [-]Part 1[/-] Part 2 of 8606. There should be no need to resort to tax software if you have been doing your taxes by hand up to this point.


Yes line 17 should be 0 if you have no basis in the IRA. Just fill out lines 16,17,18.

Tax software is generally paid for (or re-acquired) each year over and over again. There is free tax software available at irs.gov from various vendors if you meet qualifications such as income limits and age limits.

-gauss
"a detest'er of 8606 - as one who has non-0 basis"