Form 8606, Roth IRA and Non-deductable IRA

[kjpliny]

Any tax experts in the house? I'm not sure what if any tax consequences I will experience with the following maneuver, but I think I have to file a form 8606 for 2010, I'm just not sure how to fill it out. Here is a breakdown of events:

April 2010 - Opened a traditional (non-deductable) IRA account with $5k after tax money with the intent of converting it to a Roth as a workaround to the AGI limit.

April 2010 - Recharacterized a prior Roth IRA contribution from 2009 to the new IRA account $4980 (this was after I realized that we exceeded the AGI for Roth contribution when doing 2009 taxes).

Nov 2010 - Converted the original $5k that I opened the IRA with to the Roth.

So I think there is a problem because my accounts show that the Roth IRA contribution limit was reached for 2010 and the Traditional IRA contribution limit was also reached for 2010 even though the Roth IRA contribution happened in 2009 (the transfer to the IRA happened in 2010), so my statement shows the $5k I used to open the IRA as taxable (I guess it's picking it up as an over-contribution?). Since the Roth is after tax money and the non-deductable IRA is after tax money, there is really no income taxes to pay (both accounts are in cash right now), but somehow I need to make sure that the IRS has my cost basis correct for both accounts. Prior to 2009, all contributions were to the Roth since we were below the AGI limits and we didn't have a regular IRA until I opened one last year.

What do I need to do to straighten this out...I have never filed a form 8606 before and I don't think one is required if you solely contribute to a Roth, but now that the new IRA account has activity in it, I need to file one. Any thoughts?

[kaneohe]

You might want to post your situation in the retirement subforum at the fairmark.com site.

just to see if I understand
2009 5K Roth contribution for 2009----no report required
Apr 2010 Recharacterize 5K Roth contribution(4.98K) to TIRA#1---narrative report required stating original contribution amount to Roth/date; recharacterized that contribution amount (w/ recharacterized value)/date (perhaps report account nos. too)......this would be 5K non-deductible contribution now?? so 8606 required to report basis of 5k

Apr 2010 TIRA contribution for 2010 to TIRA#1(non-deductible)---8606 required to report basis of 5K (total basis now 10K)

Nov 2010 .....convert 5K to Roth.......8606 required to report conversion.
Since TIRA #1 has 10K of basis and possibly some earnings, the 5K conversion may have some earnings and possibly some tax liability.


As I see it , you need to file an 8606 to report your 5K + 5K basis in TIRA and also to report your 5K Roth conversion (there could be some taxable component from earnings). Just read the instructions for the form and go line by line . It's not that bad......you are the one who tells IRS what the basis is............otherwise they have no idea. You also need to file a brief narrative basically reporting what happened the facts relating to the contribution/recharacterization so IRS understands what happened.

I don't see any problem w/ what you've done. Maybe your broker has messed up the reporting in which case you should talk w/ them and have them fix it ,.......but I'm not quite sure what you're seeing that's bothering you.

[jimnjana]

You don't need to file an 8606 for the April recharacter... that will be reported on your 1099R from the IRA custodian. You will need an 8606 for your nov conversion, that is where you will indicate how you want to pay your tax on earnings and indicate that initial basis/non deductible nature of contribution.

[kjpliny]

Thanks for the replies!

As far as I can tell, the 2009 Roth contribution which was recharacterized as a non-deductable IRA contribution is to be treated as whatever the final transaction became, so I need to submit a form 8606 for 2009 to report cost basis of the non-deductable IRA. I also need to submit a form 8606 for 2010 which will include the 5K non-deductable contribution to the IRA as well as the conversion of the original recharacterized amount that was moved to the Roth, thereby reducing the non-deductable IRA cost basis by the amount converted back to the Roth which was previous recharacterized from the prior year).

If none of that sounds wrong, I think I will mail the two 8606 forms to the IRS with a letter explaining the reason for the 2 forms and that they do not impact my current year or previous year returns.

[kaneohe]

I don't think you can pick and choose what you convert......that is, you can't say you're going to convert the non-deductible contribution and leave the earnings behind so that you don't pay any taxes. The TIRAs are supposed to be considered one big homogeneous mixture that you convert from.

[kjpliny]

Everything was in cash...if there were earnings, it was like a dollar.

[kaneohe]

Quote:

Originally Posted by kjpliny Everything was in cash...if there were earnings, it was like a dollar.

got it........forgot what our wonderful interest rates do for us these days ....
plus you got that running start of -20 on the recharacterization. Did you resolve your other concerns? Alan S. at fairmark.com is really good about those kind of things .

[kjpliny]

I think so...I just wish the powers that be would remove the income restriction on Roth contributions so we don't have to do backflips using the back door method. What is so wrong about someone making say a million dollars a year contributing $5k to a Roth?

[teejayevans]

Quote:

Originally Posted by kjpliny I think so...I just wish the powers that be would remove the income restriction on Roth contributions so we don't have to do backflips using the back door method. What is so wrong about someone making say a million dollars a year contributing $5k to a Roth?

Check out the retire the roth thread....
TJ