Roth conversions and multiple TIRA accounts

[O2Bfree]

As I understand it, if you have multiple TIRAs, the IRS considers them all as one with regards to Roth IRA conversions, correct?

Reason I ask is because I realized I forgot to claim a TIRA contribution on my taxes back in 2009, and I want to move it to a Roth IRA. That TIRA is unfortunately in a CD with a bank and doesn't mature until July. I have another TIRA with Fidelity, the one I rolled over from my 401k, and I'm thinking I can just do the conversion from that account now. I already filed an 8606 for this. I wish I'd caught this sooner and could have filed an amended return, and I wish I'd done this conversion earlier in the year of course, two bads on me! Then there's the CD with a bank: three bads!!!

 

[cathy63]

Yes, all your IRAs are seen as one for Roth conversion purposes. It sounds like it could have been deductible in 2009, but since you forgot to deduct it you filed an 8606 to say that you have already paid the tax on these funds?

If I've understood the situation correctly, then when you do the conversion, you can't just convert those funds you already paid the tax on. You have to convert the pre-tax and post-tax funds proportionally. For example, if you put $5K in the bank CD IRA, but all your IRAs together are now worth $100K, and the other $95K is all pre-tax money, then when you do a $5K conversion, only 5% of the conversion will be the post-tax money. The other 95% is pre-tax and you will owe income tax on that amount.

 

[SecondCor521]

Correct.

However, deductible contributions and nondeductible contributions to traditional IRAs are treated as two separate piles of money and affect the math on the Form 8606.

Since you did not deduct the contribution in 2009, that becomes a non-deductible contribution and becomes basis. If properly tracked, that basis proportionately will reduce the amount you owe taxes on when you go to withdraw those funds from the traditional IRA.

It's obviously way to late to amend your 2009 return.

You certainly can convert money from your Fidelity traditional IRA to a Roth IRA if you wish. You'll owe ordinary income tax on whatever portion of the conversion was due to deductible contributions; the portion of the conversion that was due to non-deductible contributions (your 2009 contribution plus any others that you didn't deduct) can be converted tax free.

The math is done on Form 8606. Your 2009 nondeductible contribution will enter the picture on line 2, which will contribute to the total on line 5. You'll see the non-taxable amount of the conversion on line 11, which should be lower than your total conversion amount on line 8.

If the 2009 contribution amount wasn't very much and you don't want to keep track of basis (which is something that can be calculated and carried forward forever), you can just forgo the adjustments. You'll pay somewhat more in taxes but your tax return will be easier to prepare.

Another thing to think about is that, according to the rules, if you didn't file a Form 8606 back in 2009 to properly register your nondeductible contribution to your traditional IRA, then you would owe a $50 penalty for failure to do that. I honestly doubt the IRA can manage to keep track of all of our Form 8606s and so I doubt it would every be caught, but it's a thing to know about. Filing a form 8606 now with basis from a 2009 contribution that the IRS doesn't know about in theory could trigger something somewhere somehow.

 

[O2Bfree]

Yes, all your IRAs are seen as one for Roth conversion purposes. It sounds like it could have been deductible in 2009, but since you forgot to deduct it you filed an 8606 to say that you have already paid the tax on these funds?

Yes, I paid the tax at the rate paid when I was working, since I forgot to claim it then. And I double-checked with the IRS to make sure they got the 8606. I mailed it in July and they just got it into my file a couple weeks ago!

 

[O2Bfree]

If the 2009 contribution amount wasn't very much and you don't want to keep track of basis (which is something that can be calculated and carried forward forever), you can just forgo the adjustments. You'll pay somewhat more in taxes but your tax return will be easier to prepare.

I was going to convert just the contribution amount, $5000.

Another thing to think about is that, according to the rules, if you didn't file a Form 8606 back in 2009 to properly register your nondeductible contribution to your traditional IRA, then you would owe a $50 penalty for failure to do that. I honestly doubt the IRA can manage to keep track of all of our Form 8606s and so I doubt it would every be caught, but it's a thing to know about. Filing a form 8606 now with basis from a 2009 contribution that the IRS doesn't know about in theory could trigger something somewhere somehow.

I talked to the IRS twice on the phone to see if the form was in my file, and neither rep said anything about the penalty. Not that that means much right now since they've been way behind on things this year.

 

[SecondCor521]

I was going to convert just the contribution amount, $5000.

OK. Understand that in the IRS' eyes, contributions and conversions really have little to no connection with each other.

From your point of view, you might think that you're converting the $5000 that you contributed in 2009 into that traditional IRA.

From the IRS' point of view, you made a $5000 contribution in 2009, and you converted $5000 this year. Two separate and unrelated events. They don't care if it's the same traditional IRA. They don't care if it was in the same investment. They don't care if it's dividends, capital gains, stock splits, spinoffs. They don't even care that the two numbers happen to match each other.

As far as penalties go, I think very few taxpayers get Form 8606s correct, and I don't think it's high on the IRS' priority list to go hunting for people who didn't file them and charge them $50. If you did the $5000 conversion this year and fill out and file a Form 8606 and list the $5000 nondeductible contribution on line 2 of that form, I doubt the IRS will have a problem with that even though, in theory, they could.

As noted above, you could also leave line 2 blank and your math and tax life would be simpler and easier, but you'd pay somewhat more in taxes.

 

[O2Bfree]

Yes, opting for the blank line 2 sounds like a good idea. A little more in taxes, not so good, but there's premium tax credits, so I got that going for me.

 

[kaneohe]

Yes, opting for the blank line 2 sounds like a good idea. A little more in taxes, not so good, but there's premium tax credits, so I got that going for me.

you should try filling out the 8606 by hand a few times. once you see how few lines are involved , your imagined aversions may be lessened.