IRS Form 8606 and dealing with Non Deductible IRA Questions

[jimnjana]

I have done several family member taxes for several years. In December DS told me she had made ROTH contributions for 2017 and 18 during 2018. Told her big mistake, their MAGI is way over max for ROTH. She was able to recharacterize the 2018 contribution as a traditional IRA contribution. The 2017 contribution we withdrew earlier in 2019. And believe it was placed in her traditional IRA. So now for her 2018 taxes. She received a 1099r for the withdrawal in 2018 . Question is does 8606 for 2018 taxes only include the 2018 deposit? not sure if I have to wait for 2019 taxes to complete the 8606 for her 2017 roth contribution that was withdrawn deposited in 2019. I haven't even started on the form 5329.

 

[kjpliny]

I've been doing non deductable IRA contributions and Roth conversions for many years. My understanding of Form 8606 is that it is used to track basis in an IRA for future determination of taxable vs non-taxable distributions. In my case, I only have one IRA account (it is an after tax account) and after making the annual contribution, it is converted to the Roth IRA (back door Roth conversion method). The Form 8606 is for the regular IRA (basis), which then becomes zero after the conversion. If you mistakingly contribute directly to the Roth and are over the AGI limits, you can recharacterize the contribution if caught in the same tax year as you have done here. This has happened to me once or twice.

In your case, I believe you can also retroactively file 8606 forms in the current tax year for prior years if they were not filed for the years of the contributions by simply appending them to the return with a note explaining the issue. What I don't know in your situation is what to do about the withdrawal. Since a direct Roth contribution is after tax money, there shouldn't be much of a penalty or tax due unless there were significant gains in the account.

Either way, if the Roth is now empty (my assumption), you probably don't need to file a form 8606 for the 2017 contribution since there is nothing left to track in the account. You may want to check with an IRS rep to verify.

 

[cathy63]

For the 2017 contribution that was withdrawn in 2019, she will receive a 1099-R in early 2020 and you will report that on her 2019 tax return. She will have to pay taxes and penalties on the earnings that were removed from the Roth IRA. The fact that she used the cash she received to make a 2019 non-deductible contribution to a tIRA doesn't matter, she'll still owe the penalty on the earnings. You'll report the 2019 non-deductible tIRA contribution on the 8606 in her 2019 return.

Don't let her make another contribution to the tIRA this year if she's already maxed out. She may think she's made a 2017 contribution and a 2018 contribution, but she really just converted that 2017 Roth contribution into a 2019 tIRA contribution.

 

[kaneohe]

I have done several family member taxes for several years. In December DS told me she had made ROTH contributions for 2017 and 18 during 2018. Told her big mistake, their MAGI is way over max for ROTH. She was able to recharacterize the 2018 contribution as a traditional IRA contribution. The 2017 contribution we withdrew earlier in 2019. And believe it was placed in her traditional IRA. So now for her 2018 taxes. She received a 1099r for the withdrawal in 2018 . Question is does 8606 for 2018 taxes only include the 2018 deposit? not sure if I have to wait for 2019 taxes to complete the 8606 for her 2017 roth contribution that was withdrawn deposited in 2019. I haven't even started on the form 5329.

a bit messy.........if you can't figure it out, try posting in the retirement forum at fairmark.com. It might be easier to think of the 2017 Roth contribution(made in 2018) /withdrawal(in 2019) and the 2019 TIRA contribution (made in 2019) as completely separate events.

F8606 asks you for specific non-deductible contributions:
1 Enter your nondeductible contributions to traditional IRAs for 2018, including those made for 2018 from January 1, 2019, through April 15, 2019. See instructions .

Read the bolded words very carefully

 

[jimnjana]

For the 2017 contribution that was withdrawn in 2019, she will receive a 1099-R in early 2020 and you will report that on her 2019 tax return. She will have to pay taxes and penalties on the earnings that were removed from the Roth IRA. The fact that she used the cash she received to make a 2019 non-deductible contribution to a tIRA doesn't matter, she'll still owe the penalty on the earnings. You'll report the 2019 non-deductible tIRA contribution on the 8606 in her 2019 return.

Don't let her make another contribution to the tIRA this year if she's already maxed out. She may think she's made a 2017 contribution and a 2018 contribution, but she really just converted that 2017 Roth contribution into a 2019 tIRA contribution.

Thanks. In this case when Fidelity recharacterized her 2018 contribution there was a loss of a few dollars. When we spoke to the fidelity rep, he told DS just to withdraw the 2017 contribution(not contribution+earnings) Yesterday I told DS to call fidelity to see if this was correct or not and also ask on the timing of the 1099r. But I think you are spot on with the timining of the subsequent contributions to the non deductible IRA. So, no 8606 for 2017, and an 8606 for 2018, 2019 and future years.

 

[jimnjana]

I've been doing non deductable IRA contributions and Roth conversions for many years. My understanding of Form 8606 is that it is used to track basis in an IRA for future determination of taxable vs non-taxable distributions. In my case, I only have one IRA account (it is an after tax account) and after making the annual contribution, it is converted to the Roth IRA (back door Roth conversion method). The Form 8606 is for the regular IRA (basis), which then becomes zero after the conversion. If you mistakingly contribute directly to the Roth and are over the AGI limits, you can recharacterize the contribution if caught in the same tax year as you have done here. This has happened to me once or twice.

In your case, I believe you can also retroactively file 8606 forms in the current tax year for prior years if they were not filed for the years of the contributions by simply appending them to the return with a note explaining the issue. What I don't know in your situation is what to do about the withdrawal. Since a direct Roth contribution is after tax money, there shouldn't be much of a penalty or tax due unless there were significant gains in the account.

Either way, if the Roth is now empty (my assumption), you probably don't need to file a form 8606 for the 2017 contribution since there is nothing left to track in the account. You may want to check with an IRS rep to verify.

Thanks. DS will be doing the back door roth in the the future. I think cathy63 spells out how to handle 2017 so you are right no 2017 8606 as the contribution took place in 2019. My head hurts from reading pubs 590 and the instructions for 8606 and form 5329. DS did the same thing for the 2017 Roth contribution to her husbands IRA. So between the two of them its driving me nuts.

 

[kjpliny]

Thanks. DS will be doing the back door roth in the the future. I think cathy63 spells out how to handle 2017 so you are right no 2017 8606 as the contribution took place in 2019. My head hurts from reading pubs 590 and the instructions for 8606 and form 5329. DS did the same thing for the 2017 Roth contribution to her husbands IRA. So between the two of them its driving me nuts.

Hang in there...we're using a professional tax accountant now that my wife has a separate side business and even he shakes his head and curses when we get to the IRA/Roth conversion stuff.