This is for 2018 - The worksheet that goes with the 1099-R for 2018 is not like the one for 2017
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I had a few minutes this morning so I played around with this, it still works fine for me exactly as it has in the past. Again, this is NOT a recharacterization, it's a conversion from traditional IRA (with basis) to Roth IRA. You've been entering it wrong.
Screenshots attached.
I had a few minutes this morning so I played around with this, it still works fine for me exactly as it has in the past. Again, this is NOT a recharacterization, it's a conversion from traditional IRA (with basis) to Roth IRA. You've been entering it wrong.
Screenshots attached.
Does your client have money in the IRA in addition to the amount you are converting?
pdlang55, TCJA did not shut down back-door Roth IRA, only recharacterization (i.e. unwinding) of conversion (see §408A(d)(6)(B)(iii)). Roth IRA conversion has always been taxable based on the normal rules except the 10% early distribution penalty does not apply (see §408A(d)(3)).
This worked. Helpful input.
rbynaker - Can you please advise on how I can view your screenshots?
Sorry, they didn't survive the "upgrade" to the new forum.
I have a client that contributed in 2021 $7K to a traditional IRA and then converted in same year to a ROTH IRA(back door ROTH). The 1099-R had code 2.
The 1040 looks like this:
4a IRA distribution of $7,000 and 4b taxable amount $7,000. Also, there is a rollover of $30,322, but was not from a IRA/SEP/SIMPLE. She had a 401K from the past that she rolled over. Do I need to know if she rolled it over to her IRA or SEP?
Also, the Form 8606 has only Part II completed with line 16 for $7,000. The rest of the form is blank.
I appreciate any help I can get!
"She had a 401K from the past that she rolled over. Do I need to know if she rolled it over to her IRA or SEP?"
What you need to do first, to follow the retirement money, is to know what was post-tax or pre-tax. Then, from which type of account. Then, to which type of account.
That's how you know when things look right or wrong.
Especially when you have various Activities. It's not a Mix or a Net. They are tracked per how the IRS treats them for what happened, and in some cases the employer account(s) do get counted with personal (IRA, SEP) and in some cases, the employer account(s) are not taken into consideration with personal. Some cause restrictions or limitations and some do not.
Some SEP allow other types of contributions, rollovers and/or transfers, but most do not.
Many IRAs accept any other pre-tax rollovers or transfers, but some do not.
A "backdoor" Roth simply represents an amount put into an IRA post-tax, and immediately converted, avoiding any earnings that would be taxable.
And that will help you determine what needs to appear on the Form 8606 and what does not.
Thank you for your patience with this. Every situation is so different. I have spent the whole day reading Form 8606 instructions and reading about this trying to find the scenario I have for this client.
What if this is the first nondeductible IRA? So line 1 on Form 8606 would be in this case $7,000
Line 2: Enter your total basis in traditional IRAs. All of her IRAs were deductible in the past. So this is pretax money. Only the 2021 IRA contribution of $7,000 is nondeductible so this is post tax. Do I need to ask the client for the basis in her traditional IRAs(pretax accounts) for this line?
Then line 6 value of all traditional SEP and IRAs(that's all she has) as of 12/31/21? All of this pretax contribtutions except the 2021 nondeductible IRA of $7,000?
Thank you for your patience on this. The communication with the client as well is not good. So trying to figure possible scenarios so I can be clear about what I might need to complete Form 8606 accurately.
If this is not clear enough, sorry.
"What if this is the first nondeductible IRA?"
That's not enough info. You stated this: "I have a client that contributed in 2021 $7K to a traditional IRA" and that there is SEP. Was there any other money in any Traditional IRA, including any earnings? The SEP? Was there Basis in any of these accounts? Because if Not, if a conversion (which is what a backdoor Roth functionally is accomplishing) includes account(s) with anything other than Basis, the conversion will be pro-rata.
You also stated: "and then converted in same year"
That's also not good enough to help. Was it right away or later? Later, as in, now there are sheltered earnings that create a pro rata conversion.
Remember this: "A "backdoor" Roth simply represents an amount put into an IRA post-tax, and immediately converted, avoiding any earnings that would be taxable."
"So line 1 on Form 8606 would be in this case $7,000
Line 2: Enter your total basis in traditional IRAs." <== Basis, because it is post-tax
"All of her IRAs were deductible in the past."
And here is your problem, then. Not Basis. Contributions not basis; earnings not basis.
"So this is pretax money." <== meaning Not Basis
"Only the 2021 IRA contribution of $7,000 is nondeductible so this is post tax." <== Basis
It is Pro rata (lines 10 and 11). And make sure to understand how Line 6 includes SEP, because you mentioned this person has SEP and not only IRA. I mentioned for some things, they are combined/included.
"Do I need to ask the client for the basis in her traditional IRAs(pretax accounts) for this line?"
Of course. But you already stated 0 prior to 2021. If it was All Basis, you would be fine. If there is any other Basis, add it to the $7.000 figure.
Perhaps we should review that Basis is the total of any "already taxed" monies. Any amount sitting in any IRA/SEP/SIMPLE for this person, for amounts never taxed (which would be pre-tax contributions and all earnings) will result in a pro rata condition for the Basis amount you want to show converted to Backdoor, because it is not selective. You can decide the Amount is $7,000, but not which $7,000 that will be. It's just a number.
Example:
I have put $20,000 pre-tax into IRA over the years, and I have $1,000 (sheltered) earnings. I now put $7,000 post-tax (to be Roth backdoor conversion) into a new IRA (which you don't have to do for Backdoor, but perhaps I want to work with a new broker for the Roth). Before I convert $7,000 that is the entire new account, then, I have to look at the big picture:
$20,000 + $1,000 + $7,000 = $28,000 in all of my IRA accounts
Now, let's convert $7,000 (which is computed as if it will be from any/each/all of my IRA accounts). That's the point; the IRS treats all of the IRA accounts as if they are one.
$7,000 out of $28,000 is Basis, or 25% of every $1 converted was already taxed (is Basis). The other 75% is taxable as income.
$7,000 (amount to convert) X .75 = $5,250 is taxable; $1,750 was from basis and reduces my Tracking of Basis. $7,000 (was my Basis) minus $1,750 basis converted = $5,250 of original basis still left in IRA.
Next year, if there will be conversion, the math is:
$5,250 divided by whatever is my new Total. If I decide to do another $7,000 backdoor Roth, then the Basis is $12,250 against the Total of my account(s) for the factor to use for the amount I am going to convert, which (by the way) does not have to be $7,000.
Remember that contribution limits are not applied to Conversions. She can put in $7,000 and the convert All of the IRA amounts, as long as she is prepared to pay the taxes on that larger amount. So, perhaps that is another confusing point for you? Contribution Limit vs Conversion Amount.
Whew. I think that covers all of this... I'll edit it if I spot a mistake. Good Luck.
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