Backdoor Roth IRA and IRS Publication 590. They messed up.

[drdavidge]

I think there is an error in the IRS Pub 590, page 44 – the Worksheet 1-5. The note on the bottom aims to adjust for Roth conversions, but it does not work as intended. I found this out by running through TurboTax – I contributed $5000 to a Traditional in 2011, converted that ($5053) in 2012, made another $5000 contribution to the Traditional in 2012, and then converted that this year. I got a 1099-R for $5053 for 2012. I would expect to see a $53 taxable amount on line 15 of the 1040, but instead it comes up with $168, based on the value of my Traditional on 12/31/12 (by running through that worksheet). It's using my 12/31/12 value of my newly contributed money for tax year 2012 to determine the ratio of taxable vs non-taxable and is coming up with a completely incorrect number. I'm pretty sure there is something wrong with the instructions.. I don’t know how to report it though. Have any of you seen this too?

[pshonore]

What is your IRA basis as reflected on your 2011 Form 8606?

[drdavidge]

Its $5000.

Pub.590, page 44: http://www.irs.gov/pub/irs-pdf/p590.pdf

Check it out:



I'm fairly confident this should only be $53 as taxable.

[drdavidge]

I dunno. Maybe I'm wrong (definitely not a CPA..) but I would think that I should only be subject to $53 as taxable. Any thoughts from any tax pros?

[retiredjg]

In order to do a back door Roth IRA contribution correctly, the value of line 4 must be zero. Since it is not zero, the $5,291 has been prorated with the conversion. That's what that number .96674 is about and why your taxable portion is $168 instead of $53.

I'm guessing you did your conversion and then made a new contribution to itIRA before the end of the year? It is the value of all your IRAs on 12/31 that counts. The value of all your IRAs on the day of the conversion is not relevant (or even known by the IRS).

This is not a big deal. You won't be charged extra taxes in the long run. When (if) you convert the $5291, you'll pay a little less tax then because you paid a little extra this time.

In the future, for back door Roth IRA to work, be sure that you have NOTHING in tIRA, SIMPLE IRA, or SEP IRA on 12/31. Then it will work just like you expect.

[Alan S.]

Actually, you should NOT be using Worksheet 1-5 in your situation, just Form 8606. You do not need this worksheet because you are not deducting ANY of your contributions (see the instructions for use of 1-5). The worksheet treats your contributions as non deductible (even if they were not), so in your case it just produces the same taxable amount as Form 8606 does by itself.

The reason your conversion includes $168 taxable is mainly due to the $291 in gains your 2012 contribution generated through 12/31/2012.

Your 2012 conversion recovers 4,885 of your 10,000 basis, leaving you 5,115 carrying forward to 2013. You did not indicate the amount of your 2013 conversion, but if it was 5,291 (YE 2012 value), the taxable amount of your 2013 conversion will be $176 (5291 less 5115). To prevent this figure from going higher, convert your 2013 contribution immediately after making the contribution. That conversion will be added to your present conversion, but the total taxable amount would still be around $176 assuming no gains from 12/31 to your first conversion date.