Is form 8606 TIRA basis lost after backdoor roth?

[tandy1000rl]

Hello all,

I have 11 dollars of nondeductible TIRA basis in line 14 of my 2011 form 8606 after a clean backdoor Roth performed during that year:

1. 12/31/10 TIRA balance = $0
2. 2011 nondeductible TIRA contribution = $5000
3. 2011 TIRA-->ROTH conversion = $4989
4. 12/31/11 TIRA balance = $0

Now that I'm pulling together 2012 taxes, is the 11 dollar basis lost because the TIRA account was zeroed out in 2011 (despite it remaining open with the custodian), or can it be carried forward into line 2 of my 2012 form 8606 as per the IRS instructions? (I did a fresh backdoor Roth in 2012 as well.)

TurboTax Deluxe was used to prepare both 2011 and 2012, and it complains when I override form 8606 line 2 from $0 to $11 for the 2012 tax year. I'm not sure if a bug in TurboTax is causing the basis to not be transferred, or if that's in fact the correct tax treatment. I realize the amount is inconsequential, but I would like to prepare the form correctly.

Thanks in advance for any thoughts on this matter.

[Alan S.]

Issues similar to this fall into a "basis quagmire" with respect to potential uses of this unrecoved basis from Form 8606.

In fact, since you closed all your TIRA accounts in 2011 for less than your basis, you have a potential misc itemized deduction for that $11 subject to 2% AGI floor. If the 2% floor does not erase that small deduction, you may not be itemizing in the first place, or if you are in AMT, the deduction gets erased. Therefore, most people would get no benefit from this option, and would look to preserve that basis. Of course, if you itemized it the basis could not be used for later years.

Since you had to complete Part I of Form 8606 only because you made a 2011 non deductible TIRA contribution, you have a line 14 basis to carry forward to 2012. If you did not make the non deductible contribution in 2011, then you would not have done Part I, would not have had a line 14 and would have entered your full basis on line 17. Line 18 would then have been negative, but the instructions do not allow for a negative number on line 18 or to flow to line 15b of Form 1040. Therefore, in that situation your basis would have been eviscerated.

Back to your situation - since you properly have a line 14, you definitely have basis to carry forward to your 2012 8606 line 2. Ttax must have been programmed with the assumption that line 14 disappears once the IRA balance goes to -0-, but there is no IRS guidance to support that. Taken literally, your $11 should be shown on line 2 of your 2012 8606. For future years, to prevent this from happening, you might consider leaving $10 in your TIRA to eliminate various programming variances. In your current situation, I would try to override if the process does not create more problems than it is worth.

[HouseStark]

I'm not going to assert that logic pervades the workings of the tax system, but it makes sense to me that the basis would be lost when the IRA is zeroed out. The basis would seem to be tied to the existing Traditional IRA balance before distribution and when all TIRA balances were zeroed out through the conversion distribution the basis also goes. As Alan S. points out it is possible for the loss to be claimed from a Sched A misc itemized deduction. Whether or not that deduction is of any benefit due to the 2% floor is another matter, but since there is a potential benefit I can see how that would lead to the basis not carrying over. There are other cases of potentially beneficial tax attributes that simply go away or cannot be utilized. This would seem to be one of them, absent some specific indications to the contrary, which I would be interested to hear.

[Alan S.]

I'm not going to assert that logic pervades the workings of the tax system, but it makes sense to me that the basis would be lost when the IRA is zeroed out. The basis would seem to be tied to the existing Traditional IRA balance before distribution and when all TIRA balances were zeroed out through the conversion distribution the basis also goes. As Alan S. points out it is possible for the loss to be claimed from a Sched A misc itemized deduction. Whether or not that deduction is of any benefit due to the 2% floor is another matter, but since there is a potential benefit I can see how that would lead to the basis not carrying over. There are other cases of potentially beneficial tax attributes that simply go away or cannot be utilized. This would seem to be one of them, absent some specific indications to the contrary, which I would be interested to hear.

While there is no clear guidance from the IRS with respect to temporary -0- balances in an IRA, the instructions for Form 8606 (page 6) specifically indicate that the line 14 figure from the most recent 8606 is to be entered on line 2 of the current 8606. Therefore, preserving a line 14 entry is key to preserving any prior unrecovered basis. If Part I of Form 8606 is not required because the full balance of the TIRA is converted and there is no current year non deductible contribution, then there is NO line 14 and the unrecovered basis is lost according the the 8606 Instructions.

Even if you were aggressive in this situation and entered a negative figure on line 18, carrying this over to line 15b would create an ordinary loss for an IRA distribution, and this is totally inconsistent with treatment accorded to closing any form of retirement account. Therefore, if you don't have a line 14, any unrecovered basis is most certainly erased.

Creating a line 14 entry is fairly simple. You can make any small amount of a non deductible TIRA contribution for the current year, OR your conversion can leave behind $10 in the TIRA making the conversion a partial instead of a full conversion. If you don't have a line 14 figure on your latest 8606, your unrecovered basis is erased unless you were able to challenge the 8606 Instructions.

http://www.irs.gov/pub/irs-pdf/i8606.pdf