Back Door Roth IRA/Distribution Code

Have a question about your personal investments? No matter how simple or complex, you can ask it here.

Back Door Roth IRA/Distribution Code

Postby Woody999 » Sun Feb 10, 2013 7:45 pm

In 2012 my wife and I both opened traditional IRAs with after tax money. We then back doored them into Roth IRAs due to our income levels being to high to take advantage of the traditional IRAs. The problem is I think Fidelity has the wrong distribution code on my form 1999-R. They have the code as 2 which is, Early distribution (except Roth). When I enter code 2 it has me paying taxes on that distribution. :annoyed Something isn't right...I think the distribution code on this form is the problem.

Any ideas on what the distribution code should be for a traditional IRA back doored to a Roth IRA?

Thanks guys!

:sharebeer
Woody999
 
Posts: 62
Joined: Sun Sep 16, 2012 9:37 pm

Re: Back Door Roth IRA/Distribution Code

Postby livesoft » Sun Feb 10, 2013 7:52 pm

Wasn't this discussed in this thread -> viewtopic.php?f=2&t=109062&p=1600850
Last edited by livesoft on Sun Feb 10, 2013 7:53 pm, edited 1 time in total.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
livesoft
 
Posts: 32641
Joined: Thu Mar 01, 2007 9:00 pm

Re: Back Door Roth IRA/Distribution Code

Postby sscritic » Sun Feb 10, 2013 7:53 pm

Code 2
sscritic
 
Posts: 21501
Joined: Thu Sep 06, 2007 9:36 am

Re: Back Door Roth IRA/Distribution Code

Postby HouseStark » Sun Feb 10, 2013 7:58 pm

Distribution code "2" is correct. If this results in your tax software showing the entire distribution as taxable, that's probably because you're not doing it correctly. You need to make sure the program has information on your IRA basis. If you each put in $5000 as non-deduction contributions during 2012, then there is somewhere to input that information.

You didn't state whether you or wife had any other IRAs other than the ones you opened with these 2012 contributions. That could be a whole other issue.

If you want specific help on inputting things in your software, then it would help if you would say what it is.
HouseStark
 
Posts: 324
Joined: Mon Oct 15, 2012 3:31 pm
Location: Minneapolis, MN

Re: Back Door Roth IRA/Distribution Code

Postby Woody999 » Sun Feb 10, 2013 8:04 pm

livesoft wrote:Wasn't this discussed in this thread -> viewtopic.php?f=2&t=109062&p=1600850



Thanks...I'll take a look at that thread!
Woody999
 
Posts: 62
Joined: Sun Sep 16, 2012 9:37 pm

Re: Back Door Roth IRA/Distribution Code

Postby sscritic » Mon Feb 11, 2013 5:30 pm

I no longer look things up for other people, but I do like to find answers to questions that interest me. From what I have found, all of the above answers, including my own, are incorrect.
sscritic
 
Posts: 21501
Joined: Thu Sep 06, 2007 9:36 am

Re: Back Door Roth IRA/Distribution Code

Postby Alan S. » Mon Feb 11, 2013 8:38 pm

Code 2 has nothing to do with ordinary income taxes, it is a reflection that whatever the taxable is (if any), there is no early distribution penalty. Therefore it is telling you and the IRS that there is no penalty due. The reason Fidelity issued the 2 code is you transferred the funds into a Roth IRA and there is never an early distribution penalty for a rollover, and a conversion is a rollover. Now, if you asked for a distribution paid to you and you indirectly rolled it over to a Roth IRA, FIdelity would not know what you did with the money and the Code would be "1" unless you are over 59.5.

The more relevant issue here is the taxable amount for the conversion. Taxable amounts show in Box 2a, and for TIRA distribution including a conversion, the TIRA custodian has no idea whether your TIRA has basis or not. The IRS instructions have changed over the years with respect to whether the custodian should therefore show nothing in Box 2a or show the gross distribution there. Currently, the 1099R instructions indicate that the full amount should go in 2a if the custodian knows you converted and the "taxable amount not determined" Box in 2b should be checked.

From that point the taxpayer needs to correctly input the basis from Form 8606 into the software and since there are software variations between providers, this is where most people run into problems. It really helps if you understand what the taxable amount should be under the pro rate rules, so if you get something illogical you will know that the input needs to be reviewed and changed. Most programs allow you to review Form 8606 before filing so you can see the final result.
Alan S.
 
Posts: 3386
Joined: Mon May 16, 2011 7:07 pm
Location: Prescott, AZ


Return to Investing - Help with Personal Investments

Who is online

Users browsing this forum: Bing [Bot], bowtie, LongerPrimer, rixer, speedbump101 and 54 guests