Do I need to report a leftover gain from traditional IRA conversion on 8606?

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nolapepper
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Do I need to report a leftover gain from traditional IRA conversion on 8606?

Post by nolapepper » Wed Feb 17, 2016 11:41 am

I did a IRA recharacterization back in May 2015 from traditional IRA to Roth IRA. It left $171.01 dividend or gain in the traditional account. That amount was converted to Roth on August 28, 2015.

The contribution was for 2014.

Question: Do I need to report this $171.01 on tax form 8606 for 2015?

Thank you for any input!

Alan S.
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Location: Prescott, AZ

Re: Do I need to report a leftover gain from traditional IRA conversion on 8606?

Post by Alan S. » Wed Feb 17, 2016 12:16 pm

Yes, all IRA conversions require an 8606.

If there was a balance left in the TIRA, then there must have been other money in the account in addition to the recharacterized regular contribution from TIRA to Roth. If you had enough basis in your TIRA from non deductible contributions, your conversion would be non taxable. Or with no basis the conversion would be taxable. This data also goes on the 8606 for reporting the conversion.

But you need to file the 8606 whether the conversion is taxable or non taxable.

nolapepper
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Re: Do I need to report a leftover gain from traditional IRA conversion on 8606?

Post by nolapepper » Wed Feb 17, 2016 2:26 pm

There was no other money left in the tIRA. Just the $171.01 gain. There was never any traditional IRAs in the whole account. They recharacterized the $6500 and left the gain and dividend there.

So I just need to report this $171, right? Those rechacracterized amount was never deducted on tax return.

FactualFran
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Re: Do I need to report a leftover gain from traditional IRA conversion on 8606?

Post by FactualFran » Wed Feb 17, 2016 2:49 pm

nolapepper wrote:There was no other money left in the tIRA. Just the $171.01 gain. There was never any traditional IRAs in the whole account. They recharacterized the $6500 and left the gain and dividend there.

Leaving the gain in an IRA recharacterized from does not sound right. According to the Recharacterizations section of IRS Publication 590a (Contributions to Individual Retirement Arrangements (IRAs)), a recharacterization must "Include in the transfer any net income allocable to the contribution."

retiredjg
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Re: Do I need to report a leftover gain from traditional IRA conversion on 8606?

Post by retiredjg » Wed Feb 17, 2016 3:03 pm

Doesn't sound right to me either. I thought gains had to go with the contribution when an IRA was re-characterized.

I wonder if there was a misunderstanding. For example, could you have said (or could they have heard) to re-characterize a certain amount rather than to re-characterize the contribution of a certain amount?

nolapepper
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Re: Do I need to report a leftover gain from traditional IRA conversion on 8606?

Post by nolapepper » Wed Feb 17, 2016 4:17 pm

It should not be miscommunication as this is a paper process. On the recharacterization request form to vanguard, I put the whole amount ($6800+ at that time). I thought everything would be recharacterized, but vanguard only recharacterized $6500.

So it seems to be a vanguard mistake. Sigh!

retiredjg
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Re: Do I need to report a leftover gain from traditional IRA conversion on 8606?

Post by retiredjg » Wed Feb 17, 2016 4:20 pm

Let us know what you find out.

nolapepper
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Re: Do I need to report a leftover gain from traditional IRA conversion on 8606?

Post by nolapepper » Wed Feb 17, 2016 4:30 pm

I am really bothered by these unprofessional mistakes by Vanguard staff. There were several mistakes already in our accounts. For example, the percentage of Bonds and Stock were mixed up when we transferred from Fidelity. Last month they mailed my international fund dividend to my house when it was set to reinvest.

Alan S.
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Re: Do I need to report a leftover gain from traditional IRA conversion on 8606?

Post by Alan S. » Wed Feb 17, 2016 4:57 pm

nolapepper wrote:I did a IRA recharacterization back in May 2015 from traditional IRA to Roth IRA. It left $171.01 dividend or gain in the traditional account. That amount was converted to Roth on August 28, 2015.

The contribution was for 2014.

Question: Do I need to report this $171.01 on tax form 8606 for 2015?

Thank you for any input!


Our problem is that it is not clear exactly what happened here due to the various terms you used, so we need some clarification.

1) You first made a regular contribution to a TIRA or Roth IRA?

2) If the initial contribution was to a Roth IRA and you recharacterized it back to a TIRA in May, 2015, it apparently had grown to around 6800 so 6800 was recharacterized to the TIRA. From May to August, the stock market dropped, so your balance in the TIRA dropped by August.

3) In August you converted to a Roth IRA. If so, did you convert the entire balance in the TIRA or did you leave 171.01 behind in the TIRA, and just converted 6500?

Please confirm the above 3 points. If not correct, please clarify the difference.

nolapepper
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Re: Do I need to report a leftover gain from traditional IRA conversion on 8606?

Post by nolapepper » Wed Feb 17, 2016 9:35 pm

It was a little complicated:

1. On January 20, 2015, I made a $6500 traditional IRA contribution for 2014 at Fidelity (by mistake. I should have contributed to Roth IRA like I have been doing in the past 6 years)
2. On February 19, 2015, I converted the traditional IRA to Roth IRA (again, by mistake, was given WRONG instruction by the Fidelity staff who did not know I should do a recharacterization).
3. On March 9, 2015, I transferred the funds to Vanguard.
4. On May 26, vanguard re characterized $6629 + $67 earnings from Roth to tIRA, correcting the wrong Conversion in February.
5. On June 25, Vanguard re characterize $6500 + $75 earnings from tIRA back to Roth IRA. Correcting the wrong contribution in January. Leaving $171 gains and dividends behind.
6. In August TLH, I found out that I still had some total stock left in the tIRA, called Vanguard and was told that was how it was done and I was instructed to do a conversion.
I did not check it as I did it now to spot that the re characterized the full amount the first time but not the second.
I am lost as what to do next. Simply report the $171 gain on 8606?

To make it more Complicated, we sold our business in 2015, might make us ineligible for Roth. Still waiting for accountant final numbers. I cannot even imagine what trouble I am creating for myself. Should not have started the whole ordeal in the first place. :(

Lessen learned: never trying to make things complicated. Keep it simple.

Alan S.
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Re: Do I need to report a leftover gain from traditional IRA conversion on 8606?

Post by Alan S. » Wed Feb 17, 2016 10:50 pm

I guess the biggest surprise is that all of these transactions were actually allowable under the rules. You never recharacterized a regular contribution more than once and your second conversion was done after the required 30 day waiting period.

Turns out I need a couple other things clarified to try to determine why VG might have handled step 5 like they did:
1) Was this a new TIRA account that never held any money other than what you reported here? Do you have any other TIRA accounts?
2) You mentioned 6 prior years of regular Roth contributions, so you already had a Roth before all this. Was the step 2 conversion done into this larger Roth IRA or into a new Roth IRA? Same question for steps 5 and 6.

You were dealing with a 2014 IRA contribution year. Your 2015 income is immaterial to a legal 2014 regular contribution so higher income will not affect your 2014 contribution. But it will affect your 2015 contribution which I assume you have not made yet, correct?

You have already filed your 2014 return. Did you report any TIRA contribution on it? If so, was it deducted or non deductible?

nolapepper
Posts: 170
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Re: Do I need to report a leftover gain from traditional IRA conversion on 8606?

Post by nolapepper » Thu Feb 18, 2016 10:49 am

This is a brand new TIRA account created just for this transaction in Vanguard. The original TIRA account was also new in Fidelity when the first contribution was made in January. There is no money there in Fidelity since it was converted before it was transferred to vanguard. This is the only traditional IRA account. There is a simple IRA account set up for 2015, but I assume it is not related to the IRA.

Roth IRA account was also transferred from Fidelity (contribution from 2009 - 2014), so it had money other than the 2014 contribution.
Unfortunately, 2015 contribution was already made in Vanguard in January, but thank god you made me realize that it is not part of the 2014 mess if our 2015 income does not allow Roth IRA.

TIRA contribution was not reported on 2014 tax return since it was converted before tax was filed. I treated it as Roth IRA for 2014.

Thank you again for helping me, Alan. I really appreciate it.

Alan S. wrote:I guess the biggest surprise is that all of these transactions were actually allowable under the rules. You never recharacterized a regular contribution more than once and your second conversion was done after the required 30 day waiting period.

Turns out I need a couple other things clarified to try to determine why VG might have handled step 5 like they did:
1) Was this a new TIRA account that never held any money other than what you reported here? Do you have any other TIRA accounts?
2) You mentioned 6 prior years of regular Roth contributions, so you already had a Roth before all this. Was the step 2 conversion done into this larger Roth IRA or into a new Roth IRA? Same question for steps 5 and 6.

You were dealing with a 2014 IRA contribution year. Your 2015 income is immaterial to a legal 2014 regular contribution so higher income will not affect your 2014 contribution. But it will affect your 2015 contribution which I assume you have not made yet, correct?

You have already filed your 2014 return. Did you report any TIRA contribution on it? If so, was it deducted or non deductible?

Alan S.
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Location: Prescott, AZ

Re: Do I need to report a leftover gain from traditional IRA conversion on 8606?

Post by Alan S. » Thu Feb 18, 2016 7:33 pm

Since your TIRA at VG only contained your regular IRA contribution and the gains on that particular contribution while it was temporarily held in both the TIRA and Roth IRAs, the Vanguard recharacterization in step 5 should NOT have left $171 or any other balance in your TIRA. That amount should have been included in the step 5 recharacterization. That means it would transferred to your Roth IRA without any current taxes since the final result of all this activity is a regular Roth IRA contribution for 2014.

Now you have a Roth conversion of the 171 in 2015 which will be taxable because you do not have any TIRA basis as far as I know. Moreover, Vanguard has now closed their books on 2015 recharacterization reporting and that means that you probably have no chance to get them to correct this error. And the IRS will be looking for you to report the conversion as I assume you have a 1099R that reports a TIRA distribution of that amount for 2015 that the IRS expects to see on an 8606. At a 20% tax rate this will cost you $34.00.

While you could recharacterize that conversion to eliminate the 2015 tax bill, that would still leave you with 171 in your TIRA that will be taxed at some point, so I don't know if you want to bother to recharacterize it.

nolapepper
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Joined: Wed Mar 25, 2015 3:06 pm

Re: Do I need to report a leftover gain from traditional IRA conversion on 8606?

Post by nolapepper » Fri Feb 19, 2016 12:32 pm

Thanks, Alan. I think it is better just to report it on 8606 to save me some headaches trying to fix it with Vanguard.

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