Failed to report Backdoor Roth since 2003 nor make conversion

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
Buttercup9080
Posts: 5
Joined: Sun Feb 11, 2018 2:38 pm

Failed to report Backdoor Roth since 2003 nor make conversion

Post by Buttercup9080 » Thu May 02, 2019 3:34 pm

Hi All,

I have questions about my mess...

I failed to file f8606 with our 1040 we made to NonDedcutible account.

Our financial advisor helped us to open NonDeductible IRA accounts (separate from traditional IRA) but didn't tell us to convert the contributions immediately to Roth at the same year (since day 1 in 2003). We just realize we need to file f8606. Our case is slightly different: We made contributions each year when we were qualified to do so (not every year), we NEVER convert to Roth. All the contributions stay in the account. Do we still turn in f8606s? We understood that we need to file f8606 in 1040 if we convert to Roth. But, we didn’t know we need to file f8606 the year we made contributions. We never converted any contributions.

The question is (1) we never made conversion, do we still need to file f8606? (2) Do we need to file f8606 retrauactivel? If so, do we need to calculate what the amount of the gain/growth ? Do we need to pay tax for the gain/growth? It is very confusing… some CPA said yes you need to pay taxes, some said NO. Which one is correct?

Currently, we have 401k, Roth and NonDeductible accounts (we can xfer NonD to 401k and make IRA account to "0" fir PRO RATA rule.). We also have a complete list of the contribution amount for each year and current balance. Please let me know how do I start to report f8606? Thank you the help....

Regards,
Monica

jebmke
Posts: 9836
Joined: Thu Apr 05, 2007 2:44 pm

Re: Failed to report Backdoor Roth since 2003 nor make conversion

Post by jebmke » Thu May 02, 2019 3:43 pm

You need to go back to the beginning and file and 8606 for each year you made the non-deductable contribution. F8606 is a cumulative form so start from the beginning and roll the numbers forward.
When you discover that you are riding a dead horse, the best strategy is to dismount.

FactualFran
Posts: 931
Joined: Sat Feb 21, 2015 2:29 pm

Re: Failed to report Backdoor Roth since 2003 nor make conversion

Post by FactualFran » Thu May 02, 2019 3:58 pm

jebmke answered the main questions. As for other questions:
  • You don't need calculate the gain/growth to file 8606s for the years that you made non-deductible contributions.
  • You don't need pay tax on the gain/growth until to take a distribution or do a Roth conversion from a tax-deferred IRA. On the 8606 for the years you take a distribution or do a Roth conversion, you will need the sum of the balances of your non-deductible IRAs at the end of the year.

lakpr
Posts: 3064
Joined: Fri Mar 18, 2011 9:59 am

Re: Failed to report Backdoor Roth since 2003 nor make conversion

Post by lakpr » Thu May 02, 2019 4:20 pm

Buttercup9080 wrote:
Thu May 02, 2019 3:34 pm
Currently, we have 401k, Roth and NonDeductible accounts (we can xfer NonD to 401k and make IRA account to "0" fir PRO RATA rule.). We also have a complete list of the contribution amount for each year and current balance. Please let me know how do I start to report f8606? Thank you the help....

Regards,
Monica
You cannot transfer funds that have non-deductible basis into 401k. The ERISA act under which the 401k plans operate, prohibit it. Even if the 401k plan does not catch it, the IRS will.

Form 8606 is not really complicated, it does require a calculator to be handy though. Try filling out one as an exercise, then you will understand how the information flows. The instructions are right there on the form

jebmke
Posts: 9836
Joined: Thu Apr 05, 2007 2:44 pm

Re: Failed to report Backdoor Roth since 2003 nor make conversion

Post by jebmke » Thu May 02, 2019 4:31 pm

FactualFran wrote:
Thu May 02, 2019 3:58 pm
jebmke answered the main questions. As for other questions:
  • You don't need calculate the gain/growth to file 8606s for the years that you made non-deductible contributions.
  • You don't need pay tax on the gain/growth until to take a distribution or do a Roth conversion from a tax-deferred IRA. On the 8606 for the years you take a distribution or do a Roth conversion, you will need the sum of the balances of your non-deductible IRAs at the end of the year.
Yes;
more specifically, for the tax year in which you do the conversion, the custodian will issue a form 1099-R. When you report this distribution on your 1040, you complete the F8606 which reports the total basis being "converted" along with the total balance. This basis reported on F8606 for that year will report how much of the distribution to the ROTH is excludable on your income taxes that year. The difference between your total distribution and the basis will flow into taxable income.
When you discover that you are riding a dead horse, the best strategy is to dismount.

Miguelito
Posts: 283
Joined: Thu Feb 27, 2014 1:21 pm

Re: Failed to report Backdoor Roth since 2003 nor make conversion

Post by Miguelito » Thu May 02, 2019 5:24 pm

As an FYI, the "Backdoor Roth" was not a thing until 2010. By that I mean that in 2006, if I recall correctly, they passed a law such that starting in 2010 the income limit would be removed on Roth conversions.

I'm a bit confused as to why you would have been contributing to a non-deductible IRA since 2003 (other than the marginal benefit it offers as-is) when there was no way to know that years down the road the law would be changed.

Personally, I recall reading an article in 2006 about the law change and so I started funding our IRA's in 2006 in preparation for the future. In 2010 I did the conversions and have been doing them yearly since. I only found BH about five years ago.

inbox788
Posts: 6647
Joined: Thu Mar 15, 2012 5:24 pm

Re: Failed to report Backdoor Roth since 2003 nor make conversion

Post by inbox788 » Thu May 02, 2019 6:23 pm

Miguelito wrote:
Thu May 02, 2019 5:24 pm
As an FYI, the "Backdoor Roth" was not a thing until 2010. By that I mean that in 2006, if I recall correctly, they passed a law such that starting in 2010 the income limit would be removed on Roth conversions.

I'm a bit confused as to why you would have been contributing to a non-deductible IRA since 2003 (other than the marginal benefit it offers as-is) when there was no way to know that years down the road the law would be changed.

Personally, I recall reading an article in 2006 about the law change and so I started funding our IRA's in 2006 in preparation for the future. In 2010 I did the conversions and have been doing them yearly since. I only found BH about five years ago.
I was late to the game starting. I was reading about it, but didn't understand it for a number of years before I finally got it and dove in about 5 years ago. You were early birds before the game started.

If you haven't made conversions, it's not a backdoor Roth (yet) is it? I thought the opportunity was annually, but if the contribution limit is annual, but you don't convert till later, it becomes more like a Megabackdoor situation. Do you have to pay taxes on your gains in the tax-deferred portion? If you cover that base, and backfile all the prior year Form 8606, does that mean that there's still a window to convert it all at once now? Interesting.

User avatar
southerndoc
Posts: 1074
Joined: Wed Apr 22, 2009 7:07 pm
Location: Atlanta

Re: Failed to report Backdoor Roth since 2003 nor make conversion

Post by southerndoc » Thu May 02, 2019 6:57 pm

jebmke wrote:
Thu May 02, 2019 3:43 pm
You need to go back to the beginning and file and 8606 for each year you made the non-deductable contribution. F8606 is a cumulative form so start from the beginning and roll the numbers forward.
cumulative? I've never done a backdoor Roth and was planning to do one this year. If I contribute $6k as a non-deductible IRA and convert to Roth both this year and next year, do I report both years for 2020? If I don't do the backdoor Roth next year, do I also report 2019 on 2020's taxes?

User avatar
Duckie
Posts: 6886
Joined: Thu Mar 08, 2007 2:55 pm
Location: California Bay Area

Re: Failed to report Backdoor Roth since 2003 nor make conversion

Post by Duckie » Thu May 02, 2019 7:08 pm

southerndoc wrote:cumulative? I've never done a backdoor Roth and was planning to do one this year. If I contribute $6k as a non-deductible IRA and convert to Roth both this year and next year, do I report both years for 2020? If I don't do the backdoor Roth next year, do I also report 2019 on 2020's taxes?
On Form 8606 the basis on line 14 carries over to line 2 the next year. If you convert everything in 2019 there will be nothing on line 14 of your 2019 Form 8606 to carry over to line 2 of your 2020 Form 8606.

retiredjg
Posts: 38451
Joined: Thu Jan 10, 2008 12:56 pm

Re: Failed to report Backdoor Roth since 2003 nor make conversion

Post by retiredjg » Sat May 04, 2019 11:49 am

Buttercup9080 wrote:
Thu May 02, 2019 3:34 pm
Hi All,

I have questions about my mess...

I failed to file f8606 with our 1040 we made to NonDedcutible account.

Our financial advisor helped us to open NonDeductible IRA accounts (separate from traditional IRA) but didn't tell us to convert the contributions immediately to Roth at the same year (since day 1 in 2003). We just realize we need to file f8606. Our case is slightly different: We made contributions each year when we were qualified to do so (not every year), we NEVER convert to Roth. All the contributions stay in the account. Do we still turn in f8606s? We understood that we need to file f8606 in 1040 if we convert to Roth. But, we didn’t know we need to file f8606 the year we made contributions. We never converted any contributions.

The question is (1) we never made conversion, do we still need to file f8606? (2) Do we need to file f8606 retrauactivel? If so, do we need to calculate what the amount of the gain/growth ? Do we need to pay tax for the gain/growth? It is very confusing… some CPA said yes you need to pay taxes, some said NO. Which one is correct?

Currently, we have 401k, Roth and NonDeductible accounts (we can xfer NonD to 401k and make IRA account to "0" fir PRO RATA rule.). We also have a complete list of the contribution amount for each year and current balance. Please let me know how do I start to report f8606? Thank you the help....

Regards,
Monica
Monica, I've gone back through all your posts and there is something important that you don't seem to understand about this so far.

You and your husband apparently plan to retire in about 1.5 years. There is plenty of time to get that fixed before then. At this point, you probably need to forget about using the "back door" Roth process. And you do not need to roll your IRAs into anything like a 401k. You can approach it that way if you want, but it would require you to open a Solo 401k less than 2 years before retirement and I'm not sure it is worth all that. We can talk about that approach at a later time if you want.

What you can use, probably after retirement, is Roth conversions. Some people think that a Roth conversion is the same thing as the "back door", but that is incorrect. The "back door" is a two step process - the second step is a Roth conversion. That is why people get it confused.

Apparently you and your husband both have SEP IRA accounts, Rollover IRAs, and IRAs that contain non-deductible contributions. The IRS sees all of these (that belong to one person) as one IRA. Specifically, they see it as one IRA with a certain dollar amount of non-deductible contributions. When the time comes to take money out of any of these accounts or if you convert any of these accounts to Roth, it will be pro-rated across all of the accounts that person owns because you have already paid tax on part of it.

Right now, you seem to think you can convert the IRA containing the non-deductible contributions to Roth and pay little to no tax. That is incorrect. If all your non-deductible contributions add up to 10% of your total IRA money (just yours, not including your husband's) every time you take money out, you will pay tax on 90% of what you take out and not pay tax on 10%. This is true no matter which of the accounts (SEP IRA, Rollover IRA, and IRA with non-deductible contributions) you take the money out of.

How does a person know how much of your IRA money is already taxed? That is where the Form 8606 comes in. Since you have not yet documented your non-deductible contributions, you need to do that now. You can download old forms from the internet. Start with the oldest form and fill it in first. Then go to the next oldest one and fill it in next, bringing in your total "basis" (already taxed money) from the oldest form. Keep doing that for each year and you will finally have the most recent form that will tell you exactly how much you have in non-deductible contributions.

If you need help with those forms, just ask. They are easy to do with a pencil and paper once you figure out the first one.


It is fine that you have never done any Roth conversions. When you started this in 2003, the "back door" did not exist and you may have been prevented from doing Roth conversions because of your income. It was also very common for people not to know to fill out Form 8606. I think that is why the IRS is being so generous in accepting these old forms even many years later.

Let us know what kind of help you need with this. There is more to it, but you need to get through step 1 first.

retiredjg
Posts: 38451
Joined: Thu Jan 10, 2008 12:56 pm

Re: Failed to report Backdoor Roth since 2003 nor make conversion

Post by retiredjg » Sat May 04, 2019 11:54 am

inbox788 wrote:
Thu May 02, 2019 6:23 pm
If you haven't made conversions, it's not a backdoor Roth (yet) is it? I thought the opportunity was annually, but if the contribution limit is annual, but you don't convert till later, it becomes more like a Megabackdoor situation.
What it becomes is a simple conversion of IRA to Roth, something which may or may not involve non-deductible contributions.

Do you have to pay taxes on your gains in the tax-deferred portion? If you cover that base, and backfile all the prior year Form 8606, does that mean that there's still a window to convert it all at once now? Interesting.
Yes, a person can do a Roth conversion any time. If there is a mix of pre-tax and already taxed money, the conversion is simply pro-rated to account for that.

Post Reply