Help Determining IRA Basis

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
windowdog
Posts: 17
Joined: Thu Feb 13, 2020 4:46 pm

Help Determining IRA Basis

Post by windowdog » Thu Feb 13, 2020 5:22 pm

Hello!

Long time reader...first time poster. My apologies if this is an oft-repeated question.

This is probably a very simple problem, but I just want to make sure I am doing everything right. I am planning to start doing backdoor Roth IRA contributions in 2020 due my income being too high for regular contributions. I currently have a Traditional IRA that I am planning to roll into my employer 401k(it has access to good funds) in 2020.

That Traditional IRA I have is my only one and it consists solely of rollover pre-tax 401k's. I have made no contributions to the Traditional IRA and I also have no SEP or Simple IRAs. Once I move this Traditional IRA to my 401k I will have $0 left in my Traditional IRA. I will then do the Traditional IRA contribution and conversion to Roth in 2020. My plan will be to have $0 in my Traditional IRA as of 12/31/20. The limit is 6K as a total combined contribution to Traditional and Roth IRAs in 2020, correct?

My question is what goes on line 2 'enter your total basis in traditional IRAs' on my 2020 form 8606? I have never had to fill out 8606 before. The entry on line 2 of the 2020 form 8606 should be 0(zero) correct? Is line 2 on the 2020 form 8606 asking for basis in 2019 and prior years? The 2020 form 8606 Line 14 would be the basis to use on the 2021 form 8606 line 2(which if all goes well should still be 0)?

The answer seems obvious even when I am writing this, but as I said I just want to confirm my understanding. I have read the wiki on here and some other sites which have been very helpful.. I am always welcome to any general words of advice or caution!

Thanks in advance!

retiredjg
Posts: 39380
Joined: Thu Jan 10, 2008 12:56 pm

Re: Help Determining IRA Basis

Post by retiredjg » Thu Feb 13, 2020 5:37 pm

windowdog wrote:
Thu Feb 13, 2020 5:22 pm
My question is what goes on line 2 'enter your total basis in traditional IRAs' on my 2020 form 8606? I have never had to fill out 8606 before. The entry on line 2 of the 2020 form 8606 should be 0(zero) correct? Is line 2 on the 2020 form 8606 asking for basis in 2019 and prior years? The 2020 form 8606 Line 14 would be the basis to use on the 2021 form 8606 line 2(which if all goes well should still be 0)?
Welcome to the forum. You are very smart to figure this out ahead of time!

You are correct that the first time you do this, your basis will be $0. Yes, line 2 on the 2020 form is asking for basis from the past. You will not have any basis from the past.

And yes, 2020 line 14 flows to the 2021 line 2....but both of those should be $0 if you convert the whole thing in 2020 and check back a few months later to be sure no pennies have shown up in the account later.

Topic Author
windowdog
Posts: 17
Joined: Thu Feb 13, 2020 4:46 pm

Re: Help Determining IRA Basis

Post by windowdog » Thu Feb 13, 2020 6:16 pm

Thanks for the response! Just to clarify: I have no basis from the past(2019 and prior years), correct? Since line 2 on the 2020 form 8606 is asking if I have any basis from the past(2019 and prior years) I would enter 0(zero) on line 2 of the 2020 form 8606. Is that correct? I have no basis from the past(2019 and prior years) because my lone Traditional IRA(and I have no simple/sep iras) consists solely of rollover pretax 401k money and I have made no contributions to the Traditional IRA, correct?

I understand that deductible contributions do not count towards the basis, but I just want to be clear I made no contributions at all. The only money that entered the Traditional IRA is from pretax 401k rollover money.

Sorry to be redundant I just want to be clear I understand this topic!

retiredjg
Posts: 39380
Joined: Thu Jan 10, 2008 12:56 pm

Re: Help Determining IRA Basis

Post by retiredjg » Thu Feb 13, 2020 6:29 pm

Basis in this case means "already taxed money". If you had any basis, it would have come from non-deductible contributions to IRA. You have not made any non-deductible contributions so you have no basis.

That fact that you made no contributions at all is not really relevant to this question of basis. It might matter to the 401k plan that you are going to roll this IRA into.

Did that help?

Topic Author
windowdog
Posts: 17
Joined: Thu Feb 13, 2020 4:46 pm

Re: Help Determining IRA Basis

Post by windowdog » Thu Feb 13, 2020 6:56 pm

Sure. So since I have no "already taxed money" in my Traditional IRA then I have no basis. Thus line 2 for my 2020 form 8606 will be $0, correct? I think that is what I am generally trying to clarify.

Also, I know I said this already but this is my only Traditional IRA(and I will empty it all into my 401k). I have no SEP or Simple IRA. I also have no taxable account. Are taxable accounts related at all to being able to do backdoor Roth IRA conversions?

Thanks again.

Alan S.
Posts: 9129
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Help Determining IRA Basis

Post by Alan S. » Thu Feb 13, 2020 6:59 pm

You are correct in the above post. Taxable accounts are not a factor for doing the back door Roth.

Just be totally sure that your prior 401k rollovers were 100% pre tax. There is a slim chance that a prior rollover (particularly pre Notice 2014-54 rollovers) might have contained some after tax money, but it is worth checking.

If so, that after tax money should be shown on line 2 of Form 8606, AND you cannot roll that balance back into your current employer plan.

People tend to forget this happened in many cases. Two reasons for this are:
1) IRS instructions indicate that after tax amounts from qualified plan rollovers are not to be reported on Form 8606 until you would otherwise file an 8606. That could be several years after the rollover.
2) After tax money does NOT show up on the 1099R reporting the 401k to IRA direct rollover. Box 2a will be 0 and Box 5 will be blank. Therefore, you have no reminder when you file taxes for the rollover year. You have to get this information from the 401k statements or breakdown of the distribution provided by the plan at the time of the rollover.

Again, you said it was pre tax and you are probably correct. But if there is even the slightest doubt, check the paperwork for the rollovers if you kept it.

retiredjg
Posts: 39380
Joined: Thu Jan 10, 2008 12:56 pm

Re: Help Determining IRA Basis

Post by retiredjg » Thu Feb 13, 2020 7:03 pm

windowdog wrote:
Thu Feb 13, 2020 6:56 pm
Sure. So since I have no "already taxed money" in my Traditional IRA then I have no basis. Thus line 2 for my 2020 form 8606 will be $0, correct? I think that is what I am generally trying to clarify.
Correct.

Are taxable accounts related at all to being able to do backdoor Roth IRA conversions?
No.

Topic Author
windowdog
Posts: 17
Joined: Thu Feb 13, 2020 4:46 pm

Re: Help Determining IRA Basis

Post by windowdog » Thu Feb 13, 2020 7:07 pm

Thanks all! I have the 1099-Rs but that will not indicate the pretax nature of the rollovers? I can call around to the companies that held my 401k's and see what they can provide.

Topic Author
windowdog
Posts: 17
Joined: Thu Feb 13, 2020 4:46 pm

Re: Help Determining IRA Basis

Post by windowdog » Thu Feb 13, 2020 7:10 pm

I did a couple last year and I know one was code G and one was H. Doesn't that indicate Roth vs Pretax? Or can G be vague in these situations?

Alan S.
Posts: 9129
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Help Determining IRA Basis

Post by Alan S. » Thu Feb 13, 2020 9:52 pm

windowdog wrote:
Thu Feb 13, 2020 7:10 pm
I did a couple last year and I know one was code G and one was H. Doesn't that indicate Roth vs Pretax? Or can G be vague in these situations?
The H coded 1099R is a direct rollover from a Roth 401k to a Roth IRA. Box 5 will show the amount of your after tax contributions to the plan. But this thread is discussing a direct rollover from a pre tax 401k to a TIRA, the G coded 1099R. These forms do not break out the pre tax or after tax amounts for direct rollovers (G code), but they do for distributions to you because those are currently taxable. Box 2a will be 0 and Box 5 blank, so the G coded 1099R will not answer this question at all. You would need a copy of the final 401k plan statement of perhaps one shortly before the direct rollover to know if there is any after tax contributions in that plan.

In fact, there could be after tax contributions that you do not intend to be. For example, if you over contribute to the plan or fail to pass certain plan non discrimination tests, some of your pre tax contributions can be recharacterized by the plan to after tax.

That said, I would make a reasonable effort to look for plan statements or try to recall if you over contributed in any past year, but if you are fairly sure none of these events occurred, I would not make a major research project out of it. Just assume the entire rollover was pre tax.

Topic Author
windowdog
Posts: 17
Joined: Thu Feb 13, 2020 4:46 pm

Re: Help Determining IRA Basis

Post by windowdog » Thu Feb 13, 2020 10:56 pm

Ok I will do some light research.

Assuming I determine everything in my current, lone Traditional IRA is pretax money(from rollover pretax 401k's) this would confirm that my IRA basis is 0(zero), correct? There isn't any money that has already been taxed. This would also confirm that my 2020 form 8606 line 2 will be 0(zero), correct? My plan is to transfer all of this Traditional IRA to my 401k in 2020. I would then make a non-deductible contribution to my tIRA in 2020 and convert that to a rIRA in 2020. My tIRA balance on 12/31/20 would be $0.

To confirm the above, my 401k sponsor currently requires that in order to do the roll-in the money must all be pretax, but they do allow roll-ins. So, once again assuming I determine everything in my tIRA is pretax, that roll-in should work out, correct?

Sorry for being so repetitive! Just trying to wrap my head around this. Thanks again for you time Alan and jg!

Alan S.
Posts: 9129
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Help Determining IRA Basis

Post by Alan S. » Thu Feb 13, 2020 11:10 pm

Yes, you are correct on all counts. You can proceed in the order stated.

Topic Author
windowdog
Posts: 17
Joined: Thu Feb 13, 2020 4:46 pm

Re: Help Determining IRA Basis

Post by windowdog » Fri Feb 14, 2020 7:47 am

Thanks Alan! One final(for now) question!

Let’s assume I make the transfer of my traditional ira to my 401k. I then make my $6000 contribution to my traditional ira shortly after that and put it my money market account. It settles the next day(3/1/20 for example), its value doesn’t change from the $6000, and I convert it to Roth on 3/1/20.

What do I do if later in March or anytime later in the year a few cents gather in my traditional ira money market account? This could possibly happen for late dividends, correct?

In a situation where there is less than 50 cents OR equal to or greater than 50 cents that gathers I could convert it to Roth at the date I notice it. For example if I found it anytime before 12/31/20 I should do it ASAP whether it is 4/1/20 or 12/1/20.

The only difference is the amount that I report on my 2020 8606. One would be 6000.25 as an example or 6000.75. The 25 cent would round down to 6000 on my 8606 and it would not lead to a taxable gain. The 6000.75 would round up to 6001 and I would be taxed on that dollar. This would generally apply too if had a gain of $20. I would be taxed on the $20 of the $6020 converted.

Is my understanding correct? I can only contribute a max of $6000 in 2020 to my traditional ira. $6000 is the max total combined contribution to Roth and traditional iras. So I’m maxed out when I put $6000 in my traditional ira for 2020.

However my conversions are unlimited. I can make two or even three conversions if extra cents enter my traditional ira as dividends AFTER I make the initial conversion. This would be done prior to 12/31/20 to ensure the traditional ira balance on that day is $0. Now if $1 was left in my traditional ira on 12/31/20 I would just report that on my 2020 8606 and that would become basis for next year, correct? My goal would be to empty it.

I hope that makes sense. Once again I appreciate all of the help!!

Topic Author
windowdog
Posts: 17
Joined: Thu Feb 13, 2020 4:46 pm

Re: Help Determining IRA Basis

Post by windowdog » Fri Feb 14, 2020 7:58 am

To clarify: once I roll my traditional ira to my 401k I would be left with $0 in my traditional ira. I would make the $6000 contribution to the traditional ira bringing its balance to $6000. I would then plan to convert that $6000 to my Roth IRA ASAP and bring the traditional ira balance back $0.

retiredjg
Posts: 39380
Joined: Thu Jan 10, 2008 12:56 pm

Re: Help Determining IRA Basis

Post by retiredjg » Fri Feb 14, 2020 8:04 am

If you use money market, extra pennies might show up. You can leave them there if you want or you can convert them to Roth if you want.

Leaving 49 pennies will not change things at all because 49 cents does not need to be listed on line 6 of the Form 8606.

50 pennies or more does need to be reported on line 6. Depending on how large that amount is, it might make a very tiny portion of your conversion taxable. Maybe $1. And it might leave $1 as basis on line 14 for next year. This is not a problem but some people want to avoid it.

The $6k limit applies only to how much you contribute to the traditional IRA. The amount you convert has no limit.

retiredjg
Posts: 39380
Joined: Thu Jan 10, 2008 12:56 pm

Re: Help Determining IRA Basis

Post by retiredjg » Fri Feb 14, 2020 8:07 am

Form 8606 trick...line 10 says you can round the decimal to 3 places. It is best to just leave as many decimal places as you have.

User avatar
LadyGeek
Site Admin
Posts: 59603
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: Help Determining IRA Basis

Post by LadyGeek » Fri Feb 14, 2020 9:11 am

EggplantBasil has a question which I've moved to a new thread. See: [Help Determining IRA Basis - Did not file 8606]

This thread is now in the Personal Finance (Not Investing) forum (taxes).
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

Topic Author
windowdog
Posts: 17
Joined: Thu Feb 13, 2020 4:46 pm

Re: Help Determining IRA Basis

Post by windowdog » Fri Feb 14, 2020 11:14 am

Thanks for the reply!

So obviously I am limited to $6000 for IRA contributions in 2020. My conversions to Roth though are unlimited in both dollar amount and number of conversions, correct?

I will put the money in the traditional money market account and as you say I may gain a few pennies. If, after my initial hypothetical conversion of $6000 in March, let’s say I gain 10 pennies in April and 10 pennies in December. I can convert the pennies both in April and in December in separate conversions to ensure its balance is $0, correct?

The form 8606 in this situation would be unchanged as the total 2020 conversions will be $6000.20, correct? The total conversion would round to $6000.

However, if I make my initial March conversion of $6000 and now gain 30 pennies in April and 30 pennies in December. I once again can can make two additional conversions to bring my traditional balance to $0. This time, though, my 8606 total conversion would be $6000.60 and round up to $6001.

That would lead to a taxable dollar, correct? Clearly this is mostly meaningless but just confirming my understanding. In this situation I could leave the 60 cents in my traditional ira and if it is still in there on 12/31/20 it would form a basis. The basis would be $1 due to rounding on 8606 correct? I would not plan to do this. I’ll hopefully get the balance to zero at year-end.

Thanks so much for taking the time to help!!

retiredjg
Posts: 39380
Joined: Thu Jan 10, 2008 12:56 pm

Re: Help Determining IRA Basis

Post by retiredjg » Fri Feb 14, 2020 11:27 am

windowdog wrote:
Fri Feb 14, 2020 11:14 am
So obviously I am limited to $6000 for IRA contributions in 2020. My conversions to Roth though are unlimited in both dollar amount and number of conversions, correct?
Yes.
I will put the money in the traditional money market account and as you say I may gain a few pennies. If, after my initial hypothetical conversion of $6000 in March, let’s say I gain 10 pennies in April and 10 pennies in December. I can convert the pennies both in April and in December in separate conversions to ensure its balance is $0, correct?
Yes, but you won't gain another 10 pennies in December because there is nothing in the account to be earning interest.

The form 8606 in this situation would be unchanged as the total 2020 conversions will be $6000.20, correct? The total conversion would round to $6000.
Yes.

However, if I make my initial March conversion of $6000 and now gain 30 pennies in April and 30 pennies in December. I once again can can make two additional conversions to bring my traditional balance to $0. This time, though, my 8606 total conversion would be $6000.60 and round up to $6001.
Yes, except your example should say 60 pennies in April because there will not be another 30 pennies in December.

That would lead to a taxable dollar, correct? Clearly this is mostly meaningless but just confirming my understanding. In this situation I could leave the 60 cents in my traditional ira and if it is still in there on 12/31/20 it would form a basis. The basis would be $1 due to rounding on 8606 correct? I would not plan to do this. I’ll hopefully get the balance to zero at year-end.
The earnings do not form a basis because the earnings are pre-tax. However, once you pro-rate the conversion you might end up with a bit of basis. Leaving a long series of decimal places reduces that.

You need to pencil through the form to see this. Try different amounts. You will never understand the form until you actually do this.

Topic Author
windowdog
Posts: 17
Joined: Thu Feb 13, 2020 4:46 pm

Re: Help Determining IRA Basis

Post by windowdog » Fri Feb 14, 2020 2:28 pm

Ok sounds great. I’ll work through some practice 8606 forms. Tentatively as long as I plan to convert ALL of the money from my traditional ira(contributions and the small gains on that) to a Roth IRA so that on 12/31 of any year the traditional ira balance is 0(zero) then I have no basis left and none to carry forward to the next year. Is that correct?

I know there is some confusion with what to do about the traditional ira losing money prior to conversion so that you convert less than the basis. I’ll plan to look that up on here and follow up with any questions. An example of this is contributing $6000 and that losing $50 so I can only convert $5500.

retiredjg
Posts: 39380
Joined: Thu Jan 10, 2008 12:56 pm

Re: Help Determining IRA Basis

Post by retiredjg » Fri Feb 14, 2020 5:12 pm

Yes, that is correct.

About converting when there is a loss, people have different opinions. You will not find any definitive answers.

Topic Author
windowdog
Posts: 17
Joined: Thu Feb 13, 2020 4:46 pm

Re: Help Determining IRA Basis

Post by windowdog » Fri Feb 14, 2020 10:09 pm

Thanks for all of the help. Is there any definitively wrong answer when converting with a loss?

retiredjg
Posts: 39380
Joined: Thu Jan 10, 2008 12:56 pm

Re: Help Determining IRA Basis

Post by retiredjg » Sat Feb 15, 2020 8:43 am

windowdog wrote:
Fri Feb 14, 2020 10:09 pm
Thanks for all of the help. Is there any definitively wrong answer when converting with a loss?
Not that I know of. If you have concerns, you can always delay the conversion until there is no longer a loss.

Topic Author
windowdog
Posts: 17
Joined: Thu Feb 13, 2020 4:46 pm

Re: Help Determining IRA Basis

Post by windowdog » Sat Feb 15, 2020 3:01 pm

Ok that makes sense.

I am working through some practice 8606 forms. In the examples above I asked what I should do for form 8606 if I actually convert $6000.20 instead of exactly $6000. In this situation on my line 8 form 8606 I would still enter $6000, correct? If I actually converted $5999.80 I would still enter $6000 on line 8 form 8606?

If I actually converted $6000.60 instead of exactly $6000 I would enter $6001 on my form 8606 line 8, correct? If I converted $6001.20 I would enter again $6001 on line 8 form 8606?

The answer is the same even if I have to convert twice to get these totals as it is the TOTAL 2020 conversion amount that gets reported on line 8 of the 2020 form 8606.

It always rounds to the nearest whole dollar with 49 cents and below rounding down and 50 cents and above rounding up? I would not enter any cent amount on 8606(and in general on any form, but lets not delve too deep here).

Thanks again. Sorry for the repetition.

retiredjg
Posts: 39380
Joined: Thu Jan 10, 2008 12:56 pm

Re: Help Determining IRA Basis

Post by retiredjg » Sat Feb 15, 2020 3:28 pm

Enter what you convert. Rounding is OK. Do some practice runs and see if rounding matters.

Yes, it is the total converted in the calendar year no matter how many conversions you did.

User avatar
Eagle33
Posts: 385
Joined: Wed Aug 30, 2017 3:20 pm

Re: Help Determining IRA Basis

Post by Eagle33 » Sun Feb 16, 2020 9:56 am

IRA rounds all entries. 50-99 cents rounds up to $1.00 and 00-49 cents rounds down to $0.00.
Rocket science is not “rocket science” to a rocket scientist, just as personal finance is not “rocket science” to a Boglehead.

Topic Author
windowdog
Posts: 17
Joined: Thu Feb 13, 2020 4:46 pm

Re: Help Determining IRA Basis

Post by windowdog » Mon Feb 17, 2020 4:44 pm

Thanks for the responses. I am copy/pasting the following from the IRS site:

**Rounding Off to Whole Dollars

You can round off cents to whole dollars on your return and schedules. If you do round to whole dollars, you must round all amounts. To round, drop amounts under 50 cents and increase amounts from 50 to 99 cents to the next dollar. For example, $1.39 becomes $1 and $2.50 becomes $3.

If you have to add two or more amounts to figure the amount to enter on a line, include cents when adding the amounts and round off only the total.

If you are entering amounts that include cents, make sure to include the decimal point. There is no cents column on the form.**

Not that I was doubting any of you, but in case any others are reading this and want to confirm that rounding is OK.

I think I have worked through enough practice 8606s to see how rounding vs not rounding matters. I shall see how it applies when my actual conversions take place. Logically with only a $6000 balance spending 1-2 days in a money market account the gains should be kept minimal prior to conversion. In that case rounding might just be simplest. I also use turbotax and they may not even let me put cents in.

Post Reply