Form 8606 not adding up

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jfoster
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Joined: Thu Jun 15, 2017 11:46 pm

Form 8606 not adding up

Postby jfoster » Sat Jun 17, 2017 2:47 pm

Where am I going wrong here? I'm trying to convert a hypothetical traditional IRA with both pre and post-tax dollars to a Roth by filling out a hypothetical form 8086. The pro-rata calculation makes sense, but when I actually fill out the form, I don't get hit with pro-rata taxes, so I *must* be doing it wrong.

The following scenario is that I have an IRA with $4,500 of pre-tax contributions (rolled over from old retirement plan), and I made $5,500 in non-deductible contributions for 2017. The total sum of both is a simple, even $10,000. In this scenario, I am converting $5,500 of the $10,000 into a Roth as if the pro-rata rule doesn't exist and I can isolate the pre and post-tax contributions individually and move them in the most tax-efficient manner. And it looks like it works, so I know I have an error somewhere.

Part I:
Line 1 is 5,500 (my non-deductible contribution for 2017)
Line 2 is 4,500 (my existing basis from 401 rollover)
Line 3 is 10,000
Line 4 is 0
Line 5 is 10,000
Line 6 is 4,500 (the amount left in trad/non-Roth IRAs, no gains)
Line 7 is 0
Line 8 is 5,500 (the amount converted to Roth)
Line 9 is 10,000
Line 10 is 1.000 (the key calculation)
Line 11 is 5,500
Line 12 is 0
Line 13 is 5,500
Line 14 is 4,500
Line 15 is 0

Part II
Line 16 is 5,500
Line 17 is 5,500
Line 18 is 0 (the taxes I owe. ZERO.)

45% ($4,500/$10,000) of the $5,500 converted to a Roth should be taxed as ordinary income, but when I do the form, Line 18 is figuring to $0 of taxable ordinary income.

Any help here is appreciated. Thanks!

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

Re: Form 8086 not adding up

Postby retiredjg » Sat Jun 17, 2017 4:08 pm

I stopped at line 2. Your pre-tax money from the rollover is not "basis". "Basis" means already taxed money, such as a non-deductible contribution to IRA.

Do it over with line 2 as $0 (unless you have basis from a previous year's non-deductible contribution) and see if it works out right.

retiredjg
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Re: Form 8086 not adding up

Postby retiredjg » Sat Jun 17, 2017 4:18 pm

Sorry....welcome to the forum!

jfoster
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Re: Form 8086 not adding up

Postby jfoster » Sat Jun 17, 2017 5:10 pm

Yep. That worked. The taxable amount was exactly what would be expected. Thank you.

I think I'm confusing basis with the principal of the tIRA. I don't know what the difference is though. If you have a second to explain it, that'd be great. If not, I'll keep searching so that I better understand.

Thanks again.

livesoft
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Re: Form 8606 not adding up

Postby livesoft » Sat Jun 17, 2017 5:43 pm

I would say "basis" is money that one has already paid tax on or that has already been taxed. One should not have to pay taxes twice on the same dollars.
Last edited by livesoft on Sun Jun 18, 2017 10:14 am, edited 1 time in total.
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retiredjg
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Re: Form 8086 not adding up

Postby retiredjg » Sat Jun 17, 2017 6:37 pm

Agree with livesoft.

An example. If you put money into tIRA and deduct it from your taxes, that is not basis. It is money on which the taxes have been deferred. It is pre-tax or yet-to-be taxed money.

If you put money into 401k and it reduces your taxable income, that is not basis. It is also tax-deferred money.

If you put money into IRA and do not or can not deduct that contribution from your taxes because your income is too high, that is basis - money on which the income taxes have already been paid. You keep up with contributions like that on Form 8606 so that you don't have to pay tax on it a second time.

Basis is also what shows up on line 14 of your Form 8606 - that line shows the basis you get to carry forward until future years.

By the way, do you know you can convert more than just the $5,500?

jfoster
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Joined: Thu Jun 15, 2017 11:46 pm

Re: Form 8086 not adding up

Postby jfoster » Sat Jun 17, 2017 9:05 pm

Thanks for the clarification.

Yes, the scenario I was presenting was an example, not an actual conversion. Although I do intend to complete a Roth conversion later, I wanted to just fill out a hypothetical 8086 so I could see exactly how it everything is calculated. When I did though, I didn't get the expected result, so I knew I didn't correctly understand and was doing something wrong.

Again, thanks for the help.

retiredjg
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Re: Form 8086 not adding up

Postby retiredjg » Sun Jun 18, 2017 6:33 am

You are smart for doing the dry run with the 8606 paperwork. A lot of people mess it up and then have to fix it a couple of years later when they get a letter from the IRS. :(

tibbitts
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Re: Form 8086 not adding up

Postby tibbitts » Sun Jun 18, 2017 10:10 am

Will someone please fix the form number in post title, assuming this post is about form 8606?

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Re: Form 8086 not adding up

Postby LadyGeek » Sun Jun 18, 2017 12:09 pm

tibbitts wrote:Will someone please fix the form number in post title, assuming this post is about form 8606?

The thread title has been changed from "Form 8086 not adding up" to "Form 8606 not adding up"

The form is here: Form 8606, Nondeductible IRAs

FYI - If someone wants to get a moderator's attention, just report the post and explain what's wrong (the "!" in the top-right corner of the post). Thanks to the member who reported the post and requested the change.

jfoster, Welcome! This isn't a big deal, don't worry about it.
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