Are you smarter than my CPA? (IRA issue)

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lemonparade4
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Are you smarter than my CPA? (IRA issue)

Post by lemonparade4 » Sat Jun 23, 2018 1:40 pm

Ok, folks - I need your help. This year, for the first time ever, I couldn't wrangle Turbo Tax into giving me the numbers I knew it should give me, so after like 4 weekends of trying and 1000 dirty looks from my wife since I kept offloading parenting duties onto her, I just took all of my forms to a local CPA and asked him to take care of it. Five months and an extension later, he hasn't taken care of it.

Here's the deal: In 2016, I was working and my wife was in residency. I was making biweekly contributions to both of our Roth IRAs like I'd done for the previous 5 years (we had never had traditional IRAs before this). My wife graduated in July 2016 and started real work. I did some quick math in my head and realized we would probably be close to the phaseout income threshold for Roth contributions, but since my wife gets paid by the day, I couldn't tell for sure. Here's how the timeline unfolded:

- I make $5,500 in Roth IRA contributions for both of us by 12/31/16 (Me: T. Rowe Price; Her: Vanguard);
- In January 2017 I get all of our W-2s and everything and realize we exceeded the Roth contribution income threshold;
- I recharacterized both of our contributions as traditional IRA contributions by early February 2017;
- Since we were also above the income threshold for deducting traditional IRAs, I did a backdoor Roth conversion for both IRAs by mid-February 2017.
- I moved all my accounts from T. Rowe Price to Vanguard in June 2017.
- In November 2017 I made a backdoor Roth contribution of $5,500 to both of our accounts for FY 2017.

My understanding is that I should have ONLY paid FY 2016 taxes on the two weeks of interest that may have accrued between recharacterizing the contributions as traditional IRAs in early February 2017 and the backdoor Roth move in late February 2017. Looking over my 2016 tax return, however, it appears that I mis-reported what I had done, because I don't see a form 8606 in there. I've read enough to know that I should have one, so I suspect that was part 1 of the screwup. But anyway, everything moved along hunky dory and the IRS accepted my FY 2016 return, no problem.

As you might expect, I was bombarded with 5498s and 1099-Rs during calendar year 2017 and the beginning of calendar year 2018. The 5498s have 2016 on them, but all the 1099-Rs say 2017. When I input these forms into Turbo Tax for my FY 2017 return, it kept telling me I had like $23k in untaxed distributions (obviously not correct in any practical sense) and owed several grand in taxes. I suspect, though, that not all of these forms actually apply to my 2017 return, so I think my inputting them for FY 2017 was part 2 of the screwup.

This is the point at which I dropped everything off with the CPA, but he keeps telling me the same thing. I'm virtually certain he is incorrect. I think, at a minimum, I probably need to re-do my 2016 return (with 8606 this time) and assume these 1099-Rs are for FY 2016, even though they say 2017 on the form.

What says the Bogleverse?

chevca
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Re: Are you smarter than my CPA? (IRA issue)

Post by chevca » Sat Jun 23, 2018 1:45 pm

I may have missed it, but, what did the CPA say needs to be done?

I don't know the answer to your situation. But, telling us the CPA is incorrect without telling us what he said isn't going to do much good. :happy

walkerbait
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Re: Are you smarter than my CPA? (IRA issue)

Post by walkerbait » Sat Jun 23, 2018 1:57 pm

I think this is going to be hard for anyone to answer accurately without seeing what your 2016 and 2017 returns actually had on them.

I think you're right, you should only have to pay tax on the gains between when you re-characterized in Feb 2017 and converted later that month. But, if your 2016 return deducted the IRA contributions rather than treated them as non-deductible, then the ~$23k "taxable distribution" might make sense ($5,500 x 4 + some earnings worth of conversions done in 2017). That is if the brokerage doesn't know that they are non-deductible contributions the first time around (I don't think they know, but I can't recall).

I think you're right, that you should start by amending your 2016 return so that it is accurate. Then, proceed with 2017.

lemonparade4
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Re: Are you smarter than my CPA? (IRA issue)

Post by lemonparade4 » Sat Jun 23, 2018 2:11 pm

Good questions, guys. The CPA appears to be doing just what I did: plugging all the 1099-Rs into the FY 2017 return and coming up with the conclusion that I have $23k in untaxed distributions. Based on my tax rate, that's like ~$7k in taxes. I keep telling him I think we need to re-do my 2016 return, but so far, he's just doing his own thing.

I most definitely did not deduct any traditional IRA contributions on my 2016 tax return. If anything, I accidentally did the opposite: I just reported $5,500 in Roth contributions like I always do.

I think these 1099-Rs and 5498s are the true source of my confusion: I've been putting the 2017 1099-Rs into my FY 2017 return because they say "2017." I think I need to ignore this and treat them as part of my FY 2016 return, instead. I think the same these applies to these 2017 5498s, right?

Maybe my true question is this: When I properly do a simple backdoor Roth (like I did for FY 2017), what forms should I attach to my return? Once I have that answer, I'll know that any other forms I have should be part of the FY 2016 return.

retiredjg
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Re: Are you smarter than my CPA? (IRA issue)

Post by retiredjg » Sat Jun 23, 2018 2:14 pm

I could not follow what you did. You need to give date and amount for each transaction for each person separately. Or just give us one person at a time and you figure out the other person.

When you say you don't see a Form 8606 with your 2016 return, do you mean paper copies of your return or are you looking at tax software? Do you know how to find a specific form in your tax software?

What is on line 15 (a and b), line 21, and line 32 of your 2016 1040? And your 2017 1040?

Alan S.
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Re: Are you smarter than my CPA? (IRA issue)

Post by Alan S. » Sat Jun 23, 2018 2:19 pm

This really isn't as nasty a scenario as many that are posted here as all your executed transactions are proper. As usual, the problem is proper filing of Form 8606 and making a clear explanatory statement with your tax returns filed using Ttax.


To correct:

1) 2016 - you can send in stand alone 8606 forms for each of you showing that you made 5500 in non deductible TIRA contributions for 2016.
2) 2017 (under extension) - Your 8606 for 2017 should bring forward your 5500 from line 14 to line 2 of the 2017 8606 (each of you). Line 1 will also show 5500 for your 2017 non deductible contributions. You also report your total 2017 conversions on Parts I and II of the 2017 8606. To the extent each of your conversions exceeds 11,000, you owe tax on that amount. Since your total conversions were about 23k, that would result in taxable income of about 1,000 for these conversions. It does not matter that the 2017 conversion total involves more than one year of contributions. Normally, you should have included an explanatory statement about the recharacterization with your 2016 return, but now that the IRS has the 1099R recharacterization forms, you avoid a 2016 amended return by making the explanatory statement with your 2017 return. Just explain that you made a 2016 Roth contribution (date and amount) and recharacterized them as TIRA contributions in Jan, 2017, and state the amount the recharacterized contribution was worth when transferred to the TIRA (this is the Box 1 amount on the recharacterization 1099R form). You do NOT have to mention the conversion done in 2017 as that will be reported on your 2017 return.


Sounds worse than it is, but your main challenge might well be that you do not have full control of what the CPA chooses to do, and whether you still want him to file 2017 for you or not. What I explained above is the end result, but did not include exactly how to enter all these into your 2017 Turbo tax program to get the desired result. You will have to decide if you trust the CPA to get this right, or whether you want to proceed yourself with Turbotax, knowing what the final outcome should be. Remember that each 8606 is separate per spouse with respect to both the non deductible contributions and the conversion done in 2017. Taxable income only around 1,000.


If you are confident that this IRA situation is the ONLY portion of your 2017 return that is a challenge and you can easily handle the rest of it, you might attempt to replicate the desired outcome stated above, and tell the CPA to hold off until you get back to him.

retiredjg
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Re: Are you smarter than my CPA? (IRA issue)

Post by retiredjg » Sat Jun 23, 2018 2:20 pm

lemonparade4 wrote:
Sat Jun 23, 2018 2:11 pm
I most definitely did not deduct any traditional IRA contributions on my 2016 tax return. If anything, I accidentally did the opposite: I just reported $5,500 in Roth contributions like I always do.
What does this mean? Direct contributions to Roth IRA are not reported on your tax return (although your tax software may keep track of it). Back door contributions are reported as a non-deductible contribution followed by a Roth conversion.

How do you usually do it?
Maybe my true question is this: When I properly do a simple backdoor Roth (like I did for FY 2017), what forms should I attach to my return?
Form 8606.

It might be helpful to know who did your taxes for 2016 and 2017 - you or the CPA? Many CPAs have no idea what a "back door" is.

lemonparade4
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Re: Are you smarter than my CPA? (IRA issue)

Post by lemonparade4 » Sat Jun 23, 2018 2:28 pm

retiredjg wrote:
Sat Jun 23, 2018 2:14 pm
I could not follow what you did. You need to give date and amount for each transaction for each person separately. Or just give us one person at a time and you figure out the other person.

When you say you don't see a Form 8606 with your 2016 return, do you mean paper copies of your return or are you looking at tax software? Do you know how to find a specific form in your tax software?

What is on line 15 (a and b), line 21, and line 32 of your 2016 1040? And your 2017 1040?
Totally fair. I have trouble explaining it to myself sometimes. Let's take it from the top, and just talk about me:

- Throughout 2016, I make biweekly contributions to my Roth IRA, in the total amount of $5,500.
- In January 2017, I realize we're over the Roth IRA contribution income limit.
- On January 21, 2017, I recharacterize all of my Roth IRA contributions as (non-deductible) traditional IRA contributions. The actual recharacterization amount is $6,501, because gains have been accruing all year.
- On February 6, 2017, I backdoor Roth all of the non-traditional IRA contributions. The amount is now $6,535.

At this point, I'm done with everything for FY 2016. In November 2017, I make a $5,500 non-deductible contribution to my traditional IRA; I backdoor Roth the exact same amount like 2 days later.

Regarding the 8606, I'm talking about the actual PDF document that Turbo Tax produces to send to the IRS.

The answer to your questions:

FY 2016 Return:
- All those lines are blank.

FY 2017 Return:
- Lines 15(a) & (b): $23,765
- Lines 21 & 32: blank.

mhalley
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Re: Are you smarter than my CPA? (IRA issue)

Post by mhalley » Sat Jun 23, 2018 2:47 pm

Maybe this will help:
https://thefinancebuff.com/how-to-repor ... botax.html
And this:
https://www.whitecoatinvestor.com/backd ... -tutorial/
Also, the backdoor Roth has been around for many years. If your cpa can’t handle it, you need a new one.

ofckrupke
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Re: Are you smarter than my CPA? (IRA issue)

Post by ofckrupke » Sat Jun 23, 2018 3:40 pm

mhalley wrote:
Sat Jun 23, 2018 2:47 pm
Also, the backdoor Roth has been around for many years. If your cpa can’t handle it, you need a new one.
CPA was not provided complete information/documentation (specifically, a copy of a correctly completed 8606 for tax year 2016) to unambiguously interpret the several 1099s, even w/benefit of 2016 5498s.

This was a case of gradual infantalisation by tax software.

Good Listener
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Re: Are you smarter than my CPA? (IRA issue)

Post by Good Listener » Sat Jun 23, 2018 3:52 pm

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Oicuryy
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Re: Are you smarter than my CPA? (IRA issue)

Post by Oicuryy » Sat Jun 23, 2018 4:53 pm

My guess.

2016 Form 8606 (one of two)
Line 1. 5500
3. 5500
14. 5500

2017 Form 8606 (one of two)
Line 1. 5500
2. 5500 from 2016
3. 11000
5. 11000
8. 12035 total converted to Roth
9. 12035
10. 0.914
11. 11000
13. 11000
14. 0 no basis left in traditional IRA
16. 12035
17. 11000
18. 1035 also include on Form 1040 line 15b

See the post from Alan S. above for the statement to include with your 2017 return describing the Roth to traditional recharacterization done in 2017 for 2016.

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Duckie
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Re: Are you smarter than my CPA? (IRA issue)

Post by Duckie » Sat Jun 23, 2018 7:23 pm

lemonparade4 wrote:- I make $5,500 in Roth IRA contributions for both of us by 12/31/16 (Me: T. Rowe Price; Her: Vanguard);
- In January 2017 I get all of our W-2s and everything and realize we exceeded the Roth contribution income threshold;
- I recharacterized both of our contributions as traditional IRA contributions by early February 2017;
For your 2016 taxes you should have told TurboTax that you each made a $5,500 contribution to a Roth IRA, recharacterized $5,500 plus $XX earnings to a Traditional IRA, and considered the $5,500 contribution to be non-deductible. TT would have filled out Part I of Form 8606 for each of you and also provided a blank section for each of you to make a statement about the recharacterization. Both 2016 Form 8606s would have looked like this:
  • Part I
    Line 1 -- 5,500
    Line 2 -- 0
    Line 3 -- 5,500
    Line 14 -- 5,500 (goes on line 2 next year)
- Since we were also above the income threshold for deducting traditional IRAs, I did a backdoor Roth conversion for both IRAs by mid-February 2017.
- I moved all my accounts from T. Rowe Price to Vanguard in June 2017.
- In November 2017 I made a backdoor Roth contribution of $5,500 to both of our accounts for FY 2017.
For your 2017 taxes you should have told TurboTax you each made a $5,500 contribution to a TIRA and that the contribution was non-deductible. You each also converted $11,000 plus unknown earnings to your Roth IRAs. TT would fill out Form 8606s for each of you. They would have looked something like this:
  • Part I
    Line 1 -- 5,500
    Line 2 -- 5,500
    Line 3 -- 11,000
    Line 4 -- 0 or blank
    Line 5 -- 11,000
    Line 6 -- 0 or blank
    Line 7 -- 0 or blank
    Line 8 -- 11,100 (I gave you $100 in earnings)
    Line 9 -- 11,100
    Line 10 -- 0.99099099 (the more numbers the better)
    Line 11 -- 11,000
    Line 12 -- 0 or blank
    Line 13 -- 11,000
    Line 14 -- 0
    Line 15a -- 0 or blank
    Line 15b -- 0 or blank
    Line 15c -- 0 or blank
    Part II
    Line 16 -- 11,100
    Line 17 -- 11,000
    Line 18 -- 100 (taxable amount of conversion, goes on 1040 form)
My understanding is that I should have ONLY paid FY 2016 taxes on the two weeks of interest that may have accrued between recharacterizing the contributions as traditional IRAs in early February 2017 and the backdoor Roth move in late February 2017. Looking over my 2016 tax return, however, it appears that I mis-reported what I had done, because I don't see a form 8606 in there. I've read enough to know that I should have one, so I suspect that was part 1 of the screwup. But anyway, everything moved along hunky dory and the IRS accepted my FY 2016 return, no problem.
You didn't convert until 2017 so you don't pay taxes for 2016.
As you might expect, I was bombarded with 5498s and 1099-Rs during calendar year 2017 and the beginning of calendar year 2018. The 5498s have 2016 on them, but all the 1099-Rs say 2017.
The 5498s come out in May for the previous year. They are informational and don't get reported on your taxes. The 1099-Rs were for the conversions which happened in 2017 not 2016 and possibly for the rollovers depending on how you did them.
When I input these forms into Turbo Tax for my FY 2017 return, it kept telling me I had like $23k in untaxed distributions (obviously not correct in any practical sense) and owed several grand in taxes. I suspect, though, that not all of these forms actually apply to my 2017 return, so I think my inputting them for FY 2017 was part 2 of the screwup.
If you didn't file Form 8606 you don't have a correct basis. That's part of the problem.
This is the point at which I dropped everything off with the CPA, but he keeps telling me the same thing. I'm virtually certain he is incorrect. I think, at a minimum, I probably need to re-do my 2016 return (with 8606 this time) and assume these 1099-Rs are for FY 2016, even though they say 2017 on the form.
If your 2016 tax form deducted the $5,500 contributions you need to amend the form. You'll need to do that on paper and add two Form 8606s to report your basis and the statements about the recharacterizations. Then you'll need to amend your 2017 taxes.

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celia
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Re: Are you smarter than my CPA? (IRA issue)

Post by celia » Sat Jun 23, 2018 7:27 pm

We should clarify a few things so you are aware of the correct terminology. When you discuss this, you are likely confusing the CPA and Bogleheads when you say things that are not compatible with each other.

First, in 2016, you did not do a backdoor Roth conversion, since there is no such thing. What you did was a Roth contribution, a recharacterization to a traditional IRA, and a Roth conversion. In 2017, you rolled over a Roth to Vanguard and did a backdoor Roth for each of you which is a 2-step process involving a traditional IRA contribution and a Roth conversion. Each one of these 3 or 2 steps are separate as you are aware as each was done on a different day.

I don't think "backdoor Roth" is an official IRS term. It is just used in discussions as a short cut way to describe the two steps that are often paired together. Many CPAs are not aware of the term, from past posts other Bogleheads have made when telling how their tax preparer didn't understand them. The tIRA custodian probably has heard the term but does not know (or care) if your contribution was deductible or not. That is just between you and the IRS. Your tax preparer will know only if you tell her that you made a non-deductible contribution (or her software will warn her). In fact, we often recommend not confusing your tax preparer by using the word "backdoor". Just say you "made a non-deductible contribution to a traditional IRA". In a separate sentence say you also "did a Roth conversion".

The Form 5498 you received in May is NOT a tax form. It is just a notice to the IRS (and you, so you see what the IRS is getting) of all the IRA contributions and withdrawals done for the previous tax year. Since you can make IRA contributions up to April 15 of the following year to be applied to the previous year, the custodians need too wait until after that to notify the IRS of what was done that applies to the previous year.

Your 2016 Form 5498 that arrived in May 2017 should show a Roth contribution and recharacterization to a tIRA, since the IRS considers that the original Roth contribution was meant to be a tIRA contribution. The following Roth conversion of that contribution will show up for 2017.

Your 2017 Form 5498 that arrived in May 2018 should show a Roth conversion from T Rowe Price along with a rollover distribution. Your 2017 Form 5498 from Vanguard should show receipt of the rollover into a Roth, a contribution and withdrawal to a traditional IRA and a conversion to a Roth. Your wife's will show it all on one form if she was at Vanguard the entire time. Some of these transaction may be combined such as the traditional IRA contribution and withdrawal (in order to do a conversion).

To fix your taxes as Alan was recommending, you each need to file a Form 8606 for each year. Since it will not change your 2016 taxes, you can download and manually fill it out, sign and mail it in by itself. Put $5,500 on lines 1, 3 and 14, date and sign. Since this was non-deductible, it will not impact Form 1040. Be sure you make copies of these to save with your 2016 return but they also become inputs to your 2017 return so you might want to make 2 copies of each.

Assuming you have the rest of your tax data in a file, COPY your data file, open your tax software to edit the COPY of your data file. Then go to the IRA section and delete ALL THE DATA you've already entered there. Save the file and exit. Come back in and open the file again and enter all of your information before entering all of your wife's. This time, take your time and stop to understand all the terminology that is being used. Some terms sound the same, but they have different meaning to the IRS. Stop and look them up in your software's HELP section if you need to.

Here are the screen shots for how this is reported in TurboTax. Remember to enter all of your information from your 1099s and are satisfied that the AGI and tax liability are corrected for one person before you repeat all the steps for your wife's data.

When you get done, you should have 2 copies of Form 8606 for 2017, one for you and one for your wife. And your AGI and tax liability should be as you expected.

lemonparade4
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Re: Are you smarter than my CPA? (IRA issue)

Post by lemonparade4 » Sat Jun 23, 2018 7:41 pm

Thanks, everyone! I'm just a dude who knows where to find cheap index funds. The tax stuff . . . not so much. That said, I now feel confident enough to tell the CPA to take a hike. Seems to me that this will just be a one-off thing that will (hopefully) never happen again.

I appreciate everyone's help!

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Earl Lemongrab
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Re: Are you smarter than my CPA? (IRA issue)

Post by Earl Lemongrab » Sun Jun 24, 2018 12:32 pm

lemonparade4 wrote:
Sat Jun 23, 2018 1:40 pm
My understanding is that I should have ONLY paid FY 2016 taxes on the two weeks of interest that may have accrued between recharacterizing the contributions as traditional IRAs in early February 2017 and the backdoor Roth move in late February 2017.
Nothing to do with the main questions, but this isn't correct. When you recharactized the Roth to TIRA, any earnings that accrued up to that point became taxable. The tax owed would be the total value of each account - minus the basis (contribution) amount. However, you wouldn't pay them in 2016, as you did the conversion in 2017. You can't do a conversion FOR a previous year.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

Alan S.
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Re: Are you smarter than my CPA? (IRA issue)

Post by Alan S. » Sun Jun 24, 2018 7:17 pm

While there may be valid reasons to approve or disapprove of the term "back door Roth", it is time that tax preparers and particularly CPAs who prepare returns for individuals become familiar with the term and what it entails. We constantly read that tax preparers do not understand what the term means, although to be fair the public often misuses the term.

"Back door Roth" has by now been fully adopted by the financial press sources that reach ordinary people, therefore if tax pros want to effectively communicate with their clients, it is time they boned up on what this term means and how it must be reported on Form 1040 and 8606 once they receive the needed specific transaction information. They will save themselves a lot of time and money and preserve their client base in the process. Surely, the back door Roth process is more simple than most of the tax concepts CPAs deal with.

The IRS likely does not like the term and it may never be seen in their publications, yet they also endeavor to communicate effectively with the tax paying public with mixed results.

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celia
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Re: Are you smarter than my CPA? (IRA issue)

Post by celia » Sun Jun 24, 2018 8:38 pm

Earl Lemongrab wrote:
Sun Jun 24, 2018 12:32 pm
lemonparade4 wrote:
Sat Jun 23, 2018 1:40 pm
My understanding is that I should have ONLY paid FY 2016 taxes on the two weeks of interest that may have accrued between recharacterizing the contributions as traditional IRAs in early February 2017 and the backdoor Roth move in late February 2017.
Nothing to do with the main questions, but this isn't correct. When you recharactized the Roth to TIRA, any earnings that accrued up to that point became taxable. The tax owed would be the total value of each account - minus the basis (contribution) amount. However, you wouldn't pay them in 2016, as you did the conversion in 2017. You can't do a conversion FOR a previous year.
I had noticed this too, but ignored it since there were more important issues and figured the tax software would take care of it. The taxes will be/should have been paid on the 2017 tax return for both the Roth conversions done in Feb. 2017 and in Nov. 2017. The gains that are taxed are the total (for him and for her) of all of these:
gains made while the 2016 contributions where in the Roth (ie, before recharacterization)
gains made while in the traditional IRA for the 2016 contributions
gains made while in the traditional IRA for the 2017 contributions

Another way of saying what Earl said is, when you convert, the non-deductible contributions are not taxed again, but everything else is. This assumes you are converting everything that is in any of your traditional IRAs (else you would have to apply the pro rata rule).

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