Addressing Form 8606 Nerds

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Alan S.
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Addressing Form 8606 Nerds

Post by Alan S. »

Kitces via Jeff Levine has released the following extensive article on TIRA basis, including a history and source of such basis, and a decription of the many ways that IRA basis may be lost in the shuffle.

The article includes several ways to reconstruct missing IRA basis, and includes in one article many of the suggestions that have been made here. This leads up to the suggestion to file the 8606 annually even when not required to preserve IRA basis on Form 8606 for every recent year. I think there are cases where this might be considered, and others where it is not worth the trouble. But once you get to 72, you will be filing the 8606 anyway because you will taking annual RMDs for the duration.

In reconstructing missing basis, IRS transcripts were mentioned, but others are reporting that these are only provided for the last 10 years, while your missing basis could date back to 1987. Also, no mention was made for the IRS' apparent lack of a facility to monitor correct IRA basis on their end, which is clearly evident to those of us monitoring these forums in recent years.

Here it is, enjoy: https://www.kitces.com/blog/traditional ... d-57212157
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celia
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Re: Addressing Form 8606 Nerds

Post by celia »

We tend to avoid the pro rata rule here. Unless you can move the tax-deferred to an employer plan or convert it all in a few years, you will be stuck with the pro rata rule until all your tax-deferred IRAs are all emptied out.

I can’t recall a recommendation here for someone to get into that situation. But someone who is in that situation could join the forum.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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Chip Munk
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Re: Addressing Form 8606 Nerds

Post by Chip Munk »

Thanks for the post and the link to the article Alan. I went through this process myself a year or so ago.

Something that's rarely mentioned is that you may have a basis in your IRA for state tax purposes.

For example, in Massachusetts Traditional IRA contributions are not tax deductible even if they are deductible on one's Federal tax return. SEP-IRA contributions are also not deductible in some situations. There is no state equivalent to Form 8606 to track those non-deductible contributions -- you have to do it yourself and then adjust the basis as you do Roth conversions or take RMDs. Fortunately, in Massachusetts your basis comes out first and then your earnings so it's easier than the IRS's method of pro-rating your withdrawals over the life of the IRA.
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FiveK
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Re: Addressing Form 8606 Nerds

Post by FiveK »

Seems that in order to avoid losing basis, one might have to go against the letter of the instructions on Form 8606, but it also seems that retaining the basis is consistent with the law.

E.g., the letter of the instructions say "Complete [Part I] only if one or more of the following apply" and if neither contributions nor withdrawals were made then nothing applies.

But if one ignores those instructions and enters the carryover basis on line 2, then follows instructions from there, that basis appears on lines 2, 3, and (most importantly) 14, where it can be picked up next year. The remaining lines would be blank.

Note that one could do this even if the traditional IRA balance is $0, consistent with the idea that basis is an attribute independent of the balance.
Small Savanna
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Re: Addressing Form 8606 Nerds

Post by Small Savanna »

I have an IRA with a basis. When we could no longer do front door Roth, we started doing backdoor Roth, and I already had an IRA with some money in it, so I've been filling out 8606s for several years. At the moment, there is about $30K in it and basis is about $20K. I agree once you start, it's probably advisable to keep going without skipping years. My light at the end of the tunnel is rolling it all into Roth, but I've been going slow to break the tax bite into smaller bites.
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Alan S.
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Re: Addressing Form 8606 Nerds

Post by Alan S. »

celia wrote: Wed May 05, 2021 9:41 pm We tend to avoid the pro rata rule here. Unless you can move the tax-deferred to an employer plan or convert it all in a few years, you will be stuck with the pro rata rule until all your tax-deferred IRAs are all emptied out.

I can’t recall a recommendation here for someone to get into that situation. But someone who is in that situation could join the forum.
Many people in this situation made non deductible contributions between 1987 and 1998 before the Roth came out. While some could have converted, the MAGI income limit to convert was 100,000 until 2010, meaning that those who made earlier ND contributions because their income was too high to qualify for the deduction were largely the same people who could not convert as their MAGI exceeded 100,000. As a result back door Roth conversions did not gain any traction until the last decade. In addition, IRAs other than pure rollover (aka conduit) IRAs could not be rolled into an employer plan until 2002, and even then many employer plans would not accept such rollovers. When these plans finally began to open up to IRA rollovers, many of the people included above had retired and ended up subject to pro rating distributions and RMDs for life.
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celia
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Re: Addressing Form 8606 Nerds

Post by celia »

Alan S. wrote: Thu May 06, 2021 11:24 am Many people in this situation made non deductible contributions between 1987 and 1998 before the Roth came out. While some could have converted, the MAGI income limit to convert was 100,000 until 2010, meaning that those who made earlier ND contributions because their income was too high to qualify for the deduction were largely the same people who could not convert as their MAGI exceeded 100,000. As a result back door Roth conversions did not gain any traction until the last decade. In addition, IRAs other than pure rollover (aka conduit) IRAs could not be rolled into an employer plan until 2002, and even then many employer plans would not accept such rollovers. When these plans finally began to open up to IRA rollovers, many of the people included above had retired and ended up subject to pro rating distributions and RMDs for life.
Thank you for also reminding us that the rules change over time. Now I recall that there was a point where we couldn't make Roth contributions and I agonized over adding non-deductible contributions to existing tIRAs. I could foresee the pro rata rule lasting "forever" and thus decided against the nondeductible contributions.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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