Form 8606 question - is the form filled out correctly?

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catchinup
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Form 8606 question - is the form filled out correctly?

Post by catchinup »

[Moved into a new thread from: Form 8606 question - a minor backdoor Roth surprise --admin LadyGeek]
retiredjg wrote: Sun Mar 31, 2024 9:59 am It looks right to me. However the $4 left in the IRA are basis - already taxed money, not taxable next year.

Next year, carry over the $4 on line 14 to line 2 of your Form 8606.

Yes, interest rates have caused this for many people. You have to check a couple of months later to see if anything has appeared and convert it to Roth to avoid what happened here.
I have questions about the way my accountant filled mine out this year. I have been doing backdoor Roth conversions for the past several years.

Similar to OP, the traditional IRA balance was zero at the beginning of 2023. Early in the year I contributed $7.5k to the Traditional Ira and rolled it within days to my Roth. It had already earned $1 of interest which went into the Roth. It doesn't look like my accountant is showing the $1 rolled into the Roth and I therefore owe taxes on $1. Do you agree?

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lstone19
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Re: Form 8606 question - a minor backdoor Roth surprise

Post by lstone19 »

catchinup wrote: Sun Mar 31, 2024 1:04 pm I have questions about the way my accountant filled mine out this year. I have been doing backdoor Roth conversions for the past several years.

Similar to OP, the traditional IRA balance was zero at the beginning of 2023. Early in the year I contributed $7.5k to the Traditional Ira and rolled it within days to my Roth. It had already earned $1 of interest which went into the Roth. It doesn't look like my accountant is showing the $1 rolled into the Roth and I therefore owe taxes on $1. Do you agree?
This does not seem right. If you had a $0 tIRA balance on 1/1/23, where is the $7,000 on line 2 coming from? And if you converted that $1 of dividends, why is it being shown as distributed. I assume you have nothing in a tIRA at the end of 2023 so line 14 also makes no sense.

EDITING to add: Do you have your 2022 8606? What was on line 14 that year?
Last edited by lstone19 on Sun Mar 31, 2024 1:31 pm, edited 1 time in total.
DesertGator
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Re: Form 8606 question - a minor backdoor Roth surprise

Post by DesertGator »

This is the perfect opportunity to enlist an expert (i.e. CPA) to sort this out and do it correctly.
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retiredjg
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Re: Form 8606 question - a minor backdoor Roth surprise

Post by retiredjg »

catchinup, A couple of things look unusual on your form.

1. The accountant did not include the $1 in the amount you converted to Roth. He put it on line 7. Line 8 should be 7501 and line 7 should be blank. However, since 7 and 8 are added together to give line 9, line 9 is correct.

2. Then things go off the rails...sort of. LIne 10 is right except it is wrong. It is wrong because there is an extra $7k included in line 2 and line 5. According to the form, line 10 should be .517310. However, the accountant has it as 1.0 (which is correct).
Sorry, this was an error on my part. I flipped the numbers and divided in the wrong direction. :oops:

The way I understand and use the form, line 10 would be .9998666 which might be rounded up by software to 1.0.

So accountant got the right answer ($0 taxable) even though there is an extra 7k included on line 2. And this extra $7k on line 2 results in the $6,999 that does not belong on line 14.


I agree with you theoretically that you owe tax on $1. However, when the fraction on line 10 is 1.0 or very close to 1.0, the real numbers kind of get lost in the rounding.

Your line 14 should be $1...not $6,999. You should get this corrected so that the $6,999 in basis that you really do not have (or do you?) does not get carried into a future form.
Last edited by retiredjg on Mon Apr 01, 2024 8:33 am, edited 2 times in total.
Topic Author
catchinup
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Re: Form 8606 question - a minor backdoor Roth surprise

Post by catchinup »

lstone19 wrote: Sun Mar 31, 2024 1:22 pm
catchinup wrote: Sun Mar 31, 2024 1:04 pm I have questions about the way my accountant filled mine out this year. I have been doing backdoor Roth conversions for the past several years.

Similar to OP, the traditional IRA balance was zero at the beginning of 2023. Early in the year I contributed $7.5k to the Traditional Ira and rolled it within days to my Roth. It had already earned $1 of interest which went into the Roth. It doesn't look like my accountant is showing the $1 rolled into the Roth and I therefore owe taxes on $1. Do you agree?
This does not seem right. If you had a $0 tIRA balance on 1/1/23, where is the $7,000 on line 2 coming from? And if you converted that $1 of dividends, why is it being shown as distributed. I assume you have nothing in a tIRA at the end of 2023 so line 14 also makes no sense.

EDITING to add: Do you have your 2022 8606? What was on line 14 that year?
Line 14 from previous year says $7000. Every year he seems to be entering the prior year rollover amount into line 14. I'm confused about how he arrives at no tax due every year in this case.
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catchinup
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Re: Form 8606 question - a minor backdoor Roth surprise

Post by catchinup »

DesertGator wrote: Sun Mar 31, 2024 1:24 pm This is the perfect opportunity to enlist an expert (i.e. CPA) to sort this out and do it correctly.
As you see from my questions here, hiring a CPA does not guarantee it will be done correctly. Over the years I've found I get better advice from the Boglehead forum than from any accountant I've had.
lstone19
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Re: Form 8606 question - a minor backdoor Roth surprise

Post by lstone19 »

catchinup wrote: Sun Mar 31, 2024 3:47 pm
lstone19 wrote: Sun Mar 31, 2024 1:22 pm
catchinup wrote: Sun Mar 31, 2024 1:04 pm I have questions about the way my accountant filled mine out this year. I have been doing backdoor Roth conversions for the past several years.

Similar to OP, the traditional IRA balance was zero at the beginning of 2023. Early in the year I contributed $7.5k to the Traditional Ira and rolled it within days to my Roth. It had already earned $1 of interest which went into the Roth. It doesn't look like my accountant is showing the $1 rolled into the Roth and I therefore owe taxes on $1. Do you agree?
This does not seem right. If you had a $0 tIRA balance on 1/1/23, where is the $7,000 on line 2 coming from? And if you converted that $1 of dividends, why is it being shown as distributed. I assume you have nothing in a tIRA at the end of 2023 so line 14 also makes no sense.

EDITING to add: Do you have your 2022 8606? What was on line 14 that year?
Line 14 from previous year says $7000. Every year he seems to be entering the prior year rollover amount into line 14. I'm confused about how he arrives at no tax due every year in this case.
Entering the prior year's line 14 is normally correct. But why do you have (or at least have reported) $7,000 in basis with no balance. Did you do conversions in the past where due to market losses you were unable to convert all of what you contributed (e.g. make a non-deductible $7,000 contribution, market drops, only worth $6,000 when you convert so you end up with $1,000 in basis with a $0 balance - apparently this can happen in which case it appears that maybe (it does not seem to be fully settled) that basis can be used to offset future taxable distributions and conversions)? If not, then a mistake was made on some previous 8606 and you'll need to go back through them and figure out where it happened. If you've been contributing and then converting all every year without any market losses, then your basis is $0.

Now if the $7,000 basis is correct despite having no balance, then with $7,501 converted and none distributed, the correct numbers are:
7 - $0
8 - $7,501
9 - $7,501
10 - 1.000
11 - $7,501
12 - $0
13 - $7,501
14 - $6,999

Carry forward basis remains $6,999 and none of the conversion is taxable because you have basis left to use up.
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catchinup
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Re: Form 8606 question - a minor backdoor Roth surprise

Post by catchinup »

retiredjg wrote: Sun Mar 31, 2024 1:53 pm

Your line 14 should be $1...not $6,999. You should get this corrected so that the $6,999 in basis that you really do not have (or do you?) does not get carried into a future form.
At the end of every year, my TIRA balance is zero. This is the first time I'm looking at it this carefully -- I assumed it was being done correctly since I the bottom line on the forms always said I didn't owe any taxes which I knew was correct because there previously was never any gain/loss in the TIRA. (What I do each year is move the money from my brokerage account to money market in the TIRA. This year the money earned $1 in interest before I rolled it. )

On the 2023 form I posted here, line 2 says $7k because that was on line 14 on the 2022 form. If line 14 should have been zero in 2022, I think line 3 on the 2023 form should be 7,500, not 14,500.

Below are page 1 & 2 of the 2022 8606:

2022 Page 1:
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2022 Page 2:
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Last edited by catchinup on Sun Mar 31, 2024 6:13 pm, edited 1 time in total.
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retiredjg
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Re: F

Post by retiredjg »

cathinup, I'm going to look at this more closely tomorrow over coffee. For now, here are my thoughts.

The form is wrong as I understand it. However, this is not the first time someone has posted something that looks just like this. I believe it is a different interpretation of what line 14 is supposed to be.

I think line 14 is the basis going forward after the conversion, into next year. But it appears that some tax-preparers seem to understand it as basis going into the conversion.

I think the bottom line is this. What matters to the IRS is that the right number ends up on line 4a and 4b on the 1040 form. They are not going to look at the supporting documentation - the 8606 - except in very very rare cases.

The accountant is getting the right answer when it comes to how much of your conversion is taxable. And doing it consistently year after year, filling out the form incorrectly (in my opinion) the same way each year.

In my opinion, there is nothing for you to do but file your (correct) tax return and not worry about this. However, if you change accountants or start doing your taxes yourself, you need to remember that you do not actually not have any basis going into the next year.

In answer to your question, yes...it is possible to have more basis in an IRA than dollars in the IRA.
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catchinup
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Re: F

Post by catchinup »

retiredjg wrote: Sun Mar 31, 2024 4:52 pm cathinup, I'm going to look at this more closely tomorrow over coffee. For now, here are my thoughts.
Thanks, I'm posting the complete history here starting from my first backdoor roth conversion. In February 2020, I made after tax contributions for tax years 2019 & 2020, and rolled them together into Roth. After that, each year I made the single contribution and rolled it right away. Below are the transactions and 8606 forms.

Tax Year Calendar Date Event Amount
2019 2/20/2020 TIRA Contribution 7,000.00
2020 2/20/2020 TIRA Contribution 7,000.00
2020 2/24/2020 Roll to Roth $14,002.30
2021 4/6/2021 TIRA Contribution 7,000.00
2021 4/12/2021 Roll to Roth 7,000.01
2022 1/5/2022 TIRA Contribution 7,000.00
2022 1/6/2022 Roll to Roth 7,000.00
2023 5/18/2023 TIRA Contribution 7,500.00
2023 5/19/2023 Roll to Roth 7,501.03


2019 8606 p1 (page 2 missing)
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2020 p1
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2020 p2
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2021 p1
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2021 p2
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2022 Page 1:
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2022 Page 2:
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2023 Page 1:
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2023 Page 2:
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lstone19
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Re: Form 8606 question - a minor backdoor Roth surprise

Post by lstone19 »

Your main problem is in your 2021 8606. Line 2 on that is $7,000 but it should come from line 14 on your 2020 8606 which is zero. Fix that (I believe it can still be amended) and your 2022 8606 and then your 2023 8606 will be correct. Others know better than me how to amend just an 8606 (I've seen many posts in the past about that).

The other issue, far less of a problem, is why does your accountant keep showing the earnings as distributed rather than converted. It was done that way on your 2020 and 2023 8606 (in 2021 and 2022, there were not enough earnings so the conversion rounded to the same amount as the contribution).

It may be time to find a new tax preparer.
leland
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Re: Form 8606 question - a minor backdoor Roth surprise

Post by leland »

That leftover $4 is an annoyance.

Just to be sure in the future (and others please correct me if I don't have this correct):
1) Try to contribute to traditional and convert to Roth in one go
2) Day 1 of month 2: Convert any interest that accrues if not able to contribute/convert in a day
3) Day 1 of month 3: Repeat 2 for any interest on the interest

Should make life a bit easier to start the next year with a $0 TIRA.
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retiredjg
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Re: Form 8606 question - a minor backdoor Roth surprise

Post by retiredjg »

catchinup, looking at this again over coffee, my conclusions are the same as last night. I did find an error in my comments which I have fixed above, but that does not change my thinking.

I believe your accountant is using the form in a way different from the understanding we have here on the Boglehead's forum. Like isotone said, it started in 2021 when $7k in basis showed up on line 2 when it should not have been there (because line 14 of the previous year was blank). It has continued that way into the following years.

However, your accountant is coming up with the right bottom line about how much is taxable. I think he understands the process. I would not do anything about this myself. I definitely would not amend the 8606 forms. That will only confuse the issue and create a problem that does not actually exist at this point.

My only caution would be if you start doing your own taxes or if you switch tax-preparers....make sure you remember that you do not actually have any basis left. You have used it all each year. Your line 14 should be blank according to the way I understand this form.

This is not the first time we have seen a form filled out like this. I wonder if it showed up in some kind of article or training or something like that.
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FiveK
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Re: Form 8606 question - is the form filled out correctly?

Post by FiveK »

You could make the entries below in the Form8606 tab of the personal finance toolbox and see the usual Form 8606 entries further down that page. Often, tax software will use a Pub. 590-B worksheet for some calculations, leaving rows 6-12 on 8606 blank. You can force the spreadsheet to use 8606 using row 57.

Code: Select all

+-------------------------------------------------------------+-----------------------------+------+-------+------+------+------+
|                                                             | Year:                       | 2019 | 2020  | 2021 | 2022 | 2023 |
+-------------------------------------------------------------+-----------------------------+------+-------+------+------+------+
| 31-Dec-2018 tIRA basis (after-tax amount in all tIRAs)      |                             |   0  |       |      |      |      |
|                                                             |                             |      |       |      |      |      |
|  Contributions made for this tax year in this calendar year | Pre-tax                     |      |       |      |      |      |
|                                                             | Post-tax                    | 7000 | 7000  | 7000 | 7000 | 7500 |
|                                                             |                             |      |       |      |      |      |
| Distributions made in this calendar year                    | Not converted to Roth       |      |       |      |      |      |
|                                                             | Converted to Roth           |      | 14002 | 7000 | 7000 | 7501 |
|                                                             |                             |      |       |      |      |      |
|                                                             | 31-Dec non-Roth IRA balance | 7001 | 0     | 0    | 0    | 0    |
+-------------------------------------------------------------+-----------------------------+------+-------+------+------+------+
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catchinup
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Re: Form 8606 question - a minor backdoor Roth surprise

Post by catchinup »

retiredjg wrote: Mon Apr 01, 2024 9:08 am catchinup, looking at this again over coffee, my conclusions are the same as last night. I did find an error in my comments which I have fixed above, but that does not change my thinking.

I believe your accountant is using the form in a way different from the understanding we have here on the Boglehead's forum. Like isotone said, it started in 2021 when $7k in basis showed up on line 2 when it should not have been there (because line 14 of the previous year was blank). It has continued that way into the following years.

However, your accountant is coming up with the right bottom line about how much is taxable. I think he understands the process. I would not do anything about this myself. I definitely would not amend the 8606 forms. That will only confuse the issue and create a problem that does not actually exist at this point.

My only caution would be if you start doing your own taxes or if you switch tax-preparers....make sure you remember that you do not actually have any basis left. You have used it all each year. Your line 14 should be blank according to the way I understand this form.

This is not the first time we have seen a form filled out like this. I wonder if it showed up in some kind of article or training or something like that.
Thanks, the 2023 8606 has not been filed yet. I'm just checking it over. What triggered me to review this in such detail is that the $1 in interest did not flow up to the top page of my 1040. Could I get him to fix it this year, so that next year when I do my own return I don't have to override the 2023 line 14? Or would it be just as easy for me to override next year using TurboTax or some other program? Starting in tax year 2024, my tax situation is going to be significantly simpler, so I will probably start doing my own returns. I want to make sure I have my ducks in a row now.
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retiredjg
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Re: Form 8606 question - a minor backdoor Roth surprise

Post by retiredjg »

catchinup wrote: Mon Apr 01, 2024 7:20 pm Thanks, the 2023 8606 has not been filed yet. I'm just checking it over. What triggered me to review this in such detail is that the $1 in interest did not flow up to the top page of my 1040.
The $1 that should be taxable gets lost in the rounding. Theoretically, you owe tax on the $1, but since the IRS allows rounding, you don't owe it.

Could I get him to fix it this year, so that next year when I do my own return I don't have to override the 2023 line 14?
Your accountant is not going to fix this. He has his way of using the form and will stick with it. It works for him because he understands what the bottom line should be.

You don't really have to override anything because your software is not aware of what his software thinks. Just do not put the $6,999 from his line 14 onto next years line 2.


You'll notice that his software has been keeping up with your Roth IRA basis on line 24. Using your own software, you will need to enter the correct basis yourself next year. It will be the sum of all of your conversions over the years ($35,500 plus the 2024 conversion).
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catchinup
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Re: Form 8606 question - a minor backdoor Roth surprise

Post by catchinup »

retiredjg wrote: Tue Apr 02, 2024 8:29 am
catchinup wrote: Mon Apr 01, 2024 7:20 pm Thanks, the 2023 8606 has not been filed yet. I'm just checking it over. What triggered me to review this in such detail is that the $1 in interest did not flow up to the top page of my 1040.
The $1 that should be taxable gets lost in the rounding. Theoretically, you owe tax on the $1, but since the IRS allows rounding, you don't owe it.

Could I get him to fix it this year, so that next year when I do my own return I don't have to override the 2023 line 14?
Your accountant is not going to fix this. He has his way of using the form and will stick with it. It works for him because he understands what the bottom line should be.

You don't really have to override anything because your software is not aware of what his software thinks. Just do not put the $6,999 from his line 14 onto next years line 2.


You'll notice that his software has been keeping up with your Roth IRA basis on line 24. Using your own software, you will need to enter the correct basis yourself next year. It will be the sum of all of your conversions over the years ($35,500 plus the 2024 conversion).
Ok, thanks
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