Sanity check: Form 8606, total basis, rolled-over 401k, backdoor roth...

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personally-invested
Posts: 2
Joined: Tue Apr 02, 2024 12:15 am

Sanity check: Form 8606, total basis, rolled-over 401k, backdoor roth...

Post by personally-invested »

Hey there! You all have been a fantastic resource and I’d really appreciate if you might be able to help check my work before I submit my taxes this week.

Relevant events
  • 2022
    • Opened a traditional IRA and rolled over my entire traditional 401k from a previous employer via a direct rollover ($10,000 total)
      • This was entirely pre-tax money, balance was $0 before this, and I own no other traditional IRAs
      • Note: I mistakenly did not report this on my taxes for 2022
  • Feb 2024
    • In preparation for a backdoor roth IRA conversion, I converted the entire balance ($10k) of my traditional IRA to a Roth IRA
      • I will report this as a taxable event on my 2024 taxes
  • March 2024
    • Contributed $6500 (for 2023) and $7000 (for 2024) to my traditional IRA (with after tax money / non-deductible)
    • Converted the entire $13,500 to my Roth IRA
Assumptions to check

I am now preparing my 8606 for 2023. I believe this is what I need to do…
  • File a 1040X to amend my 2022 return indicating that I did the 401k > trad IRA rollover (no tax impact)
  • Form 8606 (2023)
    • Line 1 (nondeductible contributions to traditional IRAs): $6500
    • Line 2 (previous basis): $0
      • Because the money rolled over from the 401k was entirely pre-tax, that means none of it is non-taxable, and thus doesn’t affect basis, right?
    • Line 3 (1+2): $6500
    • Line 14 (basis moving forward): $6500
    • Then because I did not take any distributions and I did not make any traditional IRA > Roth IRA conversions in 2023, I can skip the rest of the 8606 form
  • Form 8606 (next year, for 2024)
    • Line 1: $7000
    • Line 2: $6500 (coming from line 14 in 2023)
    • Line 3: $13,500
    • I will continue filling out Part 1 and Part 2 because I made conversions in 2024…
    • The total amount converted is $23,500 ($10,000 originally from 401k + $13,500)
    • $13,500 will be non-taxable
    • $10,000 will be taxable (will also get reported on my 1040)
    • My basis will then return to $0
    • Pro-rata rule doesn't get triggered because my trad IRA balance is $0 by the end of the year in which I did the conversion (EDIT: pro-rata rule is being triggered as expected in 2023 but won't trigger after 2023 as long as I convert my contributions and growth completely each year)
Does that all check out? Anything that I missed or misinterpreted? Please let me know if I need to provide any additional information.

Thank you so much for your help!
Last edited by personally-invested on Tue Apr 02, 2024 5:38 pm, edited 1 time in total.
terran
Posts: 3202
Joined: Sat Jan 10, 2015 9:50 pm

Re: Sanity check: Form 8606, total basis, rolled-over 401k, backdoor roth...

Post by terran »

Someone can correct me if I'm wrong, but I don't think there was anything to report when you rolled over from the 401(k) to the IRA. Check your 2022 form 1040, as long as nothing was entered as a taxable pension distribution on line 5b you should be good.

You should be entering the 12/31/23 IRA balance on your 2023 Form 8606 line 6 and updating everything from there. The $6500 should also be on line 4 since it was contributed this year.

Otherwise, I think you've got it basically right, except the pro-rata rule is being triggered as all that means is some of your conversion is taxable and some isn't, but you're handling that properly. In the future this won't be the case.

I think you're just using numbers for the example, but they'd only be accurate if the $10k you rolled over in 2022 didn't grow at all until you converted in 2024, which seems unlikely. Your 2024 Form 8606 should show what was actually converted in 2024.

Check your accounts in a few months. There will probably be a bit of money from interest. You can convert this too if you want to get the final account value back down to $0. it will be added to the taxable part of the conversion.
Topic Author
personally-invested
Posts: 2
Joined: Tue Apr 02, 2024 12:15 am

Re: Sanity check: Form 8606, total basis, rolled-over 401k, backdoor roth...

Post by personally-invested »

terran wrote: Tue Apr 02, 2024 6:59 am You should be entering the 12/31/23 IRA balance on your 2023 Form 8606 line 6 and updating everything from there. The $6500 should also be on line 4 since it was contributed this year.
Thank you so much for taking the time to reply!

Re: my 2023 Form 8606...just beneath line 3 it states "In 2023, did you take a distribution from traditional, traditional SEP, or traditional SIMPLE IRAs, or make a Roth, Roth SEP, or Roth SIMPLE IRA conversion?" >> If no, "Enter the amount from line 3 on line 14. Do not complete the rest of Part I."

Since I didn't take any distributions or make any conversions in 2023 (or any prior year), this is why I assumed I could just input line 14 but otherwise skip anything past line 3 (including line 6).
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Duckie
Posts: 9797
Joined: Thu Mar 08, 2007 1:55 pm

Re: Sanity check: Form 8606, total basis, rolled-over 401k, backdoor roth...

Post by Duckie »

personally-invested wrote: Tue Apr 02, 2024 12:35 am Relevant events
  • 2022
    • Opened a traditional IRA and rolled over my entire traditional 401k from a previous employer via a direct rollover ($10,000 total)
      • This was entirely pre-tax money, balance was $0 before this, and I own no other traditional IRAs
      • Note: I mistakenly did not report this on my taxes for 2022
Did you get a 1099-R from the 401k?
Assumptions to check

I am now preparing my 8606 for 2023. I believe this is what I need to do…
  • File a 1040X to amend my 2022 return indicating that I did the 401k > trad IRA rollover (no tax impact)
Okay.
  • Form 8606 (2023)
    • Line 1 (nondeductible contributions to traditional IRAs): $6500
    • Line 2 (previous basis): $0
      • Because the money rolled over from the 401k was entirely pre-tax, that means none of it is non-taxable, and thus doesn’t affect basis, right?
Right.
    • Line 3 (1+2): $6500
    • Line 14 (basis moving forward): $6500
    • Then because I did not take any distributions and I did not make any traditional IRA > Roth IRA conversions in 2023, I can skip the rest of the 8606 form
Correct.
  • Form 8606 (next year, for 2024)
    • Line 1: $7000
    • Line 2: $6500 (coming from line 14 in 2023)
    • Line 3: $13,500
    • I will continue filling out Part 1 and Part 2 because I made conversions in 2024…
    • The total amount converted is $23,500 ($10,000 originally from 401k + $13,500)
    • $13,500 will be non-taxable
    • $10,000 will be taxable (will also get reported on my 1040)
    • My basis will then return to $0
    • Pro-rata rule doesn't get triggered because my trad IRA balance is $0 by the end of the year in which I did the conversion (EDIT: pro-rata rule is being triggered as expected in 2023 but won't trigger after 2023 as long as I convert my contributions and growth completely each year)
Pro-rata is not being triggered in 2023 because you did not convert in 2023.
Does that all check out?
Yes.
terran
Posts: 3202
Joined: Sat Jan 10, 2015 9:50 pm

Re: Sanity check: Form 8606, total basis, rolled-over 401k, backdoor roth...

Post by terran »

personally-invested wrote: Tue Apr 02, 2024 5:36 pm Re: my 2023 Form 8606...just beneath line 3 it states "In 2023, did you take a distribution from traditional, traditional SEP, or traditional SIMPLE IRAs, or make a Roth, Roth SEP, or Roth SIMPLE IRA conversion?" >> If no, "Enter the amount from line 3 on line 14. Do not complete the rest of Part I."

Since I didn't take any distributions or make any conversions in 2023 (or any prior year), this is why I assumed I could just input line 14 but otherwise skip anything past line 3 (including line 6).
Good catch, you're right.
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retiredjg
Posts: 54360
Joined: Thu Jan 10, 2008 11:56 am

Re: Sanity check: Form 8606, total basis, rolled-over 401k, backdoor roth...

Post by retiredjg »

The Rollover from 401k to IRA is a separate issue. It was not a taxable rollover. The IRS may contact you via letter for an explanation. Or not. If they were worried about it, I think (but do know know) they would have contacted you by now.

I believe that you have the steps correctly. However, there is no pro-rating triggered for any year in my way of thinking. That would require that you have something in IRA at the end of a year in which you do a Roth conversion. That is not happening here.

Paying tax on the untaxed portion of a Roth conversion is not pro-rating in my mind, but that may be just semantics.
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