Rollover IRA / Non Deductable IRA

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dskillz1
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Rollover IRA / Non Deductable IRA

Post by dskillz1 » Wed Sep 13, 2017 12:24 pm

About 2 years ago I rolled over some 401K funds I had to my Traditional IRA with Vanguard. I did this to simply avoid the bad investments that the 401K was offering. When I did this my income was too high to contribute to this new IRA so does that automatically classify this IRA as a non deductible IRA or would this still be considered a rollover IRA ?

I ask because I just read in the Bogle Heads Guide to retirement that you cannot contribute to a rollover IRA. I had to actual contribute to it this year (my only contribution since it was rolled over) due to over funding my roth IRA so I moved the extra funds to the IRA through Vanguard, they handled everything. I hope that I was able to contribute to the IRA but again i'm not sure if its a non-deductible or rollover IRA.

Thanks for your time.
Last edited by dskillz1 on Wed Sep 13, 2017 3:39 pm, edited 1 time in total.

retiredjg
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Re: Rollover IRS / Non Deductable IRA

Post by retiredjg » Wed Sep 13, 2017 12:44 pm

There is no such thing as a deductible or non-deductible IRA. It is the contribution to the IRA that is either deductible or non-deductible.

About 2 years ago I rolled over some 401K funds I had to my Traditional IRA with Vanguard. I did this to simply avoid the bad investments that the 401K was offering. When I did this my income was too high to contribute to this new IRA so does that automatically classify this IRA as a non deductible IRA or would this still be considered a rollover IRA ?
When you rolled the 401k into a new IRA, it was probably called a Rollover IRA and at that point it only contained tax-deferred (pre-tax) money.

I ask because I just read in the Bogle Heads Guide to retirement that you cannot contribute to a rollover IRA.
That may have been true at one time. I don't think it is true any more.

I had to actual contribute to it this year (my only contribution since it was rolled over) due to over funding my roth IRA so I moved the extra funds to the IRA through Vanguard, they handled everything. I hope that I was able to contribute to the IRA but again i'm not sure if its a non-deductible or rollover IRA.
More information is needed, but it sounds like you have made a non-deductible contribution to IRA. You now have pre-tax money and already taxed money ("basis") both in what may be named a Rollover IRA.

This is not wrong or illegal, but it may cause you complications you would rather avoid by un-doing this now.

What is "this year"? Do you mean you made a direct contribution to Roth IRA in 2017?

Did you then find out that you are not eligible to contribute directly to Roth IRA because you make too much money?

Or do you mean you are eligible to contribute to Roth IRA but you put too much in there?

When you say "they handled everything", what did they do? Did they "re-characterize" your Roth IRA contribution to a non-deductible contribution to tIRA? Or did they do something else?

Do you have any other account named "IRA"? SEP IRA, SIMPLE IRA, tIRA, rollover IRA (but not Roth IRA)?

dskillz1
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Re: Rollover IRS / Non Deductable IRA

Post by dskillz1 » Wed Sep 13, 2017 1:11 pm

What is "this year"? Do you mean you made a direct contribution to Roth IRA in 2017?
- Correct
Or do you mean you are eligible to contribute to Roth IRA but you put too much in there?
- Correct
When you say "they handled everything", what did they do? Did they "re-characterize" your Roth IRA contribution to a non-deductible contribution to tIRA?
- Correct

I never planned nor do I plan to contribute any other monies to this IRA as I am aware of form 8606 and would rather not deal with that administrative headache over the next 25 years.

So basically the re-characterization was allowed and I have nothing to worry about?

dskillz1
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Re: Rollover IRS / Non Deductable IRA

Post by dskillz1 » Wed Sep 13, 2017 1:14 pm

The IRA I have in Vanguard is called "Rollover IRA Brokerage"

livesoft
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Re: Rollover IRS / Non Deductable IRA

Post by livesoft » Wed Sep 13, 2017 1:25 pm

dskillz1 wrote:
Wed Sep 13, 2017 1:11 pm
So basically the re-characterization was allowed and I have nothing to worry about?
It reads like you need to file a Form 8606 to show the non-deductible contribution to your IRA and now deal with what you call an administrative headache for the next 25 years.

Or maybe you are saying you are not going to file a Form 8606 and just pay tax again on this contributed amount in the future when you start withdrawals.
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retiredjg
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Re: Rollover IRS / Non Deductable IRA

Post by retiredjg » Wed Sep 13, 2017 1:30 pm

dskillz1 wrote: I never planned nor do I plan to contribute any other monies to this IRA as I am aware of form 8606 and would rather not deal with that administrative headache over the next 25 years.
OK

So basically the re-characterization was allowed and I have nothing to worry about?
No, that is incorrect.

You are only allowed to contribute a certain amount to IRA. It can go into traditional IRA or Roth IRA or a combination of the two. If you contributed too much to Roth IRA (but were otherwise eligible), then you can't put the "extra" in tIRA. It has to come all the way out of IRA all-together.

There is an exception, but since you have not mentioned being in the phase out for direct contributions to Roth IRA, I assume that exception does not apply to you.

You need to call them back and get that contribution "removed" or "returned" before the end of the year or maybe tax day next spring....not sure which but there is no reason not to do this right now. If you made an "excess contribution", the money NEVER should have been sent to tIRA at all. It should have been returned to you. Perhaps you and they had a mis-communication or something.

If the excess contribution has any earnings, the earnings will come back to you as well and be taxable so expect a 1099 for that on next year's taxes.

If the contribution is returned before the end of the tax year (or tax day next year), I do not believe you will need to fill out Form 8606.

kaneohe
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Re: Rollover IRS / Non Deductable IRA

Post by kaneohe » Wed Sep 13, 2017 1:35 pm

dskillz1 wrote:
Wed Sep 13, 2017 1:11 pm
What is "this year"? Do you mean you made a direct contribution to Roth IRA in 2017?
- Correct
Or do you mean you are eligible to contribute to Roth IRA but you put too much in there?
- Correct
When you say "they handled everything", what did they do? Did they "re-characterize" your Roth IRA contribution to a non-deductible contribution to tIRA?
- Correct

I never planned nor do I plan to contribute any other monies to this IRA as I am aware of form 8606 and would rather not deal with that administrative headache over the next 25 years.

So basically the re-characterization was allowed and I have nothing to worry about?
How much did you contribute initially to the Roth? How much was returned to the rollover IRA? Did you contribute too much because
your contribution exceeded the absolute max allowed or is your personal max lowered because of high income? If the latter, not sure how you would know what your personal max allowed is because the yr isn't over and your income isn't known; If the former, then the excess doesn't belong in the rollover either since the absolute max allowed takes into account both the Roth and rollover contributions.

Alan S.
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Re: Rollover IRS / Non Deductable IRA

Post by Alan S. » Wed Sep 13, 2017 1:41 pm

A "rollover IRA" is an IRA funded exclusively from qualified retirement plan contributions. Whether the funds rolled into the rollover IRA were pre tax or after tax is immaterial. It is a rollover IRA regardless.

You CAN make a regular contribution to a rollover IRA, but the IRA is no longer a rollover IRA at that point. If you make a Roth IRA contribution and recharacterize any portion of it into the rollover IRA, that contribution is treated as a regular IRA Contribution and the rollover IRA is no longer a rollover IRA. Therefore, the recharacterized Roth contribution has the same effect as if you simply made a regular TIRA contribution to the rollover IRA.

IRA custodians are notoriously sloppy with respect to eliminating the "rollover" from the IRA title once the rollover IRA has received a regular contribution. The IRA custodian may never drop the term, but in the eyes of the IRS this is no longer a rollover IRA.

Losing the "rollover" status of the IRA may not matter. Here are the cases where it would matter:
1) Employer plans may not allow you to roll this IRA into their plan because it is no longer a rollover IRA. Some will, some will not.
2) In some states, your IRA protection against creditors is limited to around 1.4mm for a contributory IRA when a rollover IRA would not have a dollar limit. However, most states fully protect IRA accounts regardless, so if you live in one of those states, losing the rollover status does not matter.

NOTE: If you end up rolling the pre tax IRA money into an accepting employer plan, and later on roll it back out to an IRA, it becomes a rollover IRA again by having it pass through the employer plan a second time.

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celia
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Re: Rollover IRA / Non Deductable IRA

Post by celia » Wed Sep 13, 2017 1:44 pm

OP, To understand the needed corrections, you need to first understand what should have been done. What you should have done, had you known, is rollover the 401K to a Rollover IRA. There is an account type like that and it has the word "Rollover" in the title of the account. The account would likely be called "<dskillz1> Rollover IRA". That signifies that the money in that account came from an employer plan. You can rollover other employer plans into that account. It is best to put other contributions (not coming from an employer plan) into a separate traditional IRA. The reason you want to keep these separate is that you may want to roll that Rollover IRA over to a future 401K.

Almost all 401Ks accept money from other 401Ks or Rollover IRAs containing only previous rollovers (and the growth since then).
Some 401Ks will accept the tax-deferred contributions (and their growth) in a traditional IRA.
No 401K is allowed to accept non-deductible contributions in a traditional IRA. They may or may not accept the growth on these contributions.

Now you have co-mingled the money. It is best to figure out how to separate it out now since you will want the future growth of each part to stay with the contribution it belongs to.
dskillz1 wrote:
Wed Sep 13, 2017 12:24 pm
About 2 years ago I rolled over some 401K funds I had to my Traditional IRA with Vanguard. I did this to simply avoid the bad investments that the 401K was offering. When I did this my income was too high to contribute to this new IRA so does that automatically classify this IRA as a non deductible IRA or would this still be considered a rollover IRA ?
There is no such think as a non-deductible IRA, but some of your CONTRIBUTIONS might be non-deductible (if you weren't eligible to contribute as much as you did to a Roth).
I ask because I just read in the Bogle Heads Guide to retirement that you cannot contribute to a rollover IRA.
Well, you CAN, but you SHOULDN'T as I described above. I think the rule was relaxed about 5 years ago.
I had to actual contribute to it this year (my only contribution since it was rolled over) due to over funding my roth IRA so I moved the extra funds to the IRA through Vanguard, they handled everything. I hope that I was able to contribute to the IRA but again i'm not sure if its a non-deductible or rollover IRA.
There are three possible problems that we might be discussing here and we can't tell which one you have. If your income was too high that it didn't allow the contributions to a Roth, your income is also too high to make a tax-deductible contribution to a traditional IRA. In this case, moving the contribution to a traditional IRA is called RECHARACTERIZING some/all of your Roth contribution. That means that it makes it be as if the contribution had been made to the traditional IRA all along. But since your income was too high to make a tax-deductible contribution, it is non-deductible and needs to be reported that way on your taxes for the year that the contribution applies to. If you were making a 2016 Roth contribution this year, consider that you make a 2016 non-deductible contribution instead.

If you mean you contributed more than $5,500/$6,500 to a Roth this year, the correction seems to have been done incorrectly (but per your directions to the custodian). In that case, you need to REMOVE the Excess Contribution (and its earnings) instead of recharacterizing it. You are limited to a total of $5,500/$6,500 in contributions across ALL your IRAs.

If you contributed to your Roth between January 1 and April 17 this year, the contribution could have applied to 2016 if you had not yet maxed out your 2016 contribution. Then you could also have contributed any time this year for 2017. Could you have done that? This would mean there never was a "problem" that needed correction.

Which scenario are you? In addition to reporting this scenario correctly on your taxes, we will need more details to help you clean this up and separate the co-mingled money as retiredjg requests.
Last edited by celia on Wed Sep 13, 2017 1:53 pm, edited 1 time in total.

dskillz1
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Re: Rollover IRS / Non Deductable IRA

Post by dskillz1 » Wed Sep 13, 2017 1:52 pm

No, that is incorrect.

You are only allowed to contribute a certain amount to IRA. It can go into traditional IRA or Roth IRA or a combination of the two. If you contributed too much to Roth IRA (but were otherwise eligible), then you can't put the "extra" in tIRA. It has to come all the way out of IRA all-together.

There is an exception, but since you have not mentioned being in the phase out for direct contributions to Roth IRA, I assume that exception does not apply to you.

You need to call them back and get that contribution "removed" or "returned" before the end of the year or maybe tax day next spring....not sure which but there is no reason not to do this right now. If you made an "excess contribution", the money NEVER should have been sent to tIRA at all. It should have been returned to you. Perhaps you and they had a mis-communication or something.

If the excess contribution has any earnings, the earnings will come back to you as well and be taxable so expect a 1099 for that on next year's taxes.

If the contribution is returned before the end of the tax year (or tax day next year), I do not believe you will need to fill out Form 8606.
I think we misunderstood each other. Let me explain better. I was eligible to contribute to my Roth IRA for 2017 and was dollar cost averaging into it every paycheck. When tax time came my W2 showed I was over the allowed income amount for Roth Eligibility. I then spoke to Vanguard and they then transferred the funds I was over from my Roth and re-characterized them into my tIRA. I then spoke to my tax guy and we filed a 6806 form. Was that the correct action?

retiredjg
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Re: Rollover IRS / Non Deductable IRA

Post by retiredjg » Wed Sep 13, 2017 1:55 pm

dskillz1[/quote wrote: I think we misunderstood each other. Let me explain better. I was eligible to contribute to my Roth IRA for 2017 and was dollar cost averaging into it every paycheck. When tax time came my W2 showed I was over the allowed income amount for Roth Eligibility. I then spoke to Vanguard and they then transferred the funds I was over from my Roth and re-characterized them into my tIRA. I then spoke to my tax guy and we filed a 6806 form. Was that the correct action?
Unless I've been in a time warp, we are still in 2017 and W2's and tax time have not arrived yet.

Please clarify.

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celia
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Re: Rollover IRS / Non Deductable IRA

Post by celia » Wed Sep 13, 2017 2:03 pm

dskillz1 wrote:
Wed Sep 13, 2017 1:52 pm
I think we misunderstood each other. Let me explain better. I was eligible to contribute to my Roth IRA for 2017 and was dollar cost averaging into it every paycheck. When tax time came my W2 showed I was over the allowed income amount for Roth Eligibility. I then spoke to Vanguard and they then transferred the funds I was over from my Roth and re-characterized them into my tIRA. I then spoke to my tax guy and we filed a 6806 form. Was that the correct action?
Part of the confusion, I think, is that we appear to be talking about 2016 contributions since W-2s for 2017 have not yet been issued. Can you confirm this? And I thought you didn't want to mess with the 8606 for 25 years?

dskillz1
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Re: Rollover IRS / Non Deductable IRA

Post by dskillz1 » Wed Sep 13, 2017 2:06 pm

There are two possible problems that we might be discussing here and we can't tell which one you have. If your income was too high that it didn't allow the contributions to a Roth, your income is also too high to make a tax-deductible contribution to a traditional IRA. In this case, moving the contribution to a traditional IRA is called RECHARACTERIZING some/all of your Roth contribution. That means that it makes it be as if the contribution had been made to the traditional IRA all along. But since your income was too high to make a tax-deductible contribution, it is non-deductible and needs to be reported that way on your taxes for the year that the contribution applies to. If you were making a 2016 Roth contribution this year, consider that you make a 2016 non-deductible contribution instead.

If you mean you contributed more that $5,500/$6,500 to a Roth this year, the correction seems to have been done incorrectly (but per your directions to the custodian). In that case, you need to REMOVE the Excess Contribution (and its earnings) instead of recharacterizing it. You are limited to a total of $5,500/$6,500 in contributions across ALL your IRAs.

Which scenario are you? In addition to reporting this scenario correctly on your taxes, we will need more details to help you clean this up and separate the co-mingled money as retiredjg requests.
If your income was too high that it didn't allow the contributions to a Roth - This is correct. Vanguard was able to take the amount I over contributed and re-characterize it into my tIRA and my tax guy filled out the 8606 for me. Was this incorrect? I do not plan to contribute any funds to this tIRA ever and just let it sit and compound for about 20 years. I have no plans ever to roll it into anything else in the future.

dskillz1
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Re: Rollover IRS / Non Deductable IRA

Post by dskillz1 » Wed Sep 13, 2017 2:08 pm

Sorry guys yes we are talking about 2016. I was confused because the actual recharacterization occurred in 2017.

retiredjg
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Re: Rollover IRS / Non Deductable IRA

Post by retiredjg » Wed Sep 13, 2017 3:40 pm

dskillz1....details and your wording are important here. You have (obviously not on purpose) described 3 different scenarios in the course of your posts and they all have different fixes. So let's be sure we understand your situation.
  • In 2016, you contributed $____ how many dollars to Roth IRA?

    Then at tax time, you found out you were not eligible to contribute the full amount you contributed because you were in the "phase out" where you could contribute some but not the full $5,500 ($6,500 if 50 or older).

    So Vanguard re-characterized part of the contribution (how much?) to tIRA and put it in your rollover IRA. This happened a few months ago in 2017.

    Your tax guy filled out and sent in Form 8606 documenting a non-deductible contribution to Roth IRA.

    You are wondering if this was done right.
Is this list incorrect in any way? Even in a tiny small way?
Last edited by retiredjg on Fri Sep 15, 2017 7:37 am, edited 1 time in total.

dskillz1
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Re: Rollover IRA / Non Deductable IRA

Post by dskillz1 » Wed Sep 13, 2017 4:35 pm

In 2016, you contributed $____ how many dollars to Roth IRA? Not Sure exact Amount but under $5500

Then at tax time, you found out you were not eligible to contribute the full amount you contributed because you were in the "phase out" where you could contribute some but not the full $5,500 ($6,500 if 50 or older). - CORRECT

So Vanguard re-characterized part of the contribution (how much?) to tIRA and put it in your rollover IRA. This happened a few months ago in 2017. CORRECT $3,055.05

Your tax guy filled out and sent in Form 8606 documenting a non-deductible contribution to Roth IRA.

You are wondering if this was done right.
Is this list incorrect in any way? Even in a tiny small way? YES "Your tax guy filled out and sent in Form 8606 documenting a non-deductible contribution to Roth IRA" I think you meant "Your tax guy filled out and sent in Form 8606 documenting a non-deductible contribution to tIRA"

Alan S.
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Re: Rollover IRA / Non Deductable IRA

Post by Alan S. » Wed Sep 13, 2017 5:04 pm

If you really want to eliminate the "8606 forever" prospects, you still have time to request a removal of your 2016 (now TIRA contribution after the recharacterization) from your former rollover IRA. After 10/16 this is no longer possible.

Doing this would result in the following:
1) 2016 8606 sent to IRS recently would have to be corrected by sending in another 2016 8606 showing 0 basis.
2) Any earnings generated on the returned contribution would show on a 2017 1099R, but coded in Box 7 to apply to 2016 since as I understand it, you made these 2016 contributions IN 2016. Earnings returned with a contribution are taxable in the year IN WHICH you made the contributions. Being 2016, this would result in an amended 2016 return.
3) The above would eliminate your basis and no future 8606 forms would be needed for TIRA distributions (except conversions).
4) No clear IRS guidance, but I think you could also take the position that you also restored your rollover IRA status since the regular contribution and all earnings from it were specifically returned to you. This is a debatable presumption.

So there is still a way to erase the 8606 from your future, with a one month period to act. You also could do nothing, not file future 8606 forms and pay taxes on all distributions rather than having your 3000 trickle out of your TIRA, a few bucks per year.

retiredjg
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Re: Rollover IRA / Non Deductable IRA

Post by retiredjg » Wed Sep 13, 2017 5:11 pm

Yes, that's what I meant. Senior moment, automatic fingers, whatever....directly following my statement about being careful about wording.... I'd use the rolling eyes smilie if we still had it. :happy

So it appears you have $3,055.05 of basis in what is named a Rollover IRA. And your basis has been documented on Form 8606. So yes, it was done correctly. But where to go from here?

Since it is too late to "return" that part of your 2016 IRA contribution edited to add...Alan thinks differently - you should probably listen to Alan.... you'll have to live with the Form 8606 for years unless you want to try to separate your basis from the pre-tax money by rolling the pre-tax money into a current 401k/403b/etc.

Or you can just forget it and pay taxes on that $3,055.05 a second time as the money is withdrawn from your IRA. The IRS will not care if you do not claim this basis at some day in the future. And it won't be a great deal of extra taxes but it might be enough to annoy you.

What are you interested in doing?

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celia
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Re: Rollover IRA / Non Deductable IRA

Post by celia » Wed Sep 13, 2017 5:37 pm

retiredjg wrote:
Wed Sep 13, 2017 5:11 pm
So it appears you have $3,055.05 of basis in what is named a Rollover IRA. And your basis has been documented on Form 8606. So yes, it was done correctly. But where to go from here?
The unknown basis appears to be less than $3,055.05 because part of the Roth contribution and the gains that go with it were recharacterized. Only the contribution was non-deductible, not the gains part.

Let's say he was eligible to only contribute $2,500 to Roth but he contributed $5,500. The recharacterization of the excess $3,000 could have brought over $55.05 of gains with it. Since a recharacterization is considered as if the contribution was made to the tIRA instead, the gain would have been pre-tax.

OP, Take your time. Don't feel rushed. If your return has not been filed yet, ask the tax preparer to hold off on filing it. Don't tell Vanguard to do anything yet. We will help you think this through. Please don't act after one person responds. As you can see, we each bring another view to the forum.

OP, Can you tell us how much of the original contribution was recharacterized and how much of its gain went to the tIRA with it? If we all work with the exact numbers, it might be easier to understand. The amount of the contribution that was recharacterized might be the difference between $5,500 and how much room you had left before the AGI phase-out. I say "might be" because you could have rounded up, such as you only had room for a $2555 Roth contribution. But instead of recharacterizing $2,945 ($5,500-$2,555), you might have rounded up to $3,000. In this case, Form 8606, line 14 (the non-deductible part or "basis") should show $3,000 not $3.055.05.
Last edited by celia on Wed Sep 13, 2017 5:48 pm, edited 1 time in total.

retiredjg
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Re: Rollover IRA / Non Deductable IRA

Post by retiredjg » Wed Sep 13, 2017 5:43 pm

celia wrote:The unknown basis appears to be less than $3,055.05 because part of the Roth contribution and the gains that go with it were recharacterized. Only the contribution was non-deductible, not the gains part.
That seems reasonable. I had not thought of that.

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Re: Rollover IRA / Non Deductable IRA

Post by retiredjg » Thu Sep 14, 2017 7:50 am

Alan, help me out with this please.

https://www.irs.gov/pub/irs-pdf/p590a.pdf

From page 33:
  • Contributions Returned Before Due Date of Return

    If you made IRA contributions in 2016, you can withdraw them tax free by the due date of your return. If you have an extension of time to file your return, you can withdraw them tax free by the extended due date. You can do this if, for each contribution you withdraw, both of the following conditions apply.
    • You did not take a deduction for the contribution.

      You withdraw any interest or other income earned on the contribution. You can take into account any loss on the contribution while it was in the IRA when calcu- lating the amount that must be withdrawn. If there was a loss, the net income earned on the contribution may be a negative amount.

    Note. If you timely filed your 2016 tax return without withdrawing a contribution that you made in 2016, you can still have the contribution returned to you within 6 months of the due date of your 2016 tax return, excluding exten- sions. If you do, file an amended return with “Filed pur- suant to section 301.9100-2” written at the top. Report any related earnings on the amended return and include an explanation of the withdrawal. Make any other necessary changes on the amended return (for example, if you re- ported the contributions as excess contributions on your original return, include an amended Form 5329 reflecting that the withdrawn contributions are no longer treated as having been contributed).
    In most cases, the net income you must withdraw is de- termined by the IRA trustee or custodian. If you need to determine the applicable net income on IRA contributions made after 2016 that are returned to you, use Worksheet 1-4 later. See Regulations section 1.408-11 for more infor- mation.


Here's my question. The first paragraph says you can withdraw by due date or the date of the extension if you filed for one. Then later on in the last paragraph starting with Note it says you have an extra 6 months anyway.

What is the difference in the two situations? I'm missing something.

dskillz1
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Re: Rollover IRA / Non Deductable IRA

Post by dskillz1 » Thu Sep 14, 2017 11:12 am

OK so assuming I simply keep things the way they are with the recharacterization into my tIRA, what needs to be done in the future regarding the 8606 form? Assuming I never ever contribute anything to this tIRA do I need to fill out the 8606 form every year for the little amount that I contributed to it or was this year the only one needed? Also because I filled out the 8606 for this year I wont get taxed double on the amount when withdrawing in retirement correct? That's the whole purpose of the 8606 right?

kaneohe
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Re: Rollover IRA / Non Deductable IRA

Post by kaneohe » Thu Sep 14, 2017 11:59 am

dskillz1 wrote:
Thu Sep 14, 2017 11:12 am
OK so assuming I simply keep things the way they are with the recharacterization into my tIRA, what needs to be done in the future regarding the 8606 form? Assuming I never ever contribute anything to this tIRA do I need to fill out the 8606 form every year for the little amount that I contributed to it or was this year the only one needed? Also because I filled out the 8606 for this year I wont get taxed double on the amount when withdrawing in retirement correct? That's the whole purpose of the 8606 right?
It would be useful to take a look at F8606 https://www.irs.gov/pub/irs-prior/f8606--2016.pdf
It tells us to fill out each section only if.......................
That means unless you did one of those things you don't file it any more. You will file it again if you ever put more basis into the TIRA but if you never do it again, you will need to file it again when you take a distribution (whether just to withdraw or to make a Roth conversion). That's how you
don't get double taxed.. Note that because you don't have to file it every year, there is a non-zero risk that you may forget about it when you need to file it so perhaps keep a separate file of all your 8606s or at least the latest one which is supposed to reflect everything that went before.

dskillz1
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Re: Rollover IRA / Non Deductable IRA

Post by dskillz1 » Thu Sep 14, 2017 12:15 pm

Ok good deal. I only need to file once more in 20+ years when I take money out. So in 20+ years when its time to take money out of my tIRA I simply file that form again and the recharacterization I put into it in 2017 will not get taxed, that simple?

kaneohe
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Re: Rollover IRA / Non Deductable IRA

Post by kaneohe » Thu Sep 14, 2017 1:36 pm

dskillz1 wrote:
Thu Sep 14, 2017 12:15 pm
Ok good deal. I only need to file once more in 20+ years when I take money out. So in 20+ years when its time to take money out of my tIRA I simply file that form again and the recharacterization I put into it in 2017 will not get taxed, that simple?
Unless you take all the funds out in that 20+ yr, you will need to file that form every yr you withdraw funds because the non-taxable basis can not generally be withdrawn in one lump but only a fraction of it so some of it always remains in the TIRA until you withdraw everything.............unless you take all the taxable funds and put them in a 401K and isolate the non-taxable basis ............basically the prelude to a backdoor Roth.

dskillz1
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Re: Rollover IRA / Non Deductable IRA

Post by dskillz1 » Thu Sep 14, 2017 2:05 pm

So your saying I would be able to take the recharacterization funds in my tIRA now and move them to my 401K eliminating the 8606 for the end of time?

kaneohe
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Re: Rollover IRA / Non Deductable IRA

Post by kaneohe » Thu Sep 14, 2017 2:30 pm

dskillz1 wrote:
Thu Sep 14, 2017 2:05 pm
So your saying I would be able to take the recharacterization funds in my tIRA now and move them to my 401K eliminating the 8606 for the end of time?
Just the opposite.........the "normal"/"regular"funds (and earnings) go there if your 401K will accept them. Then you can convert the basis to Roth at
little to no tax............but don't do anything yet........homework https://thefinancebuff.com/the-backdoor ... ow-to.html but make sure you return here to make sure you understand this thoroughly. Many folks even if they understand what to do seem to get tripped up on the tax reporting.

retiredjg
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Re: Rollover IRA / Non Deductable IRA

Post by retiredjg » Thu Sep 14, 2017 4:24 pm

I think your best bet is to follow Alan's suggestion and remove the IRA contribution for 2016 totally and file a new Form 8606 indicating that you no longer have any basis in IRA. This will get you out from under the Form 8606.

The next best choice to me is to just forget you made the contribution all together and consider the entire IRA to be pre-tax. Yes, you will pay tax on that basis again if you actually withdraw the entire IRA before you die. But if you don't want to pro-rate your taxes each year during retirement, that is what you'd have to do.

...Unless you want to roll your entire IRA except the roughly $3k in basis into a 401k. If you do that, you could convert the basis to Roth IRA.s. That would also eliminate the Form 8606 burden.

dskillz1
Posts: 136
Joined: Sat Feb 07, 2015 10:41 pm

Re: Rollover IRA / Non Deductable IRA

Post by dskillz1 » Fri Sep 15, 2017 7:32 am

So bottom line is that i did the recharachterization of the over contributed roth ira funds into my rollover tIRA correctly to avoid any penalties from the IRS correct?

My only issue now is that if i leave things the way they are i will need to file an 8606 every year i withdraw money from my tIRA in 20 years or risk paying tax twice on the 3K added from the recharacterization?

Is that accurate?

retiredjg
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Re: Rollover IRA / Non Deductable IRA

Post by retiredjg » Fri Sep 15, 2017 7:36 am

That is my understanding of what you have told us.

kaneohe
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Re: Rollover IRA / Non Deductable IRA

Post by kaneohe » Fri Sep 15, 2017 8:12 am

dskillz1 wrote:
Fri Sep 15, 2017 7:32 am
.......................................................................

My only issue now is that if i leave things the way they are i will need to file an 8606 every year i withdraw money from my tIRA in 20 years or risk paying tax twice on the 3K added from the recharacterization?

Is that accurate?
You need to file 8606 every yr you withdraw money from TIRA period........there is no 20 yr limitation.
Suggest you actually go thru an example withdrawal on 8606. You can sit and think about it and the problem seems to get worse every time you
think about it. However if you actually go thru an example, you will find that it gets easier each time and it is actually pretty simple because
the form guides you through it........might take 5 min.

dskillz1
Posts: 136
Joined: Sat Feb 07, 2015 10:41 pm

Re: Rollover IRA / Non Deductable IRA

Post by dskillz1 » Fri Sep 15, 2017 2:15 pm

Understood. Ill just file the 8606 when I withdraw funds which wont be for another 20 years anyway so I got time. Thanks again everyone!

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