Filing 8606 - Complex case

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Xirxi
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Filing 8606 - Complex case

Post by Xirxi » Mon Mar 11, 2019 4:23 pm

Hello All,

I made my first non-deductable contribution of $5500 to traditional IRA in 2017 . In 2018, its value dropped to $4900 and I converted it to Roth IRA before the end of 2018. So my balance was zero for traditional IRA at the end of 2018. I made my 2018 non deductable IRA contribution of 5500$ in 2019. I really got confused about how to file 8606. Your help is appreciated.

Thanks

cashheavy18
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Re: Filing 8606 - Complex case

Post by cashheavy18 » Mon Mar 11, 2019 4:46 pm

If you are using TurboTax to file, I found this step by step, extremely helpful:

https://thefinancebuff.com/how-to-repor ... botax.html

kaneohe
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Re: Filing 8606 - Complex case

Post by kaneohe » Mon Mar 11, 2019 7:23 pm

Have you tried filling out the form manually https://www.irs.gov/pub/irs-prior/f8606--2018.pdf
using the instructions on the form and in the form instructions https://www.irs.gov/pub/irs-pdf/i8606.pdf

That eliminates the thinking and reduces this to a step-by-step fill in the form exercise which may be less confusing.

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FiveK
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Re: Filing 8606 - Complex case

Post by FiveK » Mon Mar 11, 2019 8:09 pm

See also the 'Form8606' tab in the Personal finance toolbox spreadsheet.

If you get the same answer using all the approaches mentioned so far, there is a good chance it is the correct answer.

Topic Author
Xirxi
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Re: Filing 8606 - Complex case

Post by Xirxi » Tue Mar 12, 2019 3:13 am

Thank you for your answers. Yes, I did try to fill out the form manually. So, this is what I got, but not sure. Do you think that this is the correct way for the case I explained before?

1 - 5500
2 - 5500
3 - 11000
4 - 5500
5 - 5500
6 - 0
7 - 0
8 - 4900
9 - 4900
10 - 1.000
11 - 4900
12 - 0
13 - 4900
14 - 6100
15a - 0
15b - 0
15c - 0
16 - 4900
17 - 4900
18 - 0

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celia
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Re: Filing 8606 - Complex case

Post by celia » Tue Mar 12, 2019 5:33 am

Your numbers are perfect, assuming you reported the 2017 nondeductible contribution for 2017 on your 2017 return.

If you now need to use tax software to file your 2018 taxes, first enter the 2018 non-deductible contribution you made this year Then report the $4,900 Roth conversion you made in 2018. Then check the Form 8606 that gets generated by the tax software to see if it matches these numbers you listed above.

This will be easier to comprehend if you contribute and convert in the same year. Now that you've contributed for 2018, go ahead and convert it now. As soon as you have $7,000 available to contribute for 2019, make another nondeductible contribution and convert it soon after. If you need to wait to see what your 2019 wages or AGI is before making a contribution, contribute and convert early next year.
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.

kaneohe
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Re: Filing 8606 - Complex case

Post by kaneohe » Tue Mar 12, 2019 11:06 am

Pretty good for a first try (unless you're a sandbagger :happy ) It's a useful skill to have to check on software.......based on the number
of threads here about software going astray, it seems to be pretty easy to go wrong since the human/software interface seems not to be very robust. Looks like you did a goog thing converting when values were lower.........now it looks like you have some "extra" basis in there to shelter conversions/withdrawals.

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celia
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Re: Filing 8606 - Complex case

Post by celia » Tue Mar 12, 2019 1:00 pm

celia wrote:
Tue Mar 12, 2019 5:33 am
Now that you've contributed for 2018, go ahead and convert it now.
I forgot one thing. Since you have an extra $600 in basis from the loss, don't convert everything until you use up that loss. Leave $100 or $20 in the traditional IRA until you can use up the remaining basis or you may lose it.

You can use it up by having a deductible $600 contribution which you then convert for free or moving at least $600 from a 401K to your traditional IRA and converting it. In other words, you can convert $600 without owing any taxes as long as you have that much basis remaining.

That's another reason you should convert right after making the contribution. No need to make this any more complicated than it inherently is.
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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FiveK
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Re: Filing 8606 - Complex case

Post by FiveK » Tue Mar 12, 2019 1:45 pm

Or make a $6000 contribution to the tIRA for 2019, and leave it and the $5500 2018 contribution in the tIRA until there has been $600 of growth. Then convert everything to Roth.

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Epsilon Delta
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Re: Filing 8606 - Complex case

Post by Epsilon Delta » Tue Mar 12, 2019 2:30 pm

FiveK wrote:
Tue Mar 12, 2019 1:45 pm
Or make a $6000 contribution to the tIRA for 2019, and leave it and the $5500 2018 contribution in the tIRA until there has been $600 of growth. Then convert everything to Roth.
This is no better than converting immediately and deliberately ignoring the carry over of the excess basis.

There has been some disagreement as to what happens to the excess basis in various circumstances. Almost everybody agrees that if you leave a few bucks in traditional at all times it should carry forward. However I bet that if you do not pay strict attention and let somebody or something else (e.g. TurboTax) prepare your returns then sooner or later you will come across a situation where they drop the excess.

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FiveK
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Re: Filing 8606 - Complex case

Post by FiveK » Tue Mar 12, 2019 3:18 pm

Epsilon Delta wrote:
Tue Mar 12, 2019 2:30 pm
FiveK wrote:
Tue Mar 12, 2019 1:45 pm
Or make a $6000 contribution to the tIRA for 2019, and leave it and the $5500 2018 contribution in the tIRA until there has been $600 of growth. Then convert everything to Roth.
This is no better than converting immediately and deliberately ignoring the carry over of the excess basis.
Huh?

What's wrong with tax free growth in the tIRA and tax free conversion from the tIRA to Roth?

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Epsilon Delta
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Re: Filing 8606 - Complex case

Post by Epsilon Delta » Tue Mar 12, 2019 3:46 pm

FiveK wrote:
Tue Mar 12, 2019 3:18 pm
Epsilon Delta wrote:
Tue Mar 12, 2019 2:30 pm
FiveK wrote:
Tue Mar 12, 2019 1:45 pm
Or make a $6000 contribution to the tIRA for 2019, and leave it and the $5500 2018 contribution in the tIRA until there has been $600 of growth. Then convert everything to Roth.
This is no better than converting immediately and deliberately ignoring the carry over of the excess basis.
Huh?

What's wrong with tax free growth in the tIRA and tax free conversion from the tIRA to Roth?
Nothing, but if you convert earlier without waiting for growth you get the same $600 of growth tax free in the Roth instead, and some leftover basis.

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FiveK
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Re: Filing 8606 - Complex case

Post by FiveK » Tue Mar 12, 2019 4:05 pm

Epsilon Delta wrote:
Tue Mar 12, 2019 3:46 pm
FiveK wrote:
Tue Mar 12, 2019 3:18 pm
Epsilon Delta wrote:
Tue Mar 12, 2019 2:30 pm
FiveK wrote:
Tue Mar 12, 2019 1:45 pm
Or make a $6000 contribution to the tIRA for 2019, and leave it and the $5500 2018 contribution in the tIRA until there has been $600 of growth. Then convert everything to Roth.
This is no better than converting immediately and deliberately ignoring the carry over of the excess basis.
Huh?

What's wrong with tax free growth in the tIRA and tax free conversion from the tIRA to Roth?
Nothing, but if you convert earlier without waiting for growth you get the same $600 of growth tax free in the Roth instead, and some leftover basis.
Agreed. People may decide which of the ~equivalent paths fits their record keeping preferences.

cherijoh
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Re: Filing 8606 - Complex case

Post by cherijoh » Tue Mar 12, 2019 4:11 pm

Xirxi wrote:
Mon Mar 11, 2019 4:23 pm
Hello All,

I made my first non-deductable contribution of $5500 to traditional IRA in 2017 . In 2018, its value dropped to $4900 and I converted it to Roth IRA before the end of 2018. So my balance was zero for traditional IRA at the end of 2018. I made my 2018 non deductable IRA contribution of 5500$ in 2019. I really got confused about how to file 8606. Your help is appreciated.

Thanks
Did you file a form 8606 for the 2017 tax year? You should have and can still do so. Only the section determining your non-taxable basis would need to be filled out for 2017.

Then you would use the data from the 2017 form for filling out the same form for 2018. This time you would fill out the section on Roth conversions and figuring out the tax on the conversion. If that was the only traditional IRA you own then you shouldn't owe any taxes on the conversion in 2018.

You also would need to calculate your carry-forward basis. Since you converted less than the amount that was your basis, I'm pretty sure the remainder is still available for future conversions. I haven't experienced this myself, but I'm pretty sure Alan S. posted about this in another Boglehead thread.

cherijoh
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Re: Filing 8606 - Complex case

Post by cherijoh » Tue Mar 12, 2019 4:20 pm

FiveK wrote:
Tue Mar 12, 2019 4:05 pm
Epsilon Delta wrote:
Tue Mar 12, 2019 3:46 pm
FiveK wrote:
Tue Mar 12, 2019 3:18 pm
Epsilon Delta wrote:
Tue Mar 12, 2019 2:30 pm
FiveK wrote:
Tue Mar 12, 2019 1:45 pm
Or make a $6000 contribution to the tIRA for 2019, and leave it and the $5500 2018 contribution in the tIRA until there has been $600 of growth. Then convert everything to Roth.
This is no better than converting immediately and deliberately ignoring the carry over of the excess basis.
Huh?

What's wrong with tax free growth in the tIRA and tax free conversion from the tIRA to Roth?
Nothing, but if you convert earlier without waiting for growth you get the same $600 of growth tax free in the Roth instead, and some leftover basis.
Agreed. People may decide which of the ~equivalent paths fits their record keeping preferences.
I don't think they are equivalent paths if the OP gets to reclaim the excess basis. For example, in the future the OP might roll over his/her traditional tax-deferred 401k and the excess basis could be used to reduce the tax on a Roth conversion of a portion of the otherwise taxable amount.

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FiveK
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Re: Filing 8606 - Complex case

Post by FiveK » Tue Mar 12, 2019 4:50 pm

cherijoh wrote:
Tue Mar 12, 2019 4:20 pm
I don't think they are equivalent paths if the OP gets to reclaim the excess basis.
Agreed - that's why the tilde preceded equivalent.
For example, in the future the OP might roll over his/her traditional tax-deferred 401k and the excess basis could be used to reduce the tax on a Roth conversion of a portion of the otherwise taxable amount.
Yes. Or, if there is a market drop anytime soon, the OP could do a form of "tax loss harvesting" by converting then, thus having even more basis left "in" the tIRA.

For someone ineligible to make direct Roth contributions due to high income, qualitative issues may be of ~equal importance as the expected tax savings on a $600 basis.

Topic Author
Xirxi
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Re: Filing 8606 - Complex case

Post by Xirxi » Wed Mar 13, 2019 4:02 pm

Thank you All for your responses. Now it is crystal clear for me.

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