Verifying basis in Roth, and 5-yr rule

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AdamP
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Verifying basis in Roth, and 5-yr rule

Post by AdamP »

Two, hopefully, simple questions:
  • First, I want to verify the number that goes on 8606 line 22. Is this just simply the sum of all contributions/conversions/rollovers minus withdrawals before the current tax year?
  • Second, the Roth has been open for > 10yrs, and there are rollovers that happened starting 10 years ago. Am I correct in reading that the rollovers that have been in longer than 5 yrs are available for withdrawal? (I'm not asking about the wisdom of doing this)
*I have a spreadsheet and supporting documentation of all money in/out of my Roth, but looking back it appears H&R Block has been miscalculating my Roth basis for years on both 8606 and the "IRA Worksheet" (and I've been using them as long as I've been contributing, converting, and mega-backdoor-rolling-over, so they have all the numbers :oops: ).
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Re: Verifying basis in Roth, and 5-yr rule

Post by Alan S. »

AdamP wrote: Fri Mar 15, 2019 10:24 pm Two, hopefully, simple questions:
  • First, I want to verify the number that goes on 8606 line 22. Is this just simply the sum of all contributions/conversions/rollovers minus withdrawals before the current tax year?
  • Second, the Roth has been open for > 10yrs, and there are rollovers that happened starting 10 years ago. Am I correct in reading that the rollovers that have been in longer than 5 yrs are available for withdrawal? (I'm not asking about the wisdom of doing this)
*I have a spreadsheet and supporting documentation of all money in/out of my Roth, but looking back it appears H&R Block has been miscalculating my Roth basis for years on both 8606 and the "IRA Worksheet" (and I've been using them as long as I've been contributing, converting, and mega-backdoor-rolling-over, so they have all the numbers :oops: ).
Yes, that is what goes on line 22, adjusted for any excess contributions returned or contributions recharacterized. Don't just enter the amount you need to make the distribution non taxable if your basis is higher. We don't know that the IRS wouldn't reduce your basis to the amount you actually show on line 22.

Conversions and Roth rollovers from qualified plans can always be distributed tax free and penalty free if over 5 years for each respective conversion. At that point removing them has the same lack of current tax impact as removal of regular contributions, but you have to show your balance on line 24.

With respect to the discrepancy on the 8606 forms actually filed in the past, if you think you might have to take any more Roth distribution before 59.5, you should probably amend the last couple of 8606 forms. This is rare for Part III, and your exposure ends at 59.5 (unlike Part I issues), but you should make a judgment call based on your estimated need for more distributions before 59.5.
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AdamP
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Re: Verifying basis in Roth, and 5-yr rule

Post by AdamP »

Alan S. wrote: Fri Mar 15, 2019 10:37 pm Yes, that is what goes on line 22, adjusted for any excess contributions returned or contributions recharacterized.
Thank you. Fortunately, no excess contributions or recharacterizations.
Alan S. wrote: Fri Mar 15, 2019 10:37 pm With respect to the discrepancy on the 8606 forms actually filed in the past, if you think you might have to take any more Roth distribution before 59.5, you should probably amend the last couple of 8606 forms.
Ugh. There's only been a few before this year, but I feel like I might as well amend all of them at the same time, and just include all of the supporting documentation since the Roth was opened. The explanation of changes will be fun.

Here's hoping the 8606 for this year doesn't upset them before I get the amendments in.
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Epsilon Delta
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Re: Verifying basis in Roth, and 5-yr rule

Post by Epsilon Delta »

Alan S. wrote: Fri Mar 15, 2019 10:37 pm
AdamP wrote: Fri Mar 15, 2019 10:24 pm Two, hopefully, simple questions:
  • First, I want to verify the number that goes on 8606 line 22. Is this just simply the sum of all contributions/conversions/rollovers minus withdrawals before the current tax year?
Yes, that is what goes on line 22, adjusted for any excess contributions returned or contributions recharacterized. Don't just enter the amount you need to make the distribution non taxable if your basis is higher. We don't know that the IRS wouldn't reduce your basis to the amount you actually show on line 22.

With respect to the discrepancy on the 8606 forms actually filed in the past,
I think you need to reconsider your answer.

The instructions are very clear that conversions from a tIRA to a Roth IRA do not belong on line 22, but go on line 24 instead. AFAICT most other conversions also go on line 24. This may or may not explain the discrepancies the OP has perceived.

Line 22 is total contributions to Roth IRAs plus rollover of contributions from qualified plans (e.g. 401k) less any withdrawals attributed to contributions. Plus some other stuff that should be fairly rare and the OP will want to check to make sure it does not apply.
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AdamP
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Re: Verifying basis in Roth, and 5-yr rule

Post by AdamP »

Epsilon Delta wrote: Wed Mar 20, 2019 11:49 am The instructions are very clear that conversions from a tIRA to a Roth IRA do not belong on line 22, but go on line 24 instead. AFAICT most other conversions also go on line 24. This may or may not explain the discrepancies the OP has perceived.
After I posted, I spent more time pouring over the instructions for 8606, and noticed the line 24 "split". However, there are some edge cases that the instructions don't seem to cover.

Here's how I read the instructions now:
Line 22: Total of all regular contributions minus total of all withdrawals (up to total of all regular contributions).
Line 24: Total of all conversions minus total of all withdrawals exceeding all regular contributions.

However, where the directions are less clear is rollovers. Line 22 clearly says nothing about rollovers or rollover contributions. However line 24 does cover "rollovers from qualified retirement plans" (but it and the worksheet don't specify pre/post tax sources). Be that as it may, I can see two different ways that line 22 and 24 should be conceptualized:

Line 22: the already after-tax contributions (regular or after-tax rollover (Roth to Roth, Roth401k to RothIRA, and AfterTax401k to RothIRA))
Line 24: the pre-tax conversions/rollovers (tIRA to Roth, or t401k to Roth)

OR

Line 22: only the normal after-tax contributions to Roth
Line 24: everything else
Last edited by AdamP on Wed Mar 20, 2019 1:06 pm, edited 1 time in total.
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Re: Verifying basis in Roth, and 5-yr rule

Post by RickBoglehead »

AdamP wrote: Fri Mar 15, 2019 10:44 pm Ugh. There's only been a few before this year, but I feel like I might as well amend all of them at the same time, and just include all of the supporting documentation since the Roth was opened. The explanation of changes will be fun.
Note that amended returns must be filed within 3 years from the date you file the original return, or within two years of the date you paid the tax, whichever is later. So, you shouldn't be filing an amended return for 2014 for example. Or back to when your ROTH was opened.
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AdamP
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Re: Verifying basis in Roth, and 5-yr rule

Post by AdamP »

RickBoglehead wrote: Wed Mar 20, 2019 1:06 pm Note that amended returns must be filed within 3 years from the date you file the original return, or within two years of the date you paid the tax, whichever is later.
When I read the amended return directions, it seemed to indicate that there was no point in filing them if you were hoping for additional money back from the IRS after 3 years. Not that you couldn't file them.

In this case, the 8606 amendments have zero affect on the taxes owed or paid, in my case. However, if I only need to amend the previous two returns, or if I also need to amend a return from about 10 years ago, depends on the 8606 Line 22/24 differences (and if line 24 must always be filled in, or if line 24 can be skipped if there is still basis left - as H&R Block seems to think).
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Re: Verifying basis in Roth, and 5-yr rule

Post by RickBoglehead »

AdamP wrote: Wed Mar 20, 2019 1:09 pm
RickBoglehead wrote: Wed Mar 20, 2019 1:06 pm Note that amended returns must be filed within 3 years from the date you file the original return, or within two years of the date you paid the tax, whichever is later.
When I read the amended return directions, it seemed to indicate that there was no point in filing them if you were hoping for additional money back from the IRS after 3 years. Not that you couldn't file them.

In this case, the 8606 amendments have zero affect on the taxes owed or paid, in my case. However, if I only need to amend the previous two returns, or if I also need to amend a return from about 10 years ago, depends on the 8606 Line 22/24 differences (and if line 24 must always be filled in, or if line 24 can be skipped if there is still basis left - as H&R Block seems to think).
I won't pretend to have any expertise on how to accomplish what your'e trying to accomplish, but I'd suggest that if the goal is to adjust the basis in your IRA for the IRS, there must be an easier way. And, unless you have non-deductible contributions to an IRA, my understanding as a non-expert is that you don't have a basis unless you've made non-deductible contributions, and there is nothing for the IRS to track.

IANAIE (I am not an IRA expert :D )
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AdamP
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Re: Verifying basis in Roth, and 5-yr rule

Post by AdamP »

RickBoglehead wrote: Wed Mar 20, 2019 1:28 pm I'd suggest that if the goal is to adjust the basis in your IRA for the IRS, there must be an easier way.
Since a withdrawal from my Roth in 2019 will finally exceed the basis of regular contributions, I need to figure out the line 22/24 nuances, and I feel like I need to amend the 8606s (since each points back to the previous 8606).

However, as you point out, there must be an easier way. And I have a feeling that a 1040X is overkill (since there is no change to the taxes for those years). But I do want to correct the 8606s, to avoid the issue of the 2018 8606 numbers not matching 2017 (and so on). The good thing is it's only like 4 lines on (4) 8606s, and I'll probably throw in all of the 5498s for good measure.
RickBoglehead wrote: Wed Mar 20, 2019 1:28 pm And, unless you have non-deductible contributions to an IRA, my understanding as a non-expert is that you don't have a basis unless you've made non-deductible contributions, and there is nothing for the IRS to track.
I believe this is only true for traditional IRAs. Roth IRA basis is calculated in part 3 of 8606. My traditional IRA only contains money rolled over from traditional 401ks, and I have no plan to ever contribute directly to it.
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Re: Verifying basis in Roth, and 5-yr rule

Post by Alan S. »

Epsilon Delta wrote: Wed Mar 20, 2019 11:49 am
Alan S. wrote: Fri Mar 15, 2019 10:37 pm
AdamP wrote: Fri Mar 15, 2019 10:24 pm Two, hopefully, simple questions:
  • First, I want to verify the number that goes on 8606 line 22. Is this just simply the sum of all contributions/conversions/rollovers minus withdrawals before the current tax year?
Yes, that is what goes on line 22, adjusted for any excess contributions returned or contributions recharacterized. Don't just enter the amount you need to make the distribution non taxable if your basis is higher. We don't know that the IRS wouldn't reduce your basis to the amount you actually show on line 22.

With respect to the discrepancy on the 8606 forms actually filed in the past,
I think you need to reconsider your answer.

The instructions are very clear that conversions from a tIRA to a Roth IRA do not belong on line 22, but go on line 24 instead. AFAICT most other conversions also go on line 24. This may or may not explain the discrepancies the OP has perceived.

Line 22 is total contributions to Roth IRAs plus rollover of contributions from qualified plans (e.g. 401k) less any withdrawals attributed to contributions. Plus some other stuff that should be fairly rare and the OP will want to check to make sure it does not apply.
Yes, while I did state that conversions go on line 24, I overlooked that the OP proposed including conversions on line 22 and conversions go on 24, not 22. Copied from that same post:
Conversions and Roth rollovers from qualified plans can always be distributed tax free and penalty free if over 5 years for each respective conversion. At that point removing them has the same lack of current tax impact as removal of regular contributions, but you have to show your balance on line 24.
However, the 8606 Inst for lines 22 and 24 and the following IRS Reg https://www.law.cornell.edu/cfr/text/26/1.408A-10 were never updated to incorporate in plan Roth rollovers (IRRs) rolled into a Roth IRA. Despite the IRRs being part of the "investment in the contract" in the Roth 401k, these amounts should go on line 24 of Form 8606, not on 22.

A qualified rollover contribution from the pre tax portion of a 401k to a Roth IRA including the so called mega back door conversion should be reported on line 24 of Form 8606. All of these line 24 amounts come out of the Roth IRA under the ordering rules and to further complicate things, Roth conversions, qualified rollover contributions, and direct rollovers from a Roth 401k all go into the 5 year queue for purposes of determining which pre tax amounts are subject to the 10% recapture tax prior to 59.5.

Therefore, if you are rolling multiple portions of a qualified plan into your Roth IRA as well as ordinary TIRA to Roth conversions, you have some complicated accounting rules and tracking work to be done should you ever take a non qualified Roth IRA distribution.
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Re: Verifying basis in Roth, and 5-yr rule

Post by AdamP »

Alan S. wrote: Wed Mar 20, 2019 2:00 pm A qualified rollover contribution from the pre tax portion of a 401k to a Roth IRA including the so called mega back door conversion should be reported on line 24 of Form 8606. All of these line 24 amounts come out of the Roth IRA under the ordering rules and to further complicate things, Roth conversions, qualified rollover contributions, and direct rollovers from a Roth 401k all go into the 5 year queue for purposes of determining which pre tax amounts are subject to the 10% recapture tax prior to 59.5.
Alan, to make sure I understand you correctly, let me repeat back what I understood.

(This doesn't include any withdrawals, only the amount added to the Roth IRA)
Line 22: Sum of all regular (post tax) contributions
Line 24: Sum of all: traditionalIRA-to-RothIRA conversions, (traditional+Roth+After Tax)401k-to-RothIRA rollovers.

And the sum of withdrawals is first taken from the basis on Line 22. Once that is brought down to zero, the remaining withdrawals then carry over to Line 24. This assumes the total of withdrawals does not exceed the contributions + 5-yr rule "contributions".
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Re: Verifying basis in Roth, and 5-yr rule

Post by Alan S. »

AdamP wrote: Wed Mar 20, 2019 1:01 pm
Epsilon Delta wrote: Wed Mar 20, 2019 11:49 am The instructions are very clear that conversions from a tIRA to a Roth IRA do not belong on line 22, but go on line 24 instead. AFAICT most other conversions also go on line 24. This may or may not explain the discrepancies the OP has perceived.
After I posted, I spent more time pouring over the instructions for 8606, and noticed the line 24 "split". However, there are some edge cases that the instructions don't seem to cover.

Here's how I read the instructions now:
Line 22: Total of all regular contributions minus total of all withdrawals (up to total of all regular contributions).
Line 24: Total of all conversions minus total of all withdrawals exceeding all regular contributions.

However, where the directions are less clear is rollovers. Line 22 clearly says nothing about rollovers or rollover contributions. However line 24 does cover "rollovers from qualified retirement plans" (but it and the worksheet don't specify pre/post tax sources). Be that as it may, I can see two different ways that line 22 and 24 should be conceptualized:

Line 22: the already after-tax contributions (regular or after-tax rollover (Roth to Roth, Roth401k to RothIRA, and AfterTax401k to RothIRA))
Line 24: the pre-tax conversions/rollovers (tIRA to Roth, or t401k to Roth)

OR

Line 22: only the normal after-tax contributions to Roth
Line 24: everything else
The first conceptualization is fairly close, but not the second.

Line 22 are amounts that are to be treated as if they were regular Roth IRA contributions in the first place. They are first out of the Roth IRA under the ordering rules.

Line 24 are amounts that are treated as if they were Roth conversions, and come out of the Roth IRA in order of the oldest year first, and for each such year the taxable amounts first. These taxable amounts are subject to the 10% recapture tax if withdrawn before 5 years is completed, unless you are 59.5 or qualify for another penalty exception.

My prior post explains how the 8606 Inst, the IRS Regs, and Pub 590 B have not been updated to address rolling over a NQ Roth 401k with an IRR in it to a Roth IRA. Those IRRs would go on line 24, so treated as if they were Roth conversions with the same 5 year holding period. Of course, if you are doing a mega back door Roth where your IRRs (or rollovers to a Roth IRA) are 99% after tax, the 10% recapture only applies to the sliver of gains on that mostly non taxable IRR.

Note that this 10% tax is glossed over on Form 8606 and the Inst, and is a parallel issue to the ordinary tax issues addressed by Form 8606. More detailed info on this is in the Form 5329 Inst.
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Re: Verifying basis in Roth, and 5-yr rule

Post by AdamP »

Alan S. wrote: Wed Mar 20, 2019 2:21 pm Line 22 are amounts that are to be treated as if they were regular Roth IRA contributions in the first place. They are first out of the Roth IRA under the ordering rules.
I'm on the same page with you there, as I understand the ordering rules. Which, yes, also apply to the 8606 amounts, but I don't see how that's pertinent, as regular contributions are first, and are on line 22--which is subtracted from before line 24.
But you lost me here:
Alan S. wrote: Wed Mar 20, 2019 2:21 pm The first conceptualization is fairly close, but not the second.
As it seems to contradict my re-wording of your earlier post
AdamP wrote: Wed Mar 20, 2019 2:10 pm Line 22: Sum of all regular (post tax) contributions
Line 24: Sum of all: traditionalIRA-to-RothIRA conversions, (traditional+Roth+After Tax)401k-to-RothIRA rollovers.
Alan S. wrote: Wed Mar 20, 2019 2:21 pm Of course, if you are doing a mega back door Roth where your IRRs (or rollovers to a Roth IRA) are 99% after tax, the 10% recapture only applies to the sliver of gains on that mostly non taxable IRR.
I had $0 in gains in all of my mega back door roth "moments" (purposefully invested in money market in 401k and quickly moved money to the Roth), so this isn't an issue for me. But it might be for others.
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Re: Verifying basis in Roth, and 5-yr rule

Post by Alan S. »

AdamP wrote: Wed Mar 20, 2019 2:10 pm
Alan S. wrote: Wed Mar 20, 2019 2:00 pm A qualified rollover contribution from the pre tax portion of a 401k to a Roth IRA including the so called mega back door conversion should be reported on line 24 of Form 8606. All of these line 24 amounts come out of the Roth IRA under the ordering rules and to further complicate things, Roth conversions, qualified rollover contributions, and direct rollovers from a Roth 401k all go into the 5 year queue for purposes of determining which pre tax amounts are subject to the 10% recapture tax prior to 59.5.
Alan, to make sure I understand you correctly, let me repeat back what I understood.

(This doesn't include any withdrawals, only the amount added to the Roth IRA)
No, the line 22 and 24 amounts that would otherwise exist must be reduced by withdrawals taken including any recharacterizations out.

Line 22: Sum of all regular (post tax) contributions
Example: Combined contributions of 50k, and prior year distributions of 5k, your line 22 would show 45k, which is your remaining basis.

Line 24: Sum of all: traditionalIRA-to-RothIRA conversions, (traditional+Roth+After Tax)401k-to-RothIRA rollovers.

You would also reduce these amounts by Roth IRA distributions of such conversions in the past. Note that direct rollovers from a NQ Roth 401k will mostly go on line 22 (Roth elective deferrals). IRRs would go on 24, and gains would go nowhere. If the entire Roth 401k was qualified, the entire amount distributed would then go on 22 and be treated as if it was a regular Roth IRA contribution.

And the sum of withdrawals is first taken from the basis on Line 22. Once that is brought down to zero, the remaining withdrawals then carry over to Line 24. This assumes the total of withdrawals does not exceed the contributions + 5-yr rule "contributions".

Correct. Lines 22 and 24 are collectively considered as Roth IRA basis. Once all the basis is gone, the only thing left are earnings which are subject to tax plus penalty. Now something simple - once your Roth IRA is itself qualified, no matter what was rolled into it is also qualified and the entire Roth IRA can be distributed tax free. Form 8606 is no longer needed and distributions go directly on Form 1040, line 4a.
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Re: Verifying basis in Roth, and 5-yr rule

Post by Alan S. »

I'll take a pause here to let some time pass so all posts can be reviewed.
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Re: Verifying basis in Roth, and 5-yr rule

Post by AdamP »

Alan S. wrote: Wed Mar 20, 2019 2:38 pm I'll take a pause here to let some time pass so all posts can be reviewed.
Yeah, I realized with your penultimate post that something I wrote earlier looks like a source of confusion. Here's the post:
Alan S. wrote: Wed Mar 20, 2019 2:34 pm
AdamP wrote: Wed Mar 20, 2019 2:10 pm Alan, to make sure I understand you correctly, let me repeat back what I understood.

(This doesn't include any withdrawals, only the amount added to the Roth IRA)
Line 22: Sum of all regular (post tax) contributions
Line 24: Sum of all: traditionalIRA-to-RothIRA conversions, (traditional+Roth+After Tax)401k-to-RothIRA rollovers.
No, the line 22 and 24 amounts that would otherwise exist must be reduced by withdrawals taken including any recharacterizations out.
I didn't mean that Lines 22 and 24 don't include withdrawals. I was attempting to simplify the discussion to just what was added to Line 22 and 24. I should've been more clear in my wording of the parenthetical statement.


Let me try this again, with the additional information I gleaned from your subsequent posts. This time I will include everything, with the following caveats:
  • Sources: regular contributions, Roth401k rollovers (elective deferrals and gains), AfterTax401k rollovers ($0 in gains), tIRA conversions.
  • Withdrawals: Assume any that exceed regular contributions follow the ordering rules and 5-yr requirements.
  • Otherwise: nothing else went in/out, i.e. no recharacterization, and I'm nowhere near 59.5 (so nothing is qualified, as I understand it).
Line 22: Sum of all regular contributions and all Roth401k elective deferrals rolled over, minus all withdrawals up to the point that this value becomes $0.
Line 24: Sum of all conversions (tIRA), Roth401k gains that were rolled over, AfterTax401k deferrals that were rolled over (again, no gains), minus the sum of any withdrawals remaining (i.e. that were "cut off" from Line 22).
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Re: Verifying basis in Roth, and 5-yr rule

Post by Epsilon Delta »

Alan S. wrote: Wed Mar 20, 2019 2:00 pm Yes, while I did state that conversions go on line 24, I overlooked that the OP proposed including conversions on line 22 and conversions go on 24, not 22. Copied from that same post:
Conversions and Roth rollovers from qualified plans can always be distributed tax free and penalty free if over 5 years for each respective conversion. At that point removing them has the same lack of current tax impact as removal of regular contributions, but you have to show your balance on line 24.
Yes, you did say that. Sorry if I over edit.
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Re: Verifying basis in Roth, and 5-yr rule

Post by Epsilon Delta »

AdamP wrote: Wed Mar 20, 2019 2:10 pm And the sum of withdrawals is first taken from the basis on Line 22. Once that is brought down to zero, the remaining withdrawals then carry over to Line 24. This assumes the total of withdrawals does not exceed the contributions + 5-yr rule "contributions".
Assuming you mean 5-year rule "conversions". Form 8606 only figures the taxable amount of withdrawal. All withdrawals attributed to conversions are tax free so form 8606 treats all conversions the same. The 10% penalty splits off at line 23 and continues to Form 5329 and instructions, which figure out is subject to the 10% penalty (the part attributed to conversion that were taxed less than five years ago) That is another fine kettle of fish.
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Re: Verifying basis in Roth, and 5-yr rule

Post by AdamP »

Epsilon Delta wrote: Thu Mar 21, 2019 12:10 am Assuming you mean 5-year rule "conversions". Form 8606 only figures the taxable amount of withdrawal. All withdrawals attributed to conversions are tax free so form 8606 treats all conversions the same. The 10% penalty splits off at line 23 and continues to Form 5329 and instructions, which figure out is subject to the 10% penalty (the part attributed to conversion that were taxed less than five years ago)
Well, I used contributions in quotes because, as I understand from Alan's posts, line 24 (the "conversion" totals minus withdrawals in excess of contributions), includes all other sources of Roth basis increases apart from regular contributions and rolled over Roth401k elective deferrals. And, again from my understanding of Alan's posts, anything that falls into a "line 24 basis increase" has a 5-yr waiting period attached to it.

I'm hoping that Alan will respond to corrected line 22/24 summary I created above.
AdamP wrote: Wed Mar 20, 2019 3:30 pm Yeah, I realized with...
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