Long time reader...first time poster. My apologies if this is an oft-repeated question.
This is probably a very simple problem, but I just want to make sure I am doing everything right. I am planning to start doing backdoor Roth IRA contributions in 2020 due my income being too high for regular contributions. I currently have a Traditional IRA that I am planning to roll into my employer 401k(it has access to good funds) in 2020.
That Traditional IRA I have is my only one and it consists solely of rollover pre-tax 401k's. I have made no contributions to the Traditional IRA and I also have no SEP or Simple IRAs. Once I move this Traditional IRA to my 401k I will have $0 left in my Traditional IRA. I will then do the Traditional IRA contribution and conversion to Roth in 2020. My plan will be to have $0 in my Traditional IRA as of 12/31/20. The limit is 6K as a total combined contribution to Traditional and Roth IRAs in 2020, correct?
My question is what goes on line 2 'enter your total basis in traditional IRAs' on my 2020 form 8606? I have never had to fill out 8606 before. The entry on line 2 of the 2020 form 8606 should be 0(zero) correct? Is line 2 on the 2020 form 8606 asking for basis in 2019 and prior years? The 2020 form 8606 Line 14 would be the basis to use on the 2021 form 8606 line 2(which if all goes well should still be 0)?
The answer seems obvious even when I am writing this, but as I said I just want to confirm my understanding. I have read the wiki on here and some other sites which have been very helpful.. I am always welcome to any general words of advice or caution!
Thanks in advance!
Welcome to the forum. You are very smart to figure this out ahead of time!windowdog wrote: ↑Thu Feb 13, 2020 5:22 pmMy question is what goes on line 2 'enter your total basis in traditional IRAs' on my 2020 form 8606? I have never had to fill out 8606 before. The entry on line 2 of the 2020 form 8606 should be 0(zero) correct? Is line 2 on the 2020 form 8606 asking for basis in 2019 and prior years? The 2020 form 8606 Line 14 would be the basis to use on the 2021 form 8606 line 2(which if all goes well should still be 0)?
You are correct that the first time you do this, your basis will be $0. Yes, line 2 on the 2020 form is asking for basis from the past. You will not have any basis from the past.
And yes, 2020 line 14 flows to the 2021 line 2....but both of those should be $0 if you convert the whole thing in 2020 and check back a few months later to be sure no pennies have shown up in the account later.
I understand that deductible contributions do not count towards the basis, but I just want to be clear I made no contributions at all. The only money that entered the Traditional IRA is from pretax 401k rollover money.
Sorry to be redundant I just want to be clear I understand this topic!
That fact that you made no contributions at all is not really relevant to this question of basis. It might matter to the 401k plan that you are going to roll this IRA into.
Did that help?
Also, I know I said this already but this is my only Traditional IRA(and I will empty it all into my 401k). I have no SEP or Simple IRA. I also have no taxable account. Are taxable accounts related at all to being able to do backdoor Roth IRA conversions?
Just be totally sure that your prior 401k rollovers were 100% pre tax. There is a slim chance that a prior rollover (particularly pre Notice 2014-54 rollovers) might have contained some after tax money, but it is worth checking.
If so, that after tax money should be shown on line 2 of Form 8606, AND you cannot roll that balance back into your current employer plan.
People tend to forget this happened in many cases. Two reasons for this are:
1) IRS instructions indicate that after tax amounts from qualified plan rollovers are not to be reported on Form 8606 until you would otherwise file an 8606. That could be several years after the rollover.
2) After tax money does NOT show up on the 1099R reporting the 401k to IRA direct rollover. Box 2a will be 0 and Box 5 will be blank. Therefore, you have no reminder when you file taxes for the rollover year. You have to get this information from the 401k statements or breakdown of the distribution provided by the plan at the time of the rollover.
Again, you said it was pre tax and you are probably correct. But if there is even the slightest doubt, check the paperwork for the rollovers if you kept it.
No.Are taxable accounts related at all to being able to do backdoor Roth IRA conversions?
The H coded 1099R is a direct rollover from a Roth 401k to a Roth IRA. Box 5 will show the amount of your after tax contributions to the plan. But this thread is discussing a direct rollover from a pre tax 401k to a TIRA, the G coded 1099R. These forms do not break out the pre tax or after tax amounts for direct rollovers (G code), but they do for distributions to you because those are currently taxable. Box 2a will be 0 and Box 5 blank, so the G coded 1099R will not answer this question at all. You would need a copy of the final 401k plan statement of perhaps one shortly before the direct rollover to know if there is any after tax contributions in that plan.
In fact, there could be after tax contributions that you do not intend to be. For example, if you over contribute to the plan or fail to pass certain plan non discrimination tests, some of your pre tax contributions can be recharacterized by the plan to after tax.
That said, I would make a reasonable effort to look for plan statements or try to recall if you over contributed in any past year, but if you are fairly sure none of these events occurred, I would not make a major research project out of it. Just assume the entire rollover was pre tax.
Assuming I determine everything in my current, lone Traditional IRA is pretax money(from rollover pretax 401k's) this would confirm that my IRA basis is 0(zero), correct? There isn't any money that has already been taxed. This would also confirm that my 2020 form 8606 line 2 will be 0(zero), correct? My plan is to transfer all of this Traditional IRA to my 401k in 2020. I would then make a non-deductible contribution to my tIRA in 2020 and convert that to a rIRA in 2020. My tIRA balance on 12/31/20 would be $0.
To confirm the above, my 401k sponsor currently requires that in order to do the roll-in the money must all be pretax, but they do allow roll-ins. So, once again assuming I determine everything in my tIRA is pretax, that roll-in should work out, correct?
Sorry for being so repetitive! Just trying to wrap my head around this. Thanks again for you time Alan and jg!
Let’s assume I make the transfer of my traditional ira to my 401k. I then make my $6000 contribution to my traditional ira shortly after that and put it my money market account. It settles the next day(3/1/20 for example), its value doesn’t change from the $6000, and I convert it to Roth on 3/1/20.
What do I do if later in March or anytime later in the year a few cents gather in my traditional ira money market account? This could possibly happen for late dividends, correct?
In a situation where there is less than 50 cents OR equal to or greater than 50 cents that gathers I could convert it to Roth at the date I notice it. For example if I found it anytime before 12/31/20 I should do it ASAP whether it is 4/1/20 or 12/1/20.
The only difference is the amount that I report on my 2020 8606. One would be 6000.25 as an example or 6000.75. The 25 cent would round down to 6000 on my 8606 and it would not lead to a taxable gain. The 6000.75 would round up to 6001 and I would be taxed on that dollar. This would generally apply too if had a gain of $20. I would be taxed on the $20 of the $6020 converted.
Is my understanding correct? I can only contribute a max of $6000 in 2020 to my traditional ira. $6000 is the max total combined contribution to Roth and traditional iras. So I’m maxed out when I put $6000 in my traditional ira for 2020.
However my conversions are unlimited. I can make two or even three conversions if extra cents enter my traditional ira as dividends AFTER I make the initial conversion. This would be done prior to 12/31/20 to ensure the traditional ira balance on that day is $0. Now if $1 was left in my traditional ira on 12/31/20 I would just report that on my 2020 8606 and that would become basis for next year, correct? My goal would be to empty it.
I hope that makes sense. Once again I appreciate all of the help!!
Leaving 49 pennies will not change things at all because 49 cents does not need to be listed on line 6 of the Form 8606.
50 pennies or more does need to be reported on line 6. Depending on how large that amount is, it might make a very tiny portion of your conversion taxable. Maybe $1. And it might leave $1 as basis on line 14 for next year. This is not a problem but some people want to avoid it.
The $6k limit applies only to how much you contribute to the traditional IRA. The amount you convert has no limit.
This thread is now in the Personal Finance (Not Investing) forum (taxes).
So obviously I am limited to $6000 for IRA contributions in 2020. My conversions to Roth though are unlimited in both dollar amount and number of conversions, correct?
I will put the money in the traditional money market account and as you say I may gain a few pennies. If, after my initial hypothetical conversion of $6000 in March, let’s say I gain 10 pennies in April and 10 pennies in December. I can convert the pennies both in April and in December in separate conversions to ensure its balance is $0, correct?
The form 8606 in this situation would be unchanged as the total 2020 conversions will be $6000.20, correct? The total conversion would round to $6000.
However, if I make my initial March conversion of $6000 and now gain 30 pennies in April and 30 pennies in December. I once again can can make two additional conversions to bring my traditional balance to $0. This time, though, my 8606 total conversion would be $6000.60 and round up to $6001.
That would lead to a taxable dollar, correct? Clearly this is mostly meaningless but just confirming my understanding. In this situation I could leave the 60 cents in my traditional ira and if it is still in there on 12/31/20 it would form a basis. The basis would be $1 due to rounding on 8606 correct? I would not plan to do this. I’ll hopefully get the balance to zero at year-end.
Thanks so much for taking the time to help!!
Yes, but you won't gain another 10 pennies in December because there is nothing in the account to be earning interest.I will put the money in the traditional money market account and as you say I may gain a few pennies. If, after my initial hypothetical conversion of $6000 in March, let’s say I gain 10 pennies in April and 10 pennies in December. I can convert the pennies both in April and in December in separate conversions to ensure its balance is $0, correct?
Yes.The form 8606 in this situation would be unchanged as the total 2020 conversions will be $6000.20, correct? The total conversion would round to $6000.
Yes, except your example should say 60 pennies in April because there will not be another 30 pennies in December.However, if I make my initial March conversion of $6000 and now gain 30 pennies in April and 30 pennies in December. I once again can can make two additional conversions to bring my traditional balance to $0. This time, though, my 8606 total conversion would be $6000.60 and round up to $6001.
The earnings do not form a basis because the earnings are pre-tax. However, once you pro-rate the conversion you might end up with a bit of basis. Leaving a long series of decimal places reduces that.That would lead to a taxable dollar, correct? Clearly this is mostly meaningless but just confirming my understanding. In this situation I could leave the 60 cents in my traditional ira and if it is still in there on 12/31/20 it would form a basis. The basis would be $1 due to rounding on 8606 correct? I would not plan to do this. I’ll hopefully get the balance to zero at year-end.
You need to pencil through the form to see this. Try different amounts. You will never understand the form until you actually do this.
I know there is some confusion with what to do about the traditional ira losing money prior to conversion so that you convert less than the basis. I’ll plan to look that up on here and follow up with any questions. An example of this is contributing $6000 and that losing $50 so I can only convert $5500.
Not that I know of. If you have concerns, you can always delay the conversion until there is no longer a loss.
I am working through some practice 8606 forms. In the examples above I asked what I should do for form 8606 if I actually convert $6000.20 instead of exactly $6000. In this situation on my line 8 form 8606 I would still enter $6000, correct? If I actually converted $5999.80 I would still enter $6000 on line 8 form 8606?
If I actually converted $6000.60 instead of exactly $6000 I would enter $6001 on my form 8606 line 8, correct? If I converted $6001.20 I would enter again $6001 on line 8 form 8606?
The answer is the same even if I have to convert twice to get these totals as it is the TOTAL 2020 conversion amount that gets reported on line 8 of the 2020 form 8606.
It always rounds to the nearest whole dollar with 49 cents and below rounding down and 50 cents and above rounding up? I would not enter any cent amount on 8606(and in general on any form, but lets not delve too deep here).
Thanks again. Sorry for the repetition.
**Rounding Off to Whole Dollars
You can round off cents to whole dollars on your return and schedules. If you do round to whole dollars, you must round all amounts. To round, drop amounts under 50 cents and increase amounts from 50 to 99 cents to the next dollar. For example, $1.39 becomes $1 and $2.50 becomes $3.
If you have to add two or more amounts to figure the amount to enter on a line, include cents when adding the amounts and round off only the total.
If you are entering amounts that include cents, make sure to include the decimal point. There is no cents column on the form.**
Not that I was doubting any of you, but in case any others are reading this and want to confirm that rounding is OK.
I think I have worked through enough practice 8606s to see how rounding vs not rounding matters. I shall see how it applies when my actual conversions take place. Logically with only a $6000 balance spending 1-2 days in a money market account the gains should be kept minimal prior to conversion. In that case rounding might just be simplest. I also use turbotax and they may not even let me put cents in.