Form 8606 has me whupped

[HeelaMonster]

We have completed IRS Form 8606 many times in the past, reporting non-deductible contributions and Roth conversions, and have never had any problems. This year, however, the particular combination of events has me and/or Turbo Tax twisted in knots. I have tried everything I could think of... deleted forms and re-entered data, re-read IRS instructions, searched the forum, investigated "technical difficulties" (I suspected that TT was clinging to data from initial attempt, but am also open to possibility that I made wrong entry). Try as I might, I can't get numbers in the right places.

I am hoping that, if I lay out all the relevant dates and amounts in one timeline, one of the resident pros can at least tell me what the key lines in Form 8606 *SHOULD* contain for 2022 tax year.

TIMELINE OF (potentially) RELEVANT EVENTS

1/1/2021 Beginning balance in Traditional IRA = $0
1/22/2021 Contributed $7000 to Roth IRA (direct contribution for 2021, no backdoor)
8/3/2021 Transferred $60,000 from federal TSP to Traditional IRA at Vanguard (direct rollover, to support Roth conversions)
9/21/2001 Converted $19,715 from Trad IRA to Roth (partial conversion)
12/31/2021 End of year balance in Trad IRA = $40,959
~~~~~~~~~~~~
1/4/2022 Contributed $7000 to Roth IRA (direct contribution for 2022, no backdoor)
1/19/2022 Converted $38,670 from Trad to Roth (this was the remainder from prior year rollover, Traditional now empty)
12/31/2022 End of year balance in Trad IRA = $0
~~~~~~~~~~~~
3/3/2023 Recharacterized prior $7000 contribution to Roth (after discovering that LTCG in late 2022 exceeded income limits for Roth)
3/3/2023 $6141 in Traditional IRA (after Vanguard accounted for changes to $7k during one year in Roth)
3/7/2023 Converted $6074 from Trad to Roth IRA (Trad now empty again)
~~~~~~~~~~~~

NOTES:
* There are no issues with 2021 tax reporting. I included 2021 data primarily to show where balance in Traditional IRA came from; this balance was reduced to $0 after Roth conversion in Jan 2022.

* To my understanding, form 8606 (line 1) should reflect $7k non-deductible contribution to Trad IRA for 2022 (after successful recharacterization of Roth contribution). So far, so good, if that is correct.

* I am not at all clear what Traditional BASIS should be (lines 2 and 14), given the comings and goings?? To confirm, there was a balance of $40k in Traditional at end of 2021, but (a) this was from direct rollover, fully taxable, and NOT from non-deductible contributions; and (b) this balance was zeroed out by Jan 19 of 2022, and remained empty for rest of the year. But then we have the recharacterization from Roth to Traditional which, even though it didn't occur until 2023, should count as a non-deductible contribution in 2022(?).

* I understand that the latest conversion from Traditional back to Roth should not be reported until 2023 taxes, since it just occurred this week.

* For this exercise, I am only showing data for myself (spouse also has 8606, but without same complicated history, and her numbers appear accurate).

* I know there's a way through this tangled web, but the longer I work on it, the more tangled it becomes. Thanks for any help!

[White Coat Investor]

The tricky part on line 8606 is often line 2, but I suspect that's not your issue. Line 6 rarely trips someone up, but I think this is probably what's tripping you up. Remember when you do a recharacterization, it is as though you made the contribution to the other type of IRA all along. Thus, you're probably putting $0 on line 6 when in reality you should be putting $7K there because that money was (due to the recharacterization) theoretically sitting in a traditional IRA on 12/31/22.

As far as Turbotax goes, if you've bought the desktop version you can do "overrides" and put whatever you want on the lines of the 8606. You're not forced to play Turbotax games to get that.

Also keep in mind that there are two ways to fill out Form 8606. One just works down the form, the other uses a worksheet found somewhere in an IRS instruction. I tend to just do the first but many have noticed that Turbotax actually does the latter. Which one is more correct is controversial, but since they give the same result nobody cares. At any rate, I'll be doing the former for your 2022 8606.

1. 7000
2. 0
3. 7000
4. 0
5. 7000
6. 7000
7. 0
8. 38670
9. 45670
10. 0.153
11. 5917
12. 0
13. 5917
14. 1083
15a. 0
15b. 0
15c. 0

16. 38670
17. 5917
18. 32753

Hope that helps. It makes sense to me. You'll pay taxes on $1,083 of your 2023 conversion on your 2023 tax return.

[HeelaMonster]

The tricky part on line 8606 is often line 2, but I suspect that's not your issue. Line 6 rarely trips someone up, but I think this is probably what's tripping you up. Remember when you do a recharacterization, it is as though you made the contribution to the other type of IRA all along. Thus, you're probably putting $0 on line 6 when in reality you should be putting $7K there because that money was (due to the recharacterization) theoretically sitting in a traditional IRA on 12/31/22.

As far as Turbotax goes, if you've bought the desktop version you can do "overrides" and put whatever you want on the lines of the 8606. You're not forced to play Turbotax games to get that.

Also keep in mind that there are two ways to fill out Form 8606. One just works down the form, the other uses a worksheet found somewhere in an IRS instruction. I tend to just do the first but many have noticed that Turbotax actually does the latter. Which one is more correct is controversial, but since they give the same result nobody cares. At any rate, I'll be doing the former for your 2022 8606.

1. 7000
2. 0
3. 7000
4. 0
5. 7000
6. 7000
7. 0
8. 38670
9. 45670
10. 0.153
11. 5917
12. 0
13. 5917
14. 1083
15a. 0
15b. 0
15c. 0

16. 38670
17. 5917
18. 32753

Hope that helps. It makes sense to me. You'll pay taxes on $1,083 of your 2023 conversion on your 2023 tax return.

It helps a LOT! Thank you so much for taking the time to walk through line-by-line. I did understand that recharacterization makes it "as if it was the other IRA (in this case Traditional) all along," and had lines 2 and 6 entered OK... but things fell apart after that.

I am working on TT Desktop, but this is my first year with that version, having used the online version for many years prior. So another complicating factor was the prior IRA history did not carry forward. And then TT seemed to be locked in with certain data, not allowing me to override (whether by IRA Worksheets, step-by-step entry, or directly into Form 8606).

But to the major point, I think your entries also make sense to me... at least mathematically. By which I mean the numbers all make sense, but I'm still working to understand the underlying logic from IRS perspective (I know, losing battle there!). Here is my question:

It looks to me that the net result of Lines 6-14 is to express the EOY value in Traditional IRA as a percent of the total that this IRA held at ANY time during the year, even if that total was never present at the same time. In my case, that was 15%, which is then used to determine the nontaxable portion of amount converted. That's the part I don't get, since 100% of the conversion (performed in Jan 2022) should have otherwise been taxable... so why doesn't IRS want to collect all of that tax now? And why are they seemingly pushing some of it ahead to next year (2023), when that conversion would've otherwise been tax free?

A related question, does any of this have to do with Pro Rata rule? If so, then I'm admittedly flying blind, having never dealt with that before. I had naively thought that emptying out the Traditional IRA before adding new anything to it would keep things clean.

[P.S., I spent nearly 40 years wearing a White Coat, not as physician but as medical school scientist/professor.... and appreciate all the good guidance you provide for your colleagues-in-arms.]

[White Coat Investor]

Conversions are pro-rated. That's just what is done. It isn't that the IRS wants more income or whatever, that's just the procedure. Don't read too much into, just follow the instructions and then try to avoid getting pro-rated in the future.

[HeelaMonster]

Conversions are pro-rated. That's just what is done. It isn't that the IRS wants more income or whatever, that's just the procedure. Don't read too much into, just follow the instructions and then try to avoid getting pro-rated in the future.

Yep. That's what I thought I was doing (avoiding issues), by emptying out the Traditional IRA before any other activity occurred, and why it's surprising me now. Thanks again for your help!

[neurosphere]

Also keep in mind that there are two ways to fill out Form 8606. One just works down the form, the other uses a worksheet found somewhere in an IRS instruction. I tend to just do the first but many have noticed that Turbotax actually does the latter. Which one is more correct is controversial, but since they give the same result nobody cares.

It's not all that controversial exactly, but simply that the second method (using worksheet 1-1 in publication 590-B) covers ALL situations, whereas the instructions on from 8606 only apply to a subset of situations.

Essentially, if one is in the phaseout range for deducting contributions, you need to use worksheet 1-1. But one has to USE that worksheet in the first place to find if they may be in the phaseout range. The instructions say (paraphrasing) "use worksheet 1-1 if some part of your IRA contribution may not be deductible". So if you are not sure, you use the worksheet. You are correct that the end result is always the same. And thus, every software package I have trialed or used (about 7 so far) defaults to using worksheet 1-1 because it correctly handles the full universe of possibilities.

[White Coat Investor]

Also keep in mind that there are two ways to fill out Form 8606. One just works down the form, the other uses a worksheet found somewhere in an IRS instruction. I tend to just do the first but many have noticed that Turbotax actually does the latter. Which one is more correct is controversial, but since they give the same result nobody cares.

It's not all that controversial exactly, but simply that the second method (using worksheet 1-1 in publication 590-B) covers ALL situations, whereas the instructions on from 8606 only apply to a subset of situations.

Essentially, if one is in the phaseout range for deducting contributions, you need to use worksheet 1-1. But one has to USE that worksheet in the first place to find if they may be in the phaseout range. The instructions say (paraphrasing) "use worksheet 1-1 if some part of your IRA contribution may not be deductible". So if you are not sure, you use the worksheet. You are correct that the end result is always the same. And thus, every software package I have trialed or used (about 7 so far) defaults to using worksheet 1-1 because it correctly handles the full universe of possibilities.

Thanks for sharing that.

I see that instruction in 590-B, but I don't see it in the 8606 instructions. Can you point out where that is? The main reference I saw to 590-B is in the instructions for Line 7, but that only says:

If you received a distribution in 2022 from a traditional,
SEP, or SIMPLE IRA, and you also made contributions
for 2022 to a traditional IRA that may not be fully
deductible because of the income limits, you must make a
special computation before completing the rest of this form. For
details, including how to complete Form 8606, see Are
Distributions Taxable? in chapter 1 of Pub. 590-B.

and doesn't say anything about partially deductible contributions.

Now I'm curious to work through the worksheet and the regular form 8606 with a partially deductible contribution to see what happens.

[neurosphere]

I see that instruction in 590-B, but I don't see it in the 8606 instructions. Can you point out where that is?

Of course! See the instructions for line 7:

If you received a distribution [Neurosphere note: includes conversions] in 2022 from a traditional, SEP, or SIMPLE IRA, and you also made contributions for 2022 to a traditional IRA that may not be fully deductible because of the income limits, you must make a special computation before completing the rest of this form. For details, including how to complete Form 8606, see Are Distributions Taxable? in chapter 1 of Pub. 590-B.

Edit. So sorry, I just simply repeated what you had already posted!! Give me a minute.

[neurosphere]

I see that instruction in 590-B, but I don't see it in the 8606 instructions. Can you point out where that is? The main reference I saw to 590-B is in the instructions for Line 7, but that only says:

If you received a distribution in 2022 from a traditional,
SEP, or SIMPLE IRA, and you also made contributions
for 2022 to a traditional IRA that may not be fully
deductible because of the income limits, you must make a
special computation before completing the rest of this form. For
details, including how to complete Form 8606, see Are
Distributions Taxable? in chapter 1 of Pub. 590-B.

and doesn't say anything about partially deductible contributions.

I read "may not be fully deductible" as you quoted for line 7 as meaning "partially deductible". No?

[White Coat Investor]

I see that instruction in 590-B, but I don't see it in the 8606 instructions. Can you point out where that is? The main reference I saw to 590-B is in the instructions for Line 7, but that only says:

If you received a distribution in 2022 from a traditional,
SEP, or SIMPLE IRA, and you also made contributions
for 2022 to a traditional IRA that may not be fully
deductible because of the income limits, you must make a
special computation before completing the rest of this form. For
details, including how to complete Form 8606, see Are
Distributions Taxable? in chapter 1 of Pub. 590-B.

and doesn't say anything about partially deductible contributions.

I read "may not be fully deductible" as you quoted for line 7 as meaning "partially deductible". No?

Yea but you're ignoring the two lines before that "If you received a distribution".

So it's not about just making a partially deductible contribution, it's about making a partially deductible contribution AND taking a distribution. That's much more rare for people doing Backdoor Roth IRAs. But you're right that the software seems to default to that worksheet.

[White Coat Investor]

Interestingly, while I was in the 8606 instructions I noticed two penalties I hadn't seen before, $50 for failing to file 8606 and $100 for overstating your non deductible contribution. Not very big, but I don't recall ever seeing them before, I wonder if they're new.

It also says you have to keep your records until all distributions are made (i.e. 30-60 years in the future). So much for only having to keep tax returns for 7 years.

[neurosphere]

Yea but you're ignoring the two lines before that "If you received a distribution".

So it's not about just making a partially deductible contribution, it's about making a partially deductible contribution AND taking a distribution. That's much more rare for people doing Backdoor Roth IRAs. But you're right that the software seems to default to that worksheet.

I'm confused. I don't think I'm ignoring anything?

A backdoor Roth REQUIRES a distribution. It's by definition part of the process. A conversion from a non-Roth IRA to a Roth IRA (conversion) by definition is a distribution. Look at the title of form 1099-R.

Edit to add: the point is that any particular taxpayer doing a backdoor Roth MAY have a partially deductible contribution and elected to do so. Perhaps they only converted a PORTION of their IRA? And thus the worksheet is required if this situation applies and so it simplifies things on the software side to simply always use the worksheet. I totally agree the worksheet is rarely necessary. But if you are a paper filer and don't know if it's necessary you SHOULD just use it anyway.

[neurosphere]

Interestingly, while I was in the 8606 instructions I noticed two penalties I hadn't seen before, $50 for failing to file 8606 and $100 for overstating your non deductible contribution. Not very big, but I don't recall ever seeing them before, I wonder if they're new.

It also says you have to keep your records until all distributions are made (i.e. 30-60 years in the future). So much for only having to keep tax returns for 7 years.

1) The penalty has always been there but in 20 years of doing taxes I've never seen anyone charged the penalty.

2) The 7 year rule only applies to certain situations. You have to keep records indefinitely in a LOT of situations. What if one makes a non-deductible contribution today and thus has basis in their IRA. Then 50 years from now they withdraw from the IRA? They have to go back to the (now 50 year old) 8606 form to prove their IRA has basis and thus some part of the IRA withdrawal is not subject to tax. Yes, that basis should carry forward to all future 8606s. But also, the IRS says to keep any receipts/records/forms that might affect their tax due in future years. Another example is you take bonus depreciation on a car you buy now, but might sell in 15 years. You need to have your taxes from the year of purchase to figure the taxable amount of the proceeds of the sale.

[HeelaMonster]

As long as this discussion is still alive, how confident are we in the following?

Line 6 rarely trips someone up, but I think this is probably what's tripping you up. Remember when you do a recharacterization, it is as though you made the contribution to the other type of IRA all along. Thus, you're probably putting $0 on line 6 when in reality you should be putting $7K there because that money was (due to the recharacterization) theoretically sitting in a traditional IRA on 12/31/22.

I ask because there is a parallel thread focused specifically on line 6, and at least one conflicting interpretation on the amount to be entered following a recharacterization. I don't know enough to argue (as evidenced by this thread!), but feel free to wade in, if any of you choose:

viewtopic.php?p=7158284#p7158284

[tashnewbie]

Yea but you're ignoring the two lines before that "If you received a distribution".

So it's not about just making a partially deductible contribution, it's about making a partially deductible contribution AND taking a distribution. That's much more rare for people doing Backdoor Roth IRAs. But you're right that the software seems to default to that worksheet.

I'm confused. I don't think I'm ignoring anything?

A backdoor Roth REQUIRES a distribution. It's by definition part of the process. A conversion from a non-Roth IRA to a Roth IRA (conversion) by definition is a distribution. Look at the title of form 1099-R.

A Trad. IRA distribution for the purposes of Line 7 of Form 8606 excludes Roth conversions which is what the second step of the backdoor process is:

Enter your distributions from traditional, SEP, and SIMPLE IRAs in 2022. Do
not include rollovers (other than repayments of qualified disaster distributions,
if any, from 2022 Form(s) 8915-F (see instructions)), qualified charitable
distributions, a one-time distribution to fund an HSA, conversions to a Roth
IRA, certain returned contributions, or recharacterizations of traditional IRA
contributions (see instructions)

So I think WCI is right that for most people, it is unlikely that they will have a distribution from a TIRA and a partially non-deductible TIRA contribution (which means some of the contribution is deductible) for the same tax year. If they can make a partially deductible TIRA contribution, they do not need to rely upon the backdoor process at all. They could just make direct Roth IRA contributions.

[toddthebod]

As long as this discussion is still alive, how confident are we in the following?

Line 6 rarely trips someone up, but I think this is probably what's tripping you up. Remember when you do a recharacterization, it is as though you made the contribution to the other type of IRA all along. Thus, you're probably putting $0 on line 6 when in reality you should be putting $7K there because that money was (due to the recharacterization) theoretically sitting in a traditional IRA on 12/31/22.

I ask because there is a parallel thread focused specifically on line 6, and at least one conflicting interpretation on the amount to be entered following a recharacterization. I don't know enough to argue (as evidenced by this thread!), but feel free to wade in, if any of you choose:

viewtopic.php?p=7158284#p7158284

Don't listen to me, but definitely listen to Alan S.

[HeelaMonster]

Don't listen to me, but definitely listen to Alan S.

Yes, I just saw Alan's reply, and am paying close attention! But I appreciate your contributions, as well.

[neurosphere]

Yea but you're ignoring the two lines before that "If you received a distribution".

So it's not about just making a partially deductible contribution, it's about making a partially deductible contribution AND taking a distribution. That's much more rare for people doing Backdoor Roth IRAs. But you're right that the software seems to default to that worksheet.

I'm confused. I don't think I'm ignoring anything?

A backdoor Roth REQUIRES a distribution. It's by definition part of the process. A conversion from a non-Roth IRA to a Roth IRA (conversion) by definition is a distribution. Look at the title of form 1099-R.

A Trad. IRA distribution for the purposes of Line 7 of Form 8606 excludes Roth conversions which is what the second step of the backdoor process is:

Enter your distributions from traditional, SEP, and SIMPLE IRAs in 2022. Do
not include rollovers (other than repayments of qualified disaster distributions,
if any, from 2022 Form(s) 8915-F (see instructions)), qualified charitable
distributions, a one-time distribution to fund an HSA, conversions to a Roth
IRA, certain returned contributions, or recharacterizations of traditional IRA
contributions (see instructions)

So I think WCI is right that for most people, it is unlikely that they will have a distribution from a TIRA and a partially non-deductible TIRA contribution (which means some of the contribution is deductible) for the same tax year. If they can make a partially deductible TIRA contribution, they do not need to rely upon the backdoor process at all. They could just make direct Roth IRA contributions.

The "preamble" to line 7 in the instructions (not the form) explains the need to include conversions. They do get separated on line 8 before being added back in on line 9.

I think we all agree that the worksheet is rarely needed. But it's certainly acceptable to use (it's not wrong to use it even if it ends up not being necessary) and covers all possible situations. And that's why all the software packages I know use the worksheet. One will have to paper file if one prefers not to use worksheet 1-1 from publication 590-B.

[White Coat Investor]

Yea but you're ignoring the two lines before that "If you received a distribution".

So it's not about just making a partially deductible contribution, it's about making a partially deductible contribution AND taking a distribution. That's much more rare for people doing Backdoor Roth IRAs. But you're right that the software seems to default to that worksheet.

I'm confused. I don't think I'm ignoring anything?

A backdoor Roth REQUIRES a distribution. It's by definition part of the process. A conversion from a non-Roth IRA to a Roth IRA (conversion) by definition is a distribution. Look at the title of form 1099-R.

A Trad. IRA distribution for the purposes of Line 7 of Form 8606 excludes Roth conversions which is what the second step of the backdoor process is:

Enter your distributions from traditional, SEP, and SIMPLE IRAs in 2022. Do
not include rollovers (other than repayments of qualified disaster distributions,
if any, from 2022 Form(s) 8915-F (see instructions)), qualified charitable
distributions, a one-time distribution to fund an HSA, conversions to a Roth
IRA, certain returned contributions, or recharacterizations of traditional IRA
contributions (see instructions)

So I think WCI is right that for most people, it is unlikely that they will have a distribution from a TIRA and a partially non-deductible TIRA contribution (which means some of the contribution is deductible) for the same tax year. If they can make a partially deductible TIRA contribution, they do not need to rely upon the backdoor process at all. They could just make direct Roth IRA contributions.

The "preamble" to line 7 in the instructions (not the form) explains the need to include conversions. They do get separated on line 8 before being added back in on line 9.

I think we all agree that the worksheet is rarely needed. But it's certainly acceptable to use (it's not wrong to use it even if it ends up not being necessary) and covers all possible situations. And that's why all the software packages I know use the worksheet. One will have to paper file if one prefers not to use worksheet 1-1 from publication 590-B.

What do you mean the preamble? The instructions for line 7 in the instructions read:

Line 7
If you received a distribution in 2022 from a traditional,
SEP, or SIMPLE IRA, and you also made contributions
for 2022 to a traditional IRA that may not be fully
deductible because of the income limits, you must make a
special computation before completing the rest of this form. For
details, including how to complete Form 8606, see Are
Distributions Taxable? in chapter 1 of Pub. 590-B.
Don’t include any of the following on line 7.
• Distributions that you converted to a Roth IRA.

Seems pretty clear to me

[White Coat Investor]

As long as this discussion is still alive, how confident are we in the following?

Line 6 rarely trips someone up, but I think this is probably what's tripping you up. Remember when you do a recharacterization, it is as though you made the contribution to the other type of IRA all along. Thus, you're probably putting $0 on line 6 when in reality you should be putting $7K there because that money was (due to the recharacterization) theoretically sitting in a traditional IRA on 12/31/22.

I ask because there is a parallel thread focused specifically on line 6, and at least one conflicting interpretation on the amount to be entered following a recharacterization. I don't know enough to argue (as evidenced by this thread!), but feel free to wade in, if any of you choose:

viewtopic.php?p=7158284#p7158284

Don't listen to me, but definitely listen to Alan S.

Most of the time when my advice disagrees with that of Alan S, I'm wrong. I guess I better look at that other thread......

Having reviewed it, he makes a strong argument. Plus, he has a lot more experience with tax than I do. Not sure the IRS would really care all that much about this though. In the end ()maybe not this year) the IRS is going to get the same amount of money either way. In my experience, they're pretty tolerant about 8606. Not a lot of audits here.

[neurosphere]

What do you mean the preamble? The instructions for line 7 in the instructions read:

Line 7
If you received a distribution in 2022 from a traditional,
SEP, or SIMPLE IRA, and you also made contributions
for 2022 to a traditional IRA that may not be fully
deductible because of the income limits, you must make a
special computation before completing the rest of this form. For
details, including how to complete Form 8606, see Are
Distributions Taxable? in chapter 1 of Pub. 590-B.
Don’t include any of the following on line 7.
• Distributions that you converted to a Roth IRA.

Seems pretty clear to me

By "preamble" I mean that the instructions for line 7 refer to a computation that spans more than one line. It introduces a portion of the form rather referring 100% to line 7. And it ALSO refers to another publication for additional information and context.

"Distribution" in line 7 refers to all distributions, including roth conversions. The quoted part says "you must make a special computation" if you took a distribution. But then that "special computation" requires separating Roth conversions from other types of distributions and entering that on line 8, and then line 7 and 8 get combined again on line 9. And it may also require following the instructions in another publication and completed an additional form (i.e. worksheet).

I'm lost track of who said what, haha. But whether in this thread or another some have been implied that a roth conversion is not a distribution because of these instructions (the bolded part) and that's not true. That's what I'm intending to point out.

I think we are all agreeing here on all of the following?

Form 8606 is for:
1) reporting non-deductible contributions (including partially deductible contributions)
2) reporting the taxable portion of any IRA distribution (which by definition includes Roth conversions)
3) most people don't need to use worksheet 1-1 as that situation does not apply to them
4) it's perfectly acceptable to use worksheet 1-1 anyway as per the instructions (use if the following "may apply")
5) Many (all?) the major software packages default to using worksheet 1-1.

[White Coat Investor]

What do you mean the preamble? The instructions for line 7 in the instructions read:

Line 7
If you received a distribution in 2022 from a traditional,
SEP, or SIMPLE IRA, and you also made contributions
for 2022 to a traditional IRA that may not be fully
deductible because of the income limits, you must make a
special computation before completing the rest of this form. For
details, including how to complete Form 8606, see Are
Distributions Taxable? in chapter 1 of Pub. 590-B.
Don’t include any of the following on line 7.
• Distributions that you converted to a Roth IRA.

Seems pretty clear to me

By "preamble" I mean that the instructions for line 7 refer to a computation that spans more than one line. It introduces a portion of the form rather referring 100% to line 7. And it ALSO refers to another publication for additional information and context.

"Distribution" in line 7 refers to all distributions, including roth conversions. The quoted part says "you must make a special computation" if you took a distribution. But then that "special computation" requires separating Roth conversions from other types of distributions and entering that on line 8, and then line 7 and 8 get combined again on line 9. And it may also require following the instructions in another publication and completed an additional form (i.e. worksheet).

I'm lost track of who said what, haha. But whether in this thread or another some have been implied that a roth conversion is not a distribution because of these instructions (the bolded part) and that's not true. That's what I'm intending to point out.

I think we are all agreeing here on all of the following?

Form 8606 is for:
1) reporting non-deductible contributions (including partially deductible contributions)
2) reporting the taxable portion of any IRA distribution (which by definition includes Roth conversions)
3) most people don't need to use worksheet 1-1 as that situation does not apply to them
4) it's perfectly acceptable to use worksheet 1-1 anyway as per the instructions (use if the following "may apply")
5) Many (all?) the major software packages default to using worksheet 1-1.

That's seriously messed up to say that Roth conversions don't count on the form and in the instructions but then bury the fact that they do somewhere else in the instructions. I can't even figure out where it does that. It's the secret menu at In-N-Out; it's the secret 8606 instructions.

[HeelaMonster]

That' seriously to say that Roth conversions don't count on the form and in the instructions but then bury the fact that they do somewhere else in the instructions. I can't even figure out where it does that. It's the secret menu at In-N-Out; it's the secret 8606 instructions.

Wait.... In-N-Out has a secret menu!??

[neurosphere]

That' seriously to say that Roth conversions don't count on the form and in the instructions but then bury the fact that they do somewhere else in the instructions. I can't even figure out where it does that. It's the secret menu at In-N-Out; it's the secret 8606 instructions.

All instructions start with Publication 17 "Your Federal Income Tax".

If you read linearly, you are directed to:

Both contributions for 2022 and distributions in 2022. If all three of the following apply, any IRA distributions you received in 2022 may be partly tax free and partly taxable.
• You received distributions in 2022 from one or more traditional IRAs.
• You made contributions to a traditional IRA for 2022.
• Some of those contributions may be nondeductible contributions.

If this is your situation, you must figure the taxable part of the traditional IRA distribution before you can figure your modified AGI. To do this, you can use Worksheet 1-1 in Pub. 590-B.

If at least one of the above doesn't apply, figure your modified AGI using Worksheet 91.

So for backdoor Roth, one is first directed to Pub 590-B and thus worksheet 1-1 before ever being directed to 8606. There are no secret instructions. The first mention of 8606 essentially comes AFTER the quoted part above. Note the word "some" in the quote. Yes, we know that if "all" the contributions are deductible we can simply follow along on the form. But a strict interpretation of the IRS instructions would require form 1-1 for backdoor Roth reporting.

I don't see any secrets, nor any contradictions, and all the instructions are concordant assuming you read the instructions from the beginning.

Btw, there are instructions right on the form 8606 that make you detour to publication 590-B, if in case you missed the instructions in Publication 17. They say that if you meet certain criteria you MUST follow them (e.g. read pub 590-B). It's a hard stop to tell you that you may be making a mistake.

[White Coat Investor]

That' seriously to say that Roth conversions don't count on the form and in the instructions but then bury the fact that they do somewhere else in the instructions. I can't even figure out where it does that. It's the secret menu at In-N-Out; it's the secret 8606 instructions.

All instructions start with Publication 17 "Your Federal Income Tax".

If you read linearly, you are directed to:

Both contributions for 2022 and distributions in 2022. If all three of the following apply, any IRA distributions you received in 2022 may be partly tax free and partly taxable.
• You received distributions in 2022 from one or more traditional IRAs.
• You made contributions to a traditional IRA for 2022.
• Some of those contributions may be nondeductible contributions.

If this is your situation, you must figure the taxable part of the traditional IRA distribution before you can figure your modified AGI. To do this, you can use Worksheet 1-1 in Pub. 590-B.

If at least one of the above doesn't apply, figure your modified AGI using Worksheet 91.

So for backdoor Roth, one is first directed to Pub 590-B and thus worksheet 1-1 before ever being directed to 8606. There are no secret instructions. The first mention of 8606 essentially comes AFTER the quoted part above. Note the word "some" in the quote. Yes, we know that if "all" the contributions are deductible we can simply follow along on the form. But a strict interpretation of the IRS instructions would require form 1-1 for backdoor Roth reporting.

I don't see any secrets, nor any contradictions, and all the instructions are concordant assuming you read the instructions from the beginning.

Btw, there are instructions right on the form 8606 that make you detour to publication 590-B, if in case you missed the instructions in Publication 17. They say that if you meet certain criteria you MUST follow them (e.g. read pub 590-B). It's a hard stop to tell you that you may be making a mistake.

Not seeing what you're referring to. In Pub 17 I see this:

Both contributions for 2022 and distributions in 2022. If all three of the following apply,
any IRA distributions you received in 2022 may
be partly tax free and partly taxable.
• You received distributions in 2022 from
one or more traditional IRAs.
• You made contributions to a traditional IRA
for 2022.
• Some of those contributions may be nondeductible contributions.
If this is your situation, you must figure the taxable part of the traditional IRA distribution before
you can figure your modified AGI. To do this,
you can use Worksheet 1-1 in Pub. 590-B

But reading that I would assume I did not receive any IRA distributions if all I did was a BD Roth.

On Form 8606 I don't see anything that directs me to Pub 590-B. But it does mention in multiple places that a conversion isn't a distribution.

[neurosphere]

But it does mention in multiple places that a conversion isn't a distribution.

Ah, now I understand why you are confused by the previous discussion and my references to the instructions on Pub 17, 8606, etc.

A Roth conversion is absolutely, 100% an IRA distribution and all the IRS publications and instructions (including form 8606) are concordant on this point.

With that fact established you'll see that the instructions in Pub 17 indeed direct you to use worksheet 1-1, and supersede the instructions on form 8606.

[neurosphere]

Interestingly and semi-related, today I saw my 3rd set of professionally prepared taxes this year reporting the backdoor process, where the contribution was reported on lines 1 and 3 of part I of the 8606, and the distribution reported on line 13 (via worksheet 1-1).

But there was no Part II filled out to specifically report the amount of the Roth conversion.

So while 8606 indicates a non-taxable distribution of IRA funds, there is no way to tell that the distribution was a Roth conversion vs money ending up in a checking account. And I'm not sure whether that's a preparer error, software error, or perhaps another allowable "parallel path" for reporting Roth conversions (similar to the two acceptable ways to fill out Part I of 8606). I tried but can't find where it's acceptable to not fill out Part II for a Roth conversion but clearly many people don't. Not a big deal I guess if people keep all their 5498s.

[Soon2BXProgrammer]

But there was no Part II filled out to specifically report the amount of the Roth conversion.

I am pretty sure this is an error of the preparer not clicking the right box of "what happened with the money", I would think this would be caught though thinking about why is the 1099-R coded as 2 (early distribution, exception applies) meaning no penalty which means the preparer should be asking why there is no penalty. (If it is like the other 1099-Rs I've seen for backdoor Roth contribution & conversions)

Nothing on the 1099-R signifies it was a Roth conversion, so unless the person tells the preparer that, they won't know to fill out part 2....

[neurosphere]

But there was no Part II filled out to specifically report the amount of the Roth conversion.

I am pretty sure this is an error of the preparer not clicking the right box of "what happened with the money"

I suspect you are correct about the person not telling the preparer about the conversion. But then yes, code 2 gives a clue but did not prompt a question from the preparer. Code 2 is required when the 1099-R reports a conversion distribution, but also applies to other situations. I just assumed I wouldn't see this "mistake" quite so often. But if it's on the taxpayer...then again, I have of course seen paid preparer errors when the taxpayer clearly communicated what they did to the prepare in very precise language.

[neurosphere]

Not seeing what you're referring to. In Pub 17 I see this:

Both contributions for 2022 and distributions in 2022. If all three of the following apply,
any IRA distributions you received in 2022 may
be partly tax free and partly taxable.
• You received distributions in 2022 from
one or more traditional IRAs.
• You made contributions to a traditional IRA
for 2022.
• Some of those contributions may be nondeductible contributions.
If this is your situation, you must figure the taxable part of the traditional IRA distribution before
you can figure your modified AGI. To do this,
you can use Worksheet 1-1 in Pub. 590-B

But reading that I would assume I did not receive any IRA distributions if all I did was a BD Roth.

On Form 8606 I don't see anything that directs me to Pub 590-B. But it does mention in multiple places that a conversion isn't a distribution.

Sorry, just now getting a chance to quote from the source, regarding the tax treatment of an IRA conversion. Here is the relevant paragraph from the Code of Federal Regulations:

(c) Any converted amount is treated as a distribution from the traditional IRA and a qualified rollover contribution to the Roth IRA for purposes of section 408 and section 408A, even if the conversion is accomplished by means of a trustee-to-trustee transfer or a transfer between IRAs of the same trustee.

With that established, we can see that vanilla backdoor Roth process contains all the elements by which Pub 17 (and form 8606) directs one to Pub 590-B and the worksheet.

1) You received distributions in 2022 from one or more traditional IRAs.

The conversion is defined as a distribution.

2) You made contributions to a traditional IRA for 2022.

The (deductible or otherwise) IRA contribution is of course an IRA contribution.

3) Some of those contributions may be nondeductible contributions.

Yes, some (indeed all) of those contributions will ultimately turn out to be non-deductible based on AGI limitations.

So if all of those criteria are satisfied, the 8606 instructions say

...you must figure the taxable part of the traditional IRA distribution before you can figure your modified AGI. To do this, you can use Worksheet 1-1 in Pub. 590-B

Now of course, we all know that if we know in advance that 100% of the IRA contribution is non-deductible and 100% of the conversion distribution** is non-taxable we can just follow along on the instructions printed on the 8606 form "on the page" (skipping the form instruction themselves) and come to the same final answer.

Finally the instructions in Pub 17 quoted at the top are the similar to the instructions for line 7 on form 8606:

If you received a distribution in 2022 from a traditional, SEP, or SIMPLE IRA, and you also made contributions for 2022 to a traditional IRA that may not be fully deductible because of the income limits, you must make a special computation before completing the rest of this form. For details, including how to complete Form 8606, see Are Distributions Taxable? in chapter 1 of Pub. 590-B.

The summary is that 8606 never says Roth conversions are not distributions. It's simply separating taxable and non-taxable Roth conversions from many other types of non-taxable distributions (non-taxable rollovers, QCD, HSA contributions, etc) to comes to the correct tax. This is made explicit on line 13 by "all your distributions", which included the previously separated Roth "contributions" from line 8.

** Fun fact, various versions of Publication 590 use the term "conversion distribution" to distinguish distributions that were converted to a Roth vs other types of distributions.

Although a conversion of a traditional IRA is considered a rollover for Roth IRA purposes, it is not an exception to the general rule for distributions from a traditional IRA. Conversion distributions are includible in your gross income subject to the special rules for conversions explained in chapter 2.

[teen persuasion]

Interestingly and semi-related, today I saw my 3rd set of professionally prepared taxes this year reporting the backdoor process, where the contribution was reported on lines 1 and 3 of part I of the 8606, and the distribution reported on line 13 (via worksheet 1-1).

But there was no Part II filled out to specifically report the amount of the Roth conversion.

So while 8606 indicates a non-taxable distribution of IRA funds, there is no way to tell that the distribution was a Roth conversion vs money ending up in a checking account. And I'm not sure whether that's a preparer error, software error, or perhaps another allowable "parallel path" for reporting Roth conversions (similar to the two acceptable ways to fill out Part I of 8606). I tried but can't find where it's acceptable to not fill out Part II for a Roth conversion but clearly many people don't. Not a big deal I guess if people keep all their 5498s.

We did our first Roth conversion this year (no non-deductible $$). Just filed our taxes yesterday with OLT, and was surprised it did not file 8606 (I work everything out in advance on paper so I know what to expect, and make sure they agree with me). SW merely entered the conversion amount on line 4b. As you say, no way to tell that the distribution was a Roth conversion, based on the 1099-R alone.

We also did a rollover from a 401k to IRAs, some to tIRA, some to Roth (no conversion here, just rolling like to like). The codes on those 1099-R forms more clearly reflected what happened.

[Artsdoctor]

For your IRA, your 1099-R will list the Distribution (the conversion) and box 2b will be checked ("taxable amount not determined"). The distribution code will be 7 ("normal distribution"). For your Roth, your 5498 will be available later in the spring and that form will list the "Roth IRA conversion amount" that matches the amount on your IRA's 1099-R.

Note: This is what happens with a Roth conversion from an IRA, and I'm over 59.5, so it may be a bit different if those variables are different for you.

[White Coat Investor]

The summary is that 8606 never says Roth conversions are not distributions. It's simply separating taxable and non-taxable Roth conversions from many other types of non-taxable distributions (non-taxable rollovers, QCD, HSA contributions, etc) to comes to the correct tax. This is made explicit on line 13 by "all your distributions", which included the previously separated Roth "contributions" from line 8.

Thanks. Classic IRS.

[muel87]

It's not all that controversial exactly, but simply that the second method (using worksheet 1-1 in publication 590-B) covers ALL situations, whereas the instructions on from 8606 only apply to a subset of situations.

Essentially, if one is in the phaseout range for deducting contributions, you need to use worksheet 1-1. But one has to USE that worksheet in the first place to find if they may be in the phaseout range. The instructions say (paraphrasing) "use worksheet 1-1 if some part of your IRA contribution may not be deductible". So if you are not sure, you use the worksheet. You are correct that the end result is always the same. And thus, every software package I have trialed or used (about 7 so far) defaults to using worksheet 1-1 because it correctly handles the full universe of possibilities.

Are you saying results from worksheet 1-1 are always the same as doing the math on 8606? They contradict in my case and in many others it would seem...
Form 8606, line 10 calculates the pro-rata ratio based on:
Total IRA contribution for the tax year
+ basis in traditional IRA as of end of the previous year
- IRA contribution for the tax year made from January 1st till April 15th of the following year.

Worksheet 1-1 calculates the pro-rata ratio based on:
Total IRA contribution for the tax year
+ basis in traditional IRA as of end of the previous year.
It does not subtract IRA contribution for the tax year made from January 1st till April 15th of the following year.

Using each gives me two different taxable amounts for my Roth conversion.....

[neurosphere]

Are you saying results from worksheet 1-1 are always the same as doing the math on 8606? They contradict in my case and in many others it would seem....

[snip]

Using each gives me two different taxable amounts for my Roth conversion.....

Can you give an example? Because for the examples I try which have previous year contributions, the instructions in 590-B end up punting me back to form 8606. E.g. "If line 5 of Form 8606 is less than line 8 of worksheet 1-1..." just keep using 8606.

And interestingly I've now found the first situation where my software actually uses form 8606!

Here's an example I used:
-- $4000 IRA contribution of which $500 was made after Jan 1 for the previous year
-- $200 sitting in the IRA which was previously deducted
-- $3600 Roth IRA conversion on Dec 31st, leaving $600 in the IRA ($100 which was not converted on Dec 31st plus the post-Jan 1 contribution).
-- New basis in IRAs is $595

With those numbers, the instructions for worksheet 1-1 lead to the correct answer (which is essentially, don't use the worksheet and go back to 8606).

So yes the "results from 1-1" lead to the correct answer even when there are post Jan 1 contributions (for my example).

[muel87]

Can you give an example? Because for the examples I try which have previous year contributions, the instructions in 590-B end up punting me back to form 8606. E.g. "If line 5 of Form 8606 is less than line 8 of worksheet 1-1..." just keep using 8606.

8606:
1) Tax Year ND contributions to tIRAs $6,000
2) Prior IRA basis $6,000
3) Total Basis $12,000
4) Jan-Apr contributions from 1) $6,000
5) 3-4 = $6,000
6) End of CY IRA balance $189,692
8) Net Roth conversions $5,501
9) 6+7+8 = $195,193
10) 5/9 = 0.0307
11) 8 * 10 Nontaxable conversions. $ 169
13) Nontaxable conversions $ 169
14) Remaining Basis $ 11,831
Taxable portion would be $5,332

Worksheet 1-1
1) Trad Basis $6,000
2) ND Contributions $6,000
3) 1+2 = $12,000
4) End of CY IRA balance $189,692
5) IRA conversions $5,501
6) 4 + 5 = $195,193
7) 3/6 = .0615
8) Nontaxble portion 5 * 7 = $338
9) Taxable portion $5,163

The worksheet includes the Jan-Apr contributions in the ratio calculation while the 8606 does not.

[neurosphere]

The worksheet includes the Jan-Apr contributions in the ratio calculation while the 8606 does not.

You are correct that this example leads to different results, with the pub 590-b instructions saying to use the worksheet for this set of numbers. Not sure I can explain the difference. [EDIT: it's clear it's treating the post Jan 1 contributions differently, but not clear which method is correct]. My software forces the use of the worksheet in this situation. E.g. it follows the tax prep instructions linearly starting from publication 17 --> 590-B -->worksheet 1-1.

Hmm....

[Artsdoctor]

Interestingly, while I was in the 8606 instructions I noticed two penalties I hadn't seen before, $50 for failing to file 8606 and $100 for overstating your non deductible contribution. Not very big, but I don't recall ever seeing them before, I wonder if they're new.

It also says you have to keep your records until all distributions are made (i.e. 30-60 years in the future). So much for only having to keep tax returns for 7 years.

I believe the $50 penalty is for failing to submit a Form 8606 with a NON-deductible contribution to an IRA. The penalty does not appear to apply to those simply failing to submit the form for an uncomplicated Roth conversion.

[neurosphere]

The worksheet includes the Jan-Apr contributions in the ratio calculation while the 8606 does not.

From reading the text of the law regarding conversions, I feel that the 8606 instructions are the "most correct" in this situation. But not all situations are addressed by from 8606 and worksheet 1-1 (and other worksheets) are necessary to figure out the amount/proportion of allowable IRA deductible and non-deductible contributions in the first place. And this does indeed lead to situations where two otherwise acceptable methods of computation lead to different results. For what it's worth, I cannot force my tax software to use 8606 even when I think it's the "correct" interpretation.

For most (all?) taxpayers the actual practical difference with respect to tax due is likely to be small. There may be some extra tax on Roth conversion in Year 1, but will lead to less tax on any distributions in future years.

[muel87]

The worksheet includes the Jan-Apr contributions in the ratio calculation while the 8606 does not.

From reading the text of the law regarding conversions, I feel that the 8606 instructions are the "most correct" in this situation. But not all situations are addressed by from 8606 and worksheet 1-1 (and other worksheets) are necessary to figure out the amount/proportion of allowable IRA deductible and non-deductible contributions in the first place. And this does indeed lead to situations where two otherwise acceptable methods of computation lead to different results. For what it's worth, I cannot force my tax software to use 8606 even when I think it's the "correct" interpretation.

For most (all?) taxpayers the actual practical difference with respect to tax due is likely to be small. There may be some extra tax on Roth conversion in Year 1, but will lead to less tax on any distributions in future years.

FreeTaxUSA forces me to use the worksheet. I laid out an excel with last year, this year, and next year using 8606 vs. worksheet 1-1.
Using the worksheet this year will result in $169 less in taxable conversions, while if I could use 8606 I'd have $169 more in remaining basis in the future, which I should retain each year as long as I keep doing backdoor Roth conversions.

In an related note, this exercise also led me to discover I'd made a disallowed rollover of basis into my solo 401k. And what's really weird, is that b/c of how the 8606 is written, some of the basis that was in the disallowed rollover hadnt even been contributed to the account yet!

[neurosphere]

I have a question. Form 8606 clearly asks for information about traditional, SEP, and SIMPLE balances when asking for year-end amounts (e.g. line 6). But the 1-1 worksheet seems to specifically omit SIMPLE and SEP contributions asking simply for "traditional IRAs" (lines 2, 4, and others). I can't tell if this is intentional, or a shorthand for all traditional-like IRAs?

[MarkNYC]

I have a question. Form 8606 clearly asks for information about traditional, SEP, and SIMPLE balances when asking for year-end amounts (e.g. line 6). But the 1-1 worksheet seems to specifically omit SIMPLE and SEP contributions asking simply for "traditional IRAs" (lines 2, 4, and others). I can't tell if this is intentional, or a shorthand for all traditional-like IRAs?

I'm sure the wording is intentional. Here is how I would try to explain the worksheet calculation vs the 8606 calculation.

When a tIRA account contains basis, the taxable amount of a tIRA distribution is normally calculated on Form 8606. However, in a year where the taxpayer makes a tIRA contribution that may be partially deductible due to the income phase-out range, and also takes a tIRA distribution, a calculation dilemma results. The IRA deduction amount depends on modified adjusted gross income (MAGI), and MAGI includes the taxable portion of the IRA distribution. But on Form 8606 the calculation of the taxable portion of the IRA distribution depends partly on the nondeductible portion of the IRA contribution. So the calculations for the deductible IRA amount and the taxable distribution amount are circular - one depends on the other.

To resolve this, the IRS provides worksheet 1-1 in Pub 590-b which allows a simplified calculation of the nontaxable portion of the IRA distribution that, unlike Form 8606, does not require the nondeductible portion of the current-year contribution. Then, once the nontaxable portion and taxable portions of the distribution are known, MAGI can be determined and the deductible portion of the contribution can be calculated.