Brand New SIMPLE IRA & Roth Conversion Consequences
Hello all.
I am starting with a new employer and will be starting a SIMPLE IRA in 2012. This is my first experience with a SIMPLE IRA.
If I decide to fund a traditional IRA with $5,000 in 2012 and convert to a Roth IRA, will I have to include the 12/31/12 value of the SIMPLE IRA on Line 2 of Form 8606 even though it is less than 2 years old? Would this mean that my taxes on the conversion would be higher than if I did not have a brand new SIMPLE IRA?
Will I be subject to the SIMPLE IRA’s 25% penalty if I do a Roth conversion of a separate traditional IRA any time before the 2-year period is over?
The Concierge Desk Representative for the company where I have my existing Roth IRA said the brand new SIMPLE IRA doesn’t have to be included in my total basis until after 2 years, but I’m not sure.
Thank you very much!
Permalink Submitted by Alan Spross on Wed, 2012-04-18 19:07
[quote=”[email protected]“]Hello all.
I am starting with a new employer and will be starting a SIMPLE IRA in 2012. This is my first experience with a SIMPLE IRA.
If I decide to fund a traditional IRA with $5,000 in 2012 and convert to a Roth IRA, will I have to include the 12/31/12 value of the SIMPLE IRA on Line 2 of Form 8606 even though it is less than 2 years old? Would this mean that my taxes on the conversion would be higher than if I did not have a brand new SIMPLE IRA?
[quote]Yes, you WILL have to include the SIMPLE IRA value on line 6 (not line 2) of the 2012 8606. It will result in more of your conversion being taxable if your current contribution is non deductible or even if you have other basis in your IRAs that appear on line 2 from prior years.[/quote]Will I be subject to the SIMPLE IRA’s 25% penalty if I do a Roth conversion of a separate traditional IRA any time before the 2-year period is over?
[quote]No penalty as long as no funds are distributed from the SIMPLE IRA before the 2 year holding period is over.[/quote]The Concierge Desk Representative for the company where I have my existing Roth IRA said the brand new SIMPLE IRA doesn’t have to be included in my total basis until after 2 years, but I’m not sure.
[quote]They are incorrect regarding the value, which must be included, but your SIMPLE IRA will have no basis. But it will dilute the basis you do have in other IRAs.[/quote]Thank you very much![/quote]
Permalink Submitted by [email protected] on Wed, 2012-04-18 21:29
[quote]Yes, you WILL have to include the SIMPLE IRA value on line 6 (not line 2) of the 2012 8606. It will result in more of your conversion being taxable if your current contribution is non deductible or even if you have other basis in your IRAs that appear on line 2 from prior years.[/quote]
Thank you for your response! I guess I am a little confused, so I will ask a couple follow-up questions if that is ok.
Hypothetical situation:
Let’s say at the end of 2012, I have $1,000 in my SIMPLE IRA and my income falls below the deductibility limits for a traditional IRA. At some point in 2012, I make a [u]deductible[/u] contribution of $5,000 to a traditional IRA and then convert the entire amount to a Roth IRA on 12/31/12 (to make it easy, let’s say it is exactly $5,000 when I convert as well).
On 12/31/12:
SIMPLE IRA balance: $1,000
Traditional IRA balance: $0
Roth IRA balance: $5,000
Because I am making a [u]deductible[/u] contribution, I do not have to fill out Part I of Form 8606, correct?
If I did fill out Part I:
Lines 1-5 would be zero
Line 6 would be $1,000
Line 7 would be zero
Line 8 would be $5,000
Line 9 would be $6,000
Lines 10-15 would be zero
Part II:
Line 16 would be $5,000
Line 17 would be $0
Line 18 would be $5,000
Did I do this correctly? In essence, the IRS doesn’t care about the SIMPLE IRA balance I entered on Line 6 because Lines 2, 14, and 17 are zero?
Permalink Submitted by Alan Spross on Wed, 2012-04-18 22:50
If your TIRA contribution is deducted and you did not make any prior year non deductible TIRA contributions, then you do NOT have to fill out Part I. Just complete Part II. And your SIMPLE IRA has no affect on your reporting because you did not complete Part I.
If your 2012 income fell in the income phaseout range or went over the max, then you would have either a partial TIRA deduction or no deduction. In that case since some part of your contribution would be non deductible, you would have to complete Part I up to line 3. Then because you did the conversion, you would have to complete the rest of Part I and also Part II.
While this is confusing, the Form 8606 itself tells you when you need to complete each part.
Permalink Submitted by [email protected] on Thu, 2012-04-19 17:50
Thank you for your response – I believe I understand now. It is more favorable in the state I live to do a deductible tIRA –> Roth than to simply contribute to a Roth directly. I wanted to make sure the SIMPLE wouldn’t affect the taxes paid, and you confirmed that. TurboTax also didn’t change the refund amount when I added in a SIMPLE balance, but I wanted to run it by someone else to make sure I was doing it right.
Thank you very much!