non-deductible IRA to Roth Conversion existing IRA

Submitted by Brittany Koch on Thu, 2014-04-17 17:28

I have a husband and wife client that each have existing IRA’s. Last year they each made $6500 non deductible IRA contributions and immediately converted to a Roth IRA. The tax return was filed on the 15th of April showing no tax on the conversion, not factoring in the other existing IRA’s. What is required to correct or unwind the transaction now that the 2013 return has been filed?



Submitted by Alan - IRA critic on Thu, 2014-04-17 19:10

  • The return will have to be amended regardless of the action taken. But there is a choice to be made that would be affected by the amount of gains on these conversions. If the gains are considerable, then they might opt to keep the conversion and just amend the return to file correct 8606 forms for each spouse which will factor in the other IRA balances. The conversions will end up being mostly taxable, but the earnings will be protected and stay in the Roth.
  • The other choice is to recharacterize the conversions and that will eliminate the current tax on the conversions, but it will also send the earnings into the TIRA where they will eventually be taxed when withdrawn. A 1040X would be required to eliminate the conversion reporting, and explanatory statement added to the 1040X explaining the conversion and recharacterization dates and amounts. Deadline to recharacterize is 10/15.
  • If any earlier non deductible contributions were made, then the 8606 forms should have been filed in the past. Perhaps the non deductible total needs to be updated, but this must start with the oldest year affected.
  • They might also want their contributions back if they cannot be converted tax free. In that case, they would recharacterize the conversions back to the TIRA, and then request a return of contributions with any earnings. Earnings would be taxable and possibly subject to penalty. In that case, the amended return would not need an 8606 at all, but would still need the explanatory statements on these transactions because the 1099R forms will not be issued till next year.

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