Backdoor Roth Pro-Rata Rule
Doing backdoor Roths for a client – just found out that they have a $20,000 IRA in a fixed annuity – we have completed 4 years of backdoor Roths – never included this IRA in the calculation – what needs to happen now with the past tax returns – or how does this need fixed since we didnt convert the 20k
Permalink Submitted by Alan - IRA critic on Wed, 2015-12-23 21:10
Unless he filed late, 2012 is the oldest open year. Client would have to amend 2012-2014 returns to reflect the year and value of that IRA annuity on line 6 of Form 8606. The result is that roughly 80% of the first conversion will be taxable, 65% of the second conversion, etc. For 2015, the taxable portion of a 5500 conversion would probably be down to perhaps 50% or so. Each 8606 starting with the oldest shows the remaining basis on line 14 which is then brought forward to the next year. Of course, the 2015 conversion can still be recharacterized, but it is the older conversions that have the highest taxable amounts, so there is probably no sense in recharacterizing the 2015 conversion now. In fact, his remaining basis now is probably half of the total TIRA value, so he might as well convert the entire balance in 2016.