Multiple year non deductible IRA contributions
Client who is age 57 made monthly non deductible contributions to a previously funded Traditional IRA for years: 2014 at $3000, 2015 at $4200, and 2016 at $1400 (which have now been stopped). Client never filled out IRS Form 8606 for years 2014, 2015; and made too much money to deduct it on their taxes. Client would now like to move non deductible contributions to a Roth IRA. What is the best solution? I have been told by CPA’s that the 8606 needs to be filled out for 2014 and 2015, and 2016 next year and funds could be left in account. Downside – the 8606 will need to be filled out for future distributions. Or can the funds be recharacterized form the IRA to Roth IRA for 2015 and 2016? But what to do with 2014? Or can they withdraw non-deductible contributions without 10% early withdraw penalty or 6% penalty on contributions and or gains? And, how far back can they do that? Should they do the 8606 forms to set up the basis and then do a partial conversion? Can they do a partial conversion?
Permalink Submitted by Alan - IRA critic on Thu, 2016-06-09 20:30
For 2015 and 2016 contributions, if a Roth contribution is desired, both of these years contributions can be recharacterized as regular Roth contributions. I assume the 2015 return was either filed or extended by 4/18/2016. As for the 2014 contribution, a 2014 8606 can be filed stand alone and mailed to the IRS showing the non deductible contribution. Note that any non deductible contributions shown on an 8606 cannot be converted alone. A conversion would pro rate the non deductible total with the pre tax total of all owned non Roth IRAs. For example, if the 2014 contribution of 3k was the only non deductible contribution in the IRA, and total IRA value was 30k, then 90% of any amount converted would be taxable. Only way to avoid future 8606 forms for any year where there is a distribution is to roll the entire pre tax IRA balance to an accepting employer plan, and then convert the remaining 3k tax free. Of course, they could also convert the entire TIRA balance but would owe taxes on the pre tax amount.