Much ado about $0.08?

Submitted by Amar Patel on Thu, 2017-03-02 02:05

Earlier today, I was notified by my broker that a trailing credits conversion, associated with a Roth conversion completed in February, failed. Looking into why, I was told that because I made a current year contribution on the day after the conversion, and a portion of that contribution still sat in cash versus CDs, the trailing credits conversion failed because the system saw more cash than expected. I’m not sure I believe that explanation, but that’s OK… I wouldn’t have wanted all the cash converted anyway.

But I would have expected the interest on the balance that was initially converted to have been converted. That interest amounted to $0.08. But because the whole auto-generated trailing credits conversion failed, and because another will not be auto-generated, am I still responsible for now manually-converting that $0.08?

Assuming I didn’t, and looking ahead to next year’s Form 8606 (based on this year’s Form 8606), I got the following math:

– Line 1 = 5500.00
– Line 2 = Line 14 from 2016 = 5500.00
– Line 3 = 11000.00
– Line 4 = 0.00
– Line 5 = 11000.00
– Line 6 = 5530.00 (this is a guess of course, as of 1-Mar-2017; but the aforementioned $0.08 would be included in here if not manually converted)
– Line 7 = 0.00
– Line 8 = 5524.00
– Line 9 = 11054.00
– Line 10 = 0.995
– Line 11 = 5496.38
– Line 12 = 0.00
– Line 13 = 5496.38
– Line 14 = 5503.62
– Line 15 = 0.00
– Line 16 = 5524.00
– Line 17 = 5496.38
– Line 18 = 27.62

Does that seem right? That 27.62 is 3.62 more than the 24 in interest that was converted along with my previous year’s contribution of 5500 in February of this year.



Submitted by Alan - IRA critic on Thu, 2017-03-02 03:10

  • You should convert whatever amount remains in your TIRA account ASAP. Your 8606 for 2017 should then show a 0 balance on line 6. Your total basis is 11,000 and the taxable portion of your conversion on line 18 will be whatever your conversions total in excess of 11,000. Line 8 and 16 will show the total of the 2 conversions, line 17 will be 11,000 and line 18 will be the amount line 16 exceeds line 17.
  • If after doing the second conversion, there is still a couple bucks in the TIRA, it does not hurt anything. You can deal with that next year, as I assume you will continue to make non deductible contributions to the TIRA and continue to do a back door Roth conversion.

Submitted by Amar Patel on Thu, 2017-03-02 03:48

  • I’m trying to grasp some conceptual items here, like in the math as originally posted, why does another 3.62 get added as taxable to line 18 when only 24 in interest was earned before the February conversion?  I see the same 3.62 counted as basis for following years too.
  • And, assuming no other conversions for 2016, would the $0.08 in interest attached to the balance converted in February still need to be converted manually?  The broker had instructions to convert the full balance as of the date in February.  I suppose they did do that.  But must the $0.08 now follow too even without any other conversions?
  • I think I’ve seen how this site differs from other sites on the “waiting period” between a contribution and a conversion in a so-called backdoor Roth.  I think this site favors little to no wait.  Does waiting longer hurt one’s tax position over time, other than having to balance math between multiple Form 8606s over the years?  I think I understand the point about getting the funds into the Roth quicker so that they can be invested sooner.  But that thought aside, any negative tax consequence of doing backdoors this way over time?  Or diminishing of value of future Roth conversion opportunities (like somehow the opportunity to convert the yearly limit is somehow permanently eroded)?

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