Tax deferred IRA Converted to Roth
Hi Everyone, In 2016 & early 2017 I maxed out my tax deferred IRA in Vanguard, but when filing my 2016 taxes in April 2017, I realized I didn’t qualify for the tax deferral deduction. Since I couldn’t take the deduction in the current years, I converted only the contribution portion of each year to a Roth IRA in my Vanguard account. I figured I’d be safe since I converted the balances in the same tax years, never claimed any deductions, and they netted to zero in the same tax years (I know the 2016 conversion happened in 2017, but it was during the grace IRA contribution period before filing).
I’m not totally surprised, and a little concerned, I just got a 1099-R from Vanguard for 11k of recognizable income in 2017. It’ll make the IRS think I earned 11k more than I did. How would you handle this? Am I going to need to ammend my 2016 taxes with an 8606 form?
Thanks in advance for any advice.
Permalink Submitted by Alan - IRA critic on Sun, 2018-01-14 17:52
The 1099R will always show the taxable amount equal to the amount converted because the custodian does not know IRA basis from non deductible contributions. The IRS knows this, but you must have filed an 8606 for 2016 showing your non deductible 2016 contribution. Then for 2017 your 2016 basis of 5500 comes forward to line 2 of your 2017 8606, and is added to your 2017 non deductible contribution of 5500 to total 11,000 of basis on line 3. This is what will make your conversion non taxable. As long as you properly file Form 8606 for both 2016 and 2017, your conversion will be non taxable. That said, for this to work out you cannot have any other non Roth IRA balance other than these two contributions (such as a rollover IRA). Finally, if you failed to file an 8606 with your 2016 return, you can download a copy from the IRS site, complete it, and then send it in by itself to the IRS office to which you would have sent your return.