Non-deductible IRA to Roth conversion bank reporting

Submitted by alberto vega on Fri, 2018-11-02 15:39

Married individual 71 years old in May 2018. Took already the 2018 RMD ($900) in Sept 2018. Has a non-deductible IRA.
Converted to a Roth IRA on Nov 1, 2018. No state income tax
Balance in IRA as of 11/1/2018 is $12,000 non-deductible contributions and $5,000 income =$17,000 total, after the 2018
$900 RMD was taken.
If $1,000 in earnings expected after conversion, 2018 balance as of 12/31/18 will be $ 18,000.
Bank states when they will issue FORM 1099 about the conversion and distribution they will place the converted amount $17,000 in the gross distribution
and taxable distribution boxes. They will not show that $13,000 is not taxable ( 12000 converted balance plus 1,000 earnings after Roth conversion) and $5,000 is taxable
Questions

1. I understand I Will have to pay tax now on $5,000 (interest) portion of converted balance as of 11/1/18. $ 12,000 is tax free because they were non-deductible contributions and additional $ 1,000 is also tax free because it was earned after the Roth conversion in 2018. Correct?
2. Also I will have to pay tax on the RMD taken before the 11/1/18 conversion to Roth which the RMD was $900
3. But how do I report correctly in the 2018 tax return the non-taxable and taxable portion when the FORM 1099 from the bank
is not going to split it correctly. They indicate they do not keep records of the non-deductible traditional IRA contributions



Submitted by Alan - IRA critic on Fri, 2018-11-02 15:57

  1. Generally you are correct. The 1099R must report the gross distribution as taxable because the custodian has no idea of what your IRA basis is. You then complete Form 8606 to show your 12,000 of basis, and the form will calculate the taxable amount.  The 1,000 of gain will be in the Roth IRA, and will be tax free once your Roth is qualified (5 years since first Roth contribution).
  2. Note that Form 8606 integrates the RMD distribution of 900 with the conversion and comes up with a combined taxable amount using the same % for both distributions. This means that a small portion of the 12,000 of basis will be applied to your RMD distribution. This means for your total conversion and RMD of 17,900 will have a taxable amount of 5,900 and 12,000 will be tax free.
  3. All these calculations are done on Form 8606 (or certain worksheets if you use a tax program). The resulting taxable amount replaces the amount shown in Box 2a of your 1099R forms, so it is critical to have your 8606 correct. With an 8606 the IRS will ignore the Box 2a taxable amount on the 1099R. The bank is correct, they do not know or care about how much IRA basis you have.
  4. For all this to work correctly, you must have filed an 8606 each year you made those non deductible contributions. If you did not, you will have to file them now for each year you made a non deductible contribution. The last 8606 before this year should have 12,000 on line 14.

Submitted by alberto vega on Fri, 2018-11-02 16:33

Should  I have the bank, after the Roth conversion,  split the traditional IRA in a Roth IRA and a traditional IRA.Do you think they would do it without giving me a hassle?

Submitted by Ben Meyer on Fri, 2018-11-02 16:50

On the form 1099-R the bank should also check box 2b with the caption “taxable amount not determined”.  This negates the taxability of the taxable amount shown in box 2a, and means that you will be determining the taxable portion of the RMD distribution and the conversion using form 8606 as Alan described.  The reason for this procedure is that the bank does not track the non-deductible after-tax portion of your contributions, and they can’t know about any other traditional IRA accounts you may have at other institutions.  Form 8606 takes into consideration all of your traditional IRA accounts at other institutions, if any, in addition to the one that made these distributions. 

Submitted by Alan - IRA critic on Fri, 2018-11-02 17:41

  • I do not understand your question.  If you convert your entire TIRA you no longer have a TIRA, just a Roth IRA.  The bank may keep your TIRA open for awhile with a 0 balance, just in case you may have an old 401k that you want to roll over. Eventually, they would want to close the TIRA account. 
  • You should only be getting one 1099R combining both the RMD distribution and the conversion, unless they came from two different TIRA accounts. The coding in Box 7 would be 7. Many people expect a Roth conversion 1099R to look different from other distributions but after age 59.5 they are coded the same and can therefore be combined into a single 1099R. If this still does not answer your question, please try to rephrase it.

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