Any changes to Roth Conversion Pro Rata rules for 2018?

Submitted by Jo Blayney on Sat, 2018-12-01 02:59

I have a TIRA with a basis (22%) that I would like to convert to a Roth IRA over 2 years, 2018 and 2019. I am trying to determine the optimal amount to convert each year taking into account our income, IRMA, and NIT. I understand that Part I of Form 8606 should be completed if “part, but not all” of the TIRA is converted, and Part II should be completed if ALL of the TIRA is converted. I just purchased the 2018 tax software I am most familiar with to help with this decision. The software asks the questions: Did you “move the money to another retirement account” and did you “convert all of this money to a Roth IRA account” (vs. a combination of rolling over/converting/cashing it out). I answered YES to these two questions. The software filled out Part II and not Part I of Form 8606, and moved 100% of the basis to the Roth IRA. It seemed to interpret the “ALL” of Form 8606 as the total amount CONVERTED, not the total amount of the entire TIRA. The software does, however, mark the form as “Do Not File” and “Form Not Final”. The 2017 version of the same software does complete Part I of form 8606 for my example. So, does anyone know if there are changes to the pro rata rules for TIRA to Roth conversions for 2018, i.e., making these conversions more like those of 401(k) to Roth IRA rollovers per IRS notice 2014-15, where one can separate or select the basis (after tax) dollars when rolling into a Roth IRA. There is a significant difference in my tax due if 100% of the basis vs. 50% of the basis (I’d like to convert over 2 years) is converted in 2018. And I would like to know this before the end of the tax year so I can convert the correct amount within my constraints of income, IRMA, and NIT.



Submitted by Alan - IRA critic on Sat, 2018-12-01 04:27

  • There have been no changes to Form 8606 or how IRA basis is applied to distributions. A conversion is a distribution and rollover.  If you do a conversion Part II of Form 8606 is always completed, and Part I is completed if you converted only part of your TIRA and you made non deductible TIRA contributions in 2018 or any prior year. Perhaps your entry into the software is incorrect. You should be asked what the year end value of all your non Roth IRA accounts is, but since we have not yet reached year end, you will have to guess at that figure as your investment results over the last month of 2018 will affect that figure. And that figure will affect how much basis is applied to your conversion per the pro rate rules of Form 8606. If you are nearing an IRMAA threshold which includes only the taxable portion of a conversion, I would not try to get overly close to the MAGI threshold as it is too costly if you go over by even $1 since IRMAA surcharges apply to your entire premium.
  • If you are going to make a contribution after year end for 2018, that will not affect the ratio since contributions made after year end are subtracted out of any basis you would add on line 1 of Form 8606.
  • You might print off an 8606 and enter your estimated numbers to serve as a comparison to what your tax program indicates.

Submitted by Jo Blayney on Sat, 2018-12-01 04:58

Thanks for your help.  Do you know what distribution code is entered in box 7 of 1099-R for a TIRA to Roth conversion?  I talked to a rep at Fidelity and they didn’t know for sure, but thought it might be 7, Normal Distribution.  I tried my tax software again and got the same result:  entire basis is distributed in this year converted amount.  I have filled in the 8606 by hand and get the result you describe, which I think is correct.  I do not think the software asked for the y/e value of all non Roth accounts.  I will it again.    

Submitted by Jo Blayney on Sat, 2018-12-01 05:39

I tried my tax software again.  Same result, it takes all the basis out this year.  Software DID ask what y/e value of all TIRAs is.  Form 8606 does not update basis on line 14 Form 8606 of remaining TIRA amount after Roth conversion.  Worksheets have all the proper information, it just isn’t recognizing the situation.  I suspect the software is not yet complete for 2018 or has a glitch.  I will contact them soon.

Submitted by David Mertz on Sat, 2018-12-01 14:04

2018 TurboTax currently has a bug in the basis calculation that is triggered if you tell TurboTax that you converted all of the money to Roth.  To avoid this bug, instead tell TurboTax that you did a combination of transactions, then explicitly enter the amount converted, even if it’s the entire amount.

Submitted by Jo Blayney on Sat, 2018-12-01 17:07

Thanks, DMx for verifying that 2018 Turbo Tax has this bug.  I was too hopeful thinking the pro rata rules had changed.  I guess It’s far more likely Turbo Tax has a bug than the pro rata rules had changed!

Submitted by David Mertz on Sat, 2018-12-01 17:45

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