Fixing past 11 years of mistakenly contributing to a tIRA with no claimed deductions (assumed ROTH IRA)

Submitted by Ken Knows on Fri, 2021-05-28 11:52

So I just learned my girlfriend mistakenly thought she had been contributing to a Roth IRA for the past 11 years. In fact it was a traditional IRA (contributions were on auto pilot from paycheck deduction). So for the last 11 years she hasn’t claimed an IRA tax deduction.

What options exist for remedying this mistake (recalling Roth IRA contributions were the goal)?

One option is to file an amended return (limited to the past 3 years only [1]) to claim the deductions and receive a refund. But if she is not seeking a refund is there an options for filing, Form 8606 to record 11 years of non-deductible tIRA contributions. Then she could do a Roth conversion paying taxes only on the gains. Alternatively is it even possible to have the investment company (American Century) correct 11 years of contributions to record them as a Roth vs tIRA?

I little more info on her situation. For the past 11 years her tIRA contributions averaged $1500 per year to a pre-existing IRA. The investment has been in equities with average growth over that period. Her MAGI is about $60K now and has not exceeded that for the last 11 years.

References:
[1] https://www.irs.gov/newsroom/heres-what-taxpayers-need-to-know-about-filing-an-amended-tax-return



Submitted by Alan - IRA critic on Fri, 2021-05-28 16:01

Starting with the first such year through 2017, file Form 8606 for each year to report a non deductible TIRA contribution. Each form will update the accumulated prior TIRA basis.  Starting with 2018 and 2019, she has a choice to either continue the 8606 filings or to amend the 2018 and 2019 to report the deduction and claim a refund. For 2020 if she has filed her 2020 return or an extension by 5/17, she can recharacterize the TIRA contribution as a Roth contribution, which is preferable if she has gains on the 2020 contribution, or she can amend 2020 if already filed to claim the deduction if she prefers the deduction. She cannot recharacterize any contribution for a year prior to 2020, but she can amend 2018 and 2019. 
Or she could file the 8606 forms through 2020, and convert the entire TIRA to Roth this year, but the cumulative gains could result in considerable taxable conversion income. If she chooses this, she should recharacterize the 2020 contribution first. 
Her intent with the earlier contributions is meaningless now, but she does have the above 8606 option through 2017, and multiple options starting with the 2018 contribution. If she amends 2018 and 2019 to claim the deduction, be sure her MAGI for those years does not enter the deduction phaseout range.

Submitted by William Tuttle on Sat, 2021-05-29 01:11

If your girlfriend has a 401k, 403b or 457b that accepts IRA rollovers. Depending on circumstances, you may want to rollover the pre-tax balances and only the pre-tax balances to that plan. Then you could do a Roth conversion of the remaining non-deductible basis with little to no tax liability.

Submitted by Ken Knows on Tue, 2021-06-01 16:23

To execute this apporach she would need to identify the shares purchased from capital gains and dividends over the 11 year period, correct?

Submitted by Ken Knows on Mon, 2021-05-31 21:57

Alan-iracritic and spiritrider Thank you for your responses.

Submitted by Alan - IRA critic on Tue, 2021-06-01 16:40

If the pre tax IRA assets were rolled into an acccepting employer plan, there is no need to identify or track any individual investments, and there are no cap gains in tax deferred accounts. She would only need to identify her IRA non deductible contributions (aka IRA basis reported on Form 8606), and avoid rolling over these IRA basis amounts in the employer plan, since such rollover of IRA basis is not allowed. This IRA basis would show on the last 8606 filed (line 14) plus any current year ND contributions made that are not yet reflected on the current year 8606.

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