Does Sequence Matter?
Hello-
I have a husband/wife client. They both need to take all of the following actions.
1. Amend 8606 forms. They sometimes filed and sometimes didn’t file 8606 forms but never cumulatively tracked non-deductible contributions as basis in the IRA.
2. Roll pre-tax portion of IRA into 401k/403b to isolate the IRA non-deductible contribution basis.
3. Recharacterize a Roth IRA contribution made in 2021 to a non-deductible IRA contribution as income will be too high for the Roth contribution.
4. Convert the remaining IRA basis to the Roth.
Can we go ahead and process steps 2-4 and then just make sure we send in the amended 8606 forms with their 2021 tax return when they file early next year or is it required those are completed and filed prior to steps 2-4?
Permalink Submitted by Alan - IRA critic on Wed, 2021-12-01 23:53
The retroactive 8606 forms can be filed after the other transactions, but if there have been IRA distributions or conversions in the last 3 years, the changed IRA basis will make it necessary to amend those returns. Due to pending legislation, Step 4 may not be possible after 12/31/2021, so time is very limited to roll over pre tax IRA balances to employer plans. Before that can be done, the basis must be completely reconstructed, which could delay the rollover into the employer plans enough such that it might be too late to complete the entire process by year end. There is no time to spare here.
The reconstructed 8606 forms should be completed and sent to the IRS before filing for 2021, so that current basis is consistent with the last reconstructed 8606 filed. These 8606 forms could go all the way back to 1987, and must be completed starting with the earliest year. 8606 forms prior to 2021 should not be filed with the 2021 return, they should be sent together to the IRS separately with a note of explanation.