Completing an 8606 on rollover

Submitted by BruceM on Fri, 2009-02-27 19:48

I’ve always thought that if one rolled over an employer sponsored retirement plan to their TIRA, that any basis would be accounted for by filing an 8606 for the year of the rollover. However, I came across this in the latest Pub 590, p.18

“A Form 8606 is not used for the year that you make a rollover from a qualified retirement plan to a traditional IRA and the rollover includes nontaxable amounts. In those situations, a Form 8606 is completed for the year you take a distribution from that IRA.”

Does this mean that I keep a separate personal record of the basis transferred over the years, and then when I make a future withdrawal, add up any and all past transfers of basis and include this on the 8606 I file in the year when I make the future TIRA withdrawal?

Thanks

BruceM



Submitted by Edward Czapor on Fri, 2009-02-27 23:08

I believe that is what Pub. 590 is saying. My tax software keeps track of basis from year to year accounting for any distributions. So with a rollover of nontaxable amounts from an employer plan, I simply add the basis. With any subsequent distribution, I attach an explanation for the increased basis to account for the difference from previously filed forms 8606 if any or to establish the basis from the rollover.



Submitted by Alan Spross on Sat, 2009-02-28 01:31

Bruce, congratulations! You may be the first to catch this change in reporting, and you also may be one of the few who will ever notice this, since the 8606 Inst. do not mention this at all, other than for occasional indirect referrals to Pub 590.

Although omission of these after tax rollovers on line 2 of Form 8606 have been very frequent, this change will further encourage these oversights. The only thing I can think of is that the IRS does not want to look at any more 8606 forms than absolutely necessary in any given year, particularly stand alone forms. This will probably further erode both taxpayer and IRS control over correct reporting of IRA related matters as one might expect when the issue is not reported when the taxpayer is currently reviewing the 1099R forms and his recent tax year transactions.

I wonder if this change could be a presursor of ending the acceptance of back year 8606 forms for regular IRA after tax contributions, and they do not want the after tax employer plan rollovers to be caught up in that. It would be very interesting to know what was actually included in their thinking here.



Submitted by Edward Czapor on Sat, 2009-02-28 03:55

The 2008 instructions for Form 8606 also state that a Form 8606 should not be filed solely for plan rollovers. The instructions for line 2 also mention adjusting the amount on line 2 for nontaxable portions rolled over from employer plans if required to file an 8606. These instructions are consistent with Pub. 590.



Submitted by Alan Spross on Sat, 2009-02-28 05:06

I must have missed that. What page and column is this on?

I see on p. 1 instructions to not file it for rollovers to a ROTH, but what about TIRA?



Submitted by BruceM on Sat, 2009-02-28 06:42

Alan
Thanks…
Yes, it seemed odd. But then, I don’t remember any instructions for completing an 8606 upon rolling a qualified plan into a TIRA…I think everyone just assumed that’s how you’d keep track of basis.

I think I’d do an 8606 anyway, with a copy of the transfer document from the retirement plan showing the basis, even though I don’t file the 8606. Rather, just keeping it as proof of basis so I’ll have a source document when I do my first IRA withdrawal in 2020 🙂

BruceM



Submitted by Edward Czapor on Sat, 2009-02-28 17:30

Bruce, I think you hit the nail on the head that everyone assumed that an 8606 should be filed to report basis from a plan rollover to a TIRA. I doubt that this was ever required, but seemed the prudent thing to do to inform the IRS and to better assure that basis would not be forgotten. This is analagous to to keeping track of stock basis. You do not inform the IRS when you make a purchase, but you should be prepared to prove your basis when you sell. Similarly, you only need your basis from a plan rollover when it affects your tax calculation on the Form 8606. Anyway, by the time you take your first IRA distribution, your IRA value will be so high (hopefully) that your basis will be insignificant.

Ed C.



Submitted by Edward Czapor on Sat, 2009-02-28 18:01

Alan, Yes the pg. 1 instructions refer to rollovers to a Roth. I believe the reason here is that a rollover could not be properly reported on a 8606 if there was any existing basis on line 2. I believe the statement “However, do not file form 8606 soley to report rollovers from qualified retirement plans.” means exactly that from the context of the instructions for line 2 on pg. 6. If this is the first year you are required to file Form 8606 (required meaning the list under Who Must File on pg. 1), enter -0- —– However, you may need to enter an amount other than -0- or adjust the amount if your basis changed because of any of the following. You rolled over any nontaxable portion of your qualified employer plan to a TRADITIONAL or SEP IRA. Include the nontaxable portion on line 2. Indirectly, they are saying to not file solely to report basis by telling you when to file and add basis.
This is my interpretation, and why I believe the instructions are consistent with Pub. 590.

I doubt that this has anything to do with ending acceptance of back year 8606 forms since they are filed for all the reasons listed on pg. 1. I think it is simply a matter of not needing the basis from a plan rollover until it affects the tax calculation

Ed C.



Submitted by BruceM on Mon, 2009-03-02 06:08

Ed
Thanks for your explanation. The ‘stock basis’ example is a good one.

Since a direct retirement plan-to-Roth rollover does not involve the 8606, what is the source document used in accounting for the basis? Is it the difference between box 1 and box 2a on the 1099-R? Or must there be a retirement plan generated rollover document that shows what portion of the distribution is pretax?

Thanks

BruceM



Submitted by Edward Czapor on Mon, 2009-03-02 19:42

Bruce, A 1099-R showing the correct taxable amount in box 2a should suffice. To my knowledge there is no formal retirement plan document that would show pretax distributions other than the 1099-R. The entire rollover will also be reported on Form 5498. Any supplemental information regarding basis furnished by the plan should of course also be filed.

Ed C.



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