Non-deductible IRA taxes + high income conversion
Hi everyone,
I have 3 retirement accounts: 401k, traditional IRA, and Roth IRA. For several years, I contributed to a Roth IRA. The last couple of years my income was >$120k and I wasn’t eligible for the Roth. So I’ve been contributing to a traditional IRA with post-tax $, but never (couldn’t) take a tax deduction on my 1040. So basically all of my IRA contributions have been non-deductible.
1: I never filed a 8606 for the years I funded the trad IRA… I simply didn’t take the deduction. Will that come back to bite me when I retire and take my IRA distributions? Or bite me today when I try a Roth conversion? Only the IRA earnings should be taxed, but it is dawning on me that I don’t have any paperwork that proves what part of the trad IRA is taxable or not taxable. In general, who determines the portion of an IRA that is taxable? The IRS or plan administrator? Should I file amended tax returns?
2: How to compute the tax when converting the trad IRA to a Roth? Assume $10k non-deductible contributions and $5k taxable earnings. (5/15 = 33% of the IRA is taxable). It gets back to ques 1, who or how determines the total non-taxable $ in the trad IRA? Will all this info be included on a 1099-R or something like that?
Thanks!
Permalink Submitted by Anonymous (not verified) on Wed, 2010-01-27 17:16
I found this interesting response to your question #1. I personally do not believe that the IRS will just simply waive the penalty:
http://taxes.about.com/b/2007/02/09/forgot-to-file-form-8606-for-non-ded…
#2: The calculation for the pro-rata rule will be performed on IRS Form 8606 and the result will flow to your 1040. Since your custodian does not see your tax returns, your 1099-R will simply report the amount distributed/converted.
pmk
Permalink Submitted by Kevin O on Wed, 2010-02-03 01:16
Thanks! Your google is better than my google. J
Follow up Qs: Like the article mentions, how do I pay the IRS the $50? Should I write “8606 fee 2008” as a comment on the check? Should I send a separate check for each year or just pay $100 for both years? Should I mail it to the same place I mail my 1040 tax return? And can I send all 8606 forms + checks in a single envelope?
Also, is there a way to verify what’s in your past IRS filings? (a simple phone call?) Two reasons: I want to verify the 2008 e-file didn’t include a 8606. After I file the new 8606, I’d like to check and make sure the updated forms actually get applied to my IRS profile, etc.
Permalink Submitted by Alan Spross on Wed, 2010-02-03 02:43
The IRS has consistently been accepting retroactively filed 8606 forms, and not one poster has come back and indicated that the IRS has levied the fine. Many people have faced research projects going all the way back to 1987, the first year that non deductible contributions were possible. However, if you file an 8606 that misrepresents your basis, all bets are off. In your case, if only two recent years are in play, it should not take much work to determine that you both made a contribution and did not deduct it.
But it sounds like you may not be keeping copies of your tax returns. You should keep copies for at least 7 years, and personally I have a copy of every one I ever filed and they really do not take up that much space. Your IRA custodian can also help with the amount and year of your contributions if you do not keep IRA statements either. Note that with a Roth IRA, good records are even more vital unless you are sure that you will never take a distribution until after age 59.5.
Once you have completed your checking, do the 8606 forms in order of the oldest first because they are cumulative. Mail them together with a brief note of explanation to your IRS filing center, some of which have changed this year. I have not heard of any cases of lost forms or people checking their IRS file for their 8606 figures. If you are going to convert soon, your 8606 will compute the taxable percentage, and if the IRS does not agree to your basis, you will find out soon enough. You could simply assume they have your 8606 forms and if not they will inquire about your conversion figures in due time.
You may also continue to make non deductible contributions, so you will be building on your cumulative 8606 totals. The conversion will reduce your basis since you will “recover” part of it with your conversions, but then new regular non deductible contributions will build it back up. Many high income people will be making these contributions and converting tax free right away for the foreseeable future, so an 8606 will be part of each year’s filing, both Parts 1 and 2.
Permalink Submitted by Anonymous (not verified) on Wed, 2010-02-03 02:52
Well, although I am not a CPA or tax preparer here is my take:
If all you are doing is creating the non-deductible basis, the 8606 by itself is sufficient. I would used the version for the year you are updating ie. 8606 for 2008, etc. These can be found on:
http://www.irs.gov/formspubs/article/0,,id=98339,00.html
I, actually, would use separate checks and write the appropriate year and each memo section – just my preference.
Where to send the form. Use this guide:
http://www.irs.gov/file/article/0,,id=105054,00.html
If you sent an electronic return using a vender like TurboTax (like I do), you can log back in and see your whole return. I doubt someone would give your tax information to you over the phone. I would never discuss that over the phoneline anyway.
I don’t think you can find out what your “IRS profile” looks like either. So you may want to keep copies of everything, with mail receipts (tracking).
Hope this helps. Maybe someone elso has experience and will also comment.
pko
Permalink Submitted by Kevin O on Thu, 2010-02-04 23:12
Thanks guys! Yes, I have paper copies for all my tax returns and I just printed out yearly summaries for my IRA contributions/balances. Thanks for the tip on tracking the Roth contributions. I hadn’t thought of that! I’m sure I didn’t submit 8606 for the years I snail mailed. I remember having trouble figuring out which forms Taxcut actually submitted during my e-files. I have the 8606 printed for my home copy, but I want to make sure it was included in the e-file. So that’s why I wanted to ping the IRS and see what they have on file.
What should I say on my brief explanation? “Here is my form 8606 for 2006, 2007, 2008. I made non-deductible IRA contributions those years and I am filing the 8606 to establish basis.” Anything more than that? I can give them end-of-year account summaries for every year if needed (both TIRA + ROTH). But that may not mean very much since people can make up phony account statements, etc.
Not sure what you meant by “if the IRS does not agree to your basis, you will find out soon enough”. I plan to file the 8606’s and then wait a couple of months before doing the Roth conversion. The IRS won’t know any of this until April of 2011 when I do my 2010 taxes and file my 2010 8606, correct? So I won’t find out about any issues until 2011, correct? Or did you mean I’ll have an issue with my 2009 8606 if the updated 2006/7/8 forms aren’t in the system yet? The 2006/7/8 forms won’t be filed much ahead of my 2009 taxes, so hopefully that is OK. Can anyone comment/advise?
Thanks again for all the help! I’m just a regular Joe trying to make heads or tails and do the right thing.