Help with Form 8606
In 2010 I converted my deductible IRA (hypothetically valued at $30,000) and nondeductible IRA (hypothetically valued at $15,000 plus $5,000 I added in 2010 for a total value of $20,000) to a Roth IRA. My understanding is that I will have to pay tax on the $30,000 portion of my now $50,000 Roth IRA. However, when I complete Form 8606 (without any tax software–the old fashioned way), I get taxable amount as $40,000 instead of $30,000. What have I done wrong? Here are the amounts on each line for Form 8606 for my hypothetical numbers above:
line 1 5,000
line 2 15,000
line 3 20,000 and checked “yes”
line 4 0
line 5 20,000
line 6 50,000
line 7 0
line 8 50,000
line 9 100,000
line 10 .200
line 11 10,000
line 12 0
line 13 10,000
line 14 40,000
line 15 0
line 16 50,000
line 17 10,000
line 18 40,000
Permalink Submitted by Alan Spross on Wed, 2011-02-23 00:36
Line 5 is where you went wrong. Since you converted your entire TIRA, the year end value of your TIRAs is 0, not 50k. Following through, you would get the non taxable amount of 20,000 (40%) instead of 10,000.
But note that line 2 should show the amount of your prior basis from non deductible contributions, not the VALUE of the account. The value would only turn out to be correct if you made 15k of non deductible contributions plus the new 5k non deductible contribution and there was no gains or losses at all in this account when you converted it. Very unlikely.
For a 2010 conversion, you must also decide whether you want the taxable income of 30k in 2010 or you want 15k in 2011 and 2012. You make that choice on line 19.
Permalink Submitted by Norman Rifkind on Wed, 2011-02-23 00:46
Actually I invested the prior year’s nondeductible contributions in basically cash so the value is, neglibly above, 15,000. You mentioned line 5 is wrong (which is a simple mathematical calculation) but I think you meant line 6, correct? Now that I look it over, you are (of course) correct….line 6 was my error since I converted before 12/31/10 so my value on that date was 0, not 50K.
I realize I can treat the 30K as income this year, or split it between years 2011 and 2012 but because of an increase in our state tax for those years, and my likely marginal tax bracket being the same in all 3 years without regard to the added income, I likely will bite the bullet this year….with after tax dollars of course.
Thanks so much for your help. For your information, I contacted the IRS 800 number and was talking with a representative for 45 minutes and neither could figure out what we did wrong. I called again tonight before I posted and yet another representative could not assist me.
What a great website!!!!
Permalink Submitted by Alan Spross on Wed, 2011-02-23 02:25
Right, line 6 – typing error.
But revisiting the value of the IRA you call the non deductible IRA. Your recent contribution of 5k was in cash, but the other 15k must have been contributed over a period of years. Seems unlikely that the value of this IRA could exactly equal your total non deductible contributions over a period of years. Of course, every year in which you made a non deductible contribution had to be reported on an 8606, line 1 and then added to your prior basis shown on line 2. As long as your reference to “value” is the total amount of all non deductible contributions and NOT the fair market value of the account you are fine.
Permalink Submitted by Norman Rifkind on Wed, 2011-02-23 14:42
Thanks again Alan for further clarifying, but I am sorry to say, and somewhat embarassed to admit, that my actual basis in the nondeductible IRA is a little higher than what I called “value” for my hypothetical due to some minor losses sustained. I started nondeductible IRAs when I first read in 2007 that income limits would be eliminated in 2010 for conversions to Roth so I simply used it primarily to park some cash, but did buy one stock whose value decreased. (Paranthetically, all nondeductible contributions have been filed in prior years’ 8606 forms, and the 2010 contribution was actually $6,000 and not $5,000 but it made my hypothetical easier and did not impact the crust of my problem which you solved)
I will complete the form tonight and the rest of the return and post if I have any other questions, but I suspect your astute answer above resolved my misreading of line 6. Again, awesome website!!