Roth IRA Conversion 2010 question
Hi All,
I can use some help regarding a Roth IRA conversion I did in 2010. While using a computer tax program to prepare my joint return I was surprised to find out that taxes are due on my conversersion according to the tax program. If you can confirm based on the information below it would be appreciated.
Transaction # 1 – On 10/05/2010 I opened a new Traditional non-deductible IRA for $6,000 for myself and $6,000 for my wife.
Transaction #2 – On 10/19/2010 I transferred the money from transaction #1 into existing Roth IRA accounts for $6,000.19 for both of us. I am trying to find out if there is any tax due on this Roth IRA conversion? I received 1099-R’s for $6000.19. Prior to this I had opened Traditional non-deductible IRA’s for myself in 1996 for $2,000 and 1997 for $2,000. My wife had opened Traditional non-deductible IRA’s in 1996 for $250 and 1997 for $2,000.
Transaction # 3 – These IRA’s were converted on 11/15/2010 to Roth IRA’s with a different company. The value on 12/31/10 of the Traditional non-deductible IRA’s for myself from 1996 & 1997 was $157.40 and my wife’s was $1,355.38. Can you claim a loss? I am trying to find out if there is any tax due on this Roth IRA conversion as well? I received 1099-R’s for $157.40 and $1,355.38.
My wife and I had been contributing to Traditional Deductible IRA’s from 1983 through 1986. My contributions totaled $6,529 and my wife’s $4,305. On 12/31/2010 the value of my Traditional Deductible IRA’s was $104,360.60 and my wife’s Traditional Deductible IRA’s was $34,799.12. These are invested with a third company. We file a joint return.
My thinking for doing transaction #1 was that no tax is due for opening a Traditional non-deductible IRA.
My thinking for transaction #2 was that only tax would be due for the gain of $0.19 for each of us.
My thinking for doing transaction #3 was that no tax would be due since it was a loss and we would not have any Traditional non-deductible IRA’s left.
Your assistance in clarifying this matter is appreciated.
Permalink Submitted by Alan Spross on Sun, 2011-03-27 18:27
The main issue you are not recognizing is that all of these traditional IRAs are considered as one large IRA, one for each of you. Each of you has a basis on Form 8606 when you reported prior non deductible contributions and that basis applies over all your IRAs. Likewise, when you convert it does not matter which IRA you converted with respect to how much basis is applied. Form 8606 will calculate the taxable amount for the combined conversions separately for each of you.
1) Be sure you reported all these non deductible contributions in the year you made them – as far back as 1987. If you did not file them, you can do do retroactively, but it will take some major research to figure the amounts that should be reported. This is the only way to avoid double taxes on distributions or conversions. Report your 2010 non deductible contributions on the same Form 8606 used to report the conversions.
2) You have no loss since your basis is far less than your total TIRA values
3) Looking at your post it appears that your total basis is 10,000; your wife’s is 8,250. Your total adjusted TIRA values were over 100k for you and that means that your conversions are over 90% taxable, your wifes’ around 75-80%.
4) These conversions reduce your remaining basis for future distributions, and the 8606 for each of you will show the remaining basis as well.
5) Pay no attention to the taxable amount shown in Box 2a of the 1099R forms. Each custodian has no idea what your total basis is. Only the gross converted amount matters and Form 8606 does the rest.
6) You will be able to split the taxable amounts between 2011 and 2012 unless you opt not to. Your choice here.
It sounds like you have kept decent records, just hope you filed those prior 8606 forms. If you did not, let me know.
Permalink Submitted by Steven Messin on Sun, 2011-03-27 18:58
Thanks alan-oniras for the great explanation. It seems my tax program carried out the calculations as you described. I have to go back and see if the form 8606 was filed each year.
Do you know which years I had to file that form?
Permalink Submitted by Alan Spross on Sun, 2011-03-27 19:49
Just the years for which you made non deductible contributions – apparently 1996 and 1997. These forms are cumulative as they add up your non deductible contributions so normally they are filed in order.
But if you find that you did not file these forms for each of you (Form only holds one SSN), you could still go ahead and complete your 2010 return as if you had. That means you would have a starting basis to which you would each add your 6,000 2010 contribution. Then around May 1, file the old 8606 forms separately with a note of explanation. When determining if you should file the form for a particular year, look on your tax return to be sure that you did not deduct the full contribution you made. You would need to look for Form 5498 or other record to be sure you actually made a contribution for that year, since if you overstate your basis, you can get fined and penalized.
Permalink Submitted by Steven Messin on Mon, 2011-03-28 01:54
Thank you once again!