SEP and Traditional IRA (TIRA) conversion to Roth IRA and Form 8606

Submitted by unknown on Fri, 2015-01-09 18:17

Fact Pattern:
2013 employer contribution to SEP IRA
Jan 2014 non-deductible TIRA contribution (for 2013 tax year)
2013 individual return included Form 8606 showing Jan 2014 non-deductible TIRA contribution and therefore basis of that amount on line 14
Jan 2014 Roth conversion of SEP and TIRA
Basically Roth conversion of balances in SEP (2013 employer contribution) and TIRA (Jan 2014 ND contribution for 2013) in Jan 2014

2014 employer contribution to SEP IRA (balance was 0 prior to that b/c 2013 conversion had already been converted to Roth in Jan 2014)
Jan 2015 non-deductible TIRA contribution (for 2014 tax year)
Jan 2015 Roth conversion of SEP and TIRA
Basically Roth conversion of balances in SEP (2014 employer contribution) and TIRA (Jan 2015 ND contribution for 2014) in Jan 2015

I understand that the 2014 Roth conversion is taxable based on the ratio of pre and post tax balances of all IRAs, but I’m struggling with how to calculate that and when. Since the conversion was done in Jan 2014, is it based on values at Dec 2013? Looking at the 2014 Form 8606, Line 6 asks for the value of all the traditional, SEP, etc. at 12/31/14. That’s almost 12-months after the conversion was completed. Shouldn’t that be 12/31/13? Also, line 9 says to add the 12/31/14 value and all distributions and Roth conversions (lines 6-8), but that picks up the 2014 employer contribution to the SEP which doesn’t make sense to me.

Thanks.



Submitted by Alan - IRA critic on Fri, 2015-01-09 18:55

  • Line 6 of 2014 8606 should indicate the 12/31/2014 IRA balance since the taxable amount ratio is done using year end values adjusted for contribution and distributions (conversions) actually done in 2014. The SEP contribution done in 2014 is properly included in the 12/2014 year end balance. In other words, any amount that is either still in the IRAs at year end plus amounts such as conversions that were run through the IRA during the year are included for the pro rate calculation.
  • The above calculation are all based on where the money actually is regardless of which years the contributions are for. Your January, 2015 ND contribution which you reported on line 1 is subtracted back out on line 5 because it was not in the IRA on 12/31/2014.
  • You could achieve a one time faster basis recovery by moving up your ND IRA Contribution by a month to December. That would reduce the taxable % of a conversion since the contribution would not be subtracted out on line 5. Presently, you are also accelerating your SEP contributions (if self employed), since most people do not know the allowed SEP contribution for a year until their tax return is prepared the following spring. Then they make the SEP contribution for the prior year. There would also be a one time reduction of your taxable amount if you made the SEP contributions for a year in the following year. In summary, your contribution pattern has been accelerating the year of the pre tax SEP contribution and delaying the contribution of the ND TIRA contribution. Perhaps you want to reverse that pattern.
  • The other way to not only reduce but to eliminate the taxable portion of the conversion is to set up a solo K to replace the SEP IRA, unless you expect to actually benefit from converting pre tax dollars to your Roth in the long run.

Submitted by unknown on Fri, 2015-01-09 19:31

i’m still trying to absorb your response, but just to clarify.  the sep contribution done in 2014 was for 2014.  there was also a sep contribution done in 2013 for 2013.  your second sentence above states that the sep contribution in 2014 was for 2013.  does that make a difference in your explanation?  thanks.

Submitted by Alan - IRA critic on Fri, 2015-01-09 20:19

It makes no difference and I removed the reference to 2013 for that contribution. For pro rating, but not for deductibility, what matters is the year IN WHICH the contribution is made. Therefore for pro rating purposes the year that SEP Contribution was for does not matter. With respect to the tax year in which it is deducted, then it does matter.

Submitted by Ted McNamara on Mon, 2017-04-10 20:18

I have $1250 left on my 8606.  Can I convert it to a Roth IRA so I can have a zero basis.  How do I report this conversion on my Fed taxes?

Submitted by Alan - IRA critic on Tue, 2017-04-11 00:26

You cannot convert basis by itself unless all your TIRAs are worth less than your basis. And you cannot get rid of this basis without doing a total distribution or total conversion. For example, if your IRA is worth 125,000 in total, your basis is 1% of the total. Any conversion you do will be 1% non taxable and 99% taxable. If you are still working and want to roll your pre tax IRA amount into your employer plan, you could roll in the 99%, then convert the 1250 tax free, then anytime after the end of that year, roll the pre tax amount back out of the plan if the plan allows it. If you are retired, you are probably stuck with this basis.

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