2017 Roth Conversions

Submitted by Christopher Combs on Tue, 2017-01-10 20:35

Dear Alan et al,

I have two Roth conversion scenarios that I want to ask you about:

1. Ed makes a $5,500 non-deductible IRA deposit for 2016 in Feb 2017 and converts it to his Roth IRA the next month. Although he has no other Traditional IRAs, he rolls a $80K 401(k) into his Traditional IRA later in 2017.

My understanding is that, even though the nondeductible IRA deposit was for the 2016 tax year, the conversion is taxable because the $80K rollover shows up before 1-1-2018. Does this sound right?

2. Luke makes a $5,500 non-deductible IRA deposit for 2016 in Jan 2016 and converts it to his Roth IRA the next month. Although he has no other Traditional IRAs, in Mar 2017 his company starts and funds a 2016 SEP account with $53K for him.

My understanding is that, since the entire nondeductible IRA was converted before 1-1-2017 and the SEP didn’t exist on 12-31-2016, his Roth conversion is not taxable. Does this sound right or would the fact that the SEP deposit is credited towards the 2016 tax year make it taxable? He is not a sole proprietor.

Thank you very much in advance,

Chris



Submitted by Alan - IRA critic on Tue, 2017-01-10 23:23

  1. Chris, yes you are correct. The conversion will be over 90% taxable because that 80k balance will still be in his TIRA on 12/31/2017. The only way to prevent this is roll the 80k back into an employer plan before year end, or of course recharacterize the conversion.
  2. You are correct again. The SEP does not affect the 2016 conversion because there was no non Roth IRA balance on 12/31/2016. It does not matter that the SEP contribution was for 2016.


Submitted by Denise Sowell on Thu, 2017-01-26 20:13

We want to  Recharacterize a ROTH Conversion that was completed in 2016, before we file our 2016 tax return. Do we need to submit a Form 8606 when we file our 2016 taxes?



Submitted by Alan - IRA critic on Thu, 2017-01-26 21:53

If the full amount of the conversion is rechacacterized, you would not report the conversion on Form 8606. However, the return should include an explanatory statement indicating the date and amount of the conversion and the date and amount of that conversion that was recharacterized, as well as what the conversion was worth at the time of recharacterization. This statement allows the IRS to know that  you did not neglect to report the conversion,  because the recharacterization 1099R will not be issued until January, 2018.



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