Need Aggregation Rule Help

Submitted by Narayan Baral on Sun, 2017-03-19 18:00

I rolled over my previous employer’s 401K ($11,172.04) to current employer’s 401K on May 19, 2014. I then rolled over the same 401K ($10,892.12-lost value) to Traditional IRA on Feb 2, 2016.

I opened non-deductible Traditional IRA ($5,000) on June 6, 2010 (which I never reported to IRS-did not know). I then again rolled over this account to Traditional IRA ($5,460.13) on Feb 9, 2016, to convert to Roth IRA. I then rolled over this account to Roth IRA ($5,662.19- Value increased.

Can you please advise how pro-rata aggregation rule applies in my case.
Thanks
Narayan



Submitted by Alan - IRA critic on Sun, 2017-03-19 19:16

  • First, you need to complete a 2010 Form 8606 showing your 5,000 non deductible TIRA contribution and send it to the IRS. Now you must report the 2016 conversion of  5662 on Form 8606 for 2016. This form will calculate the taxable amount of your conversion based on the adjusted year end 2016 value of all your non Roth IRA accounts. If you IRA basis is 5000 (goes on line 2 of 8606), and your year end value is say 11,000 for the rollover IRA, then 5662/11000+5662 = 34% non taxable. 1925 would be the non taxable amount and 3737 would be the taxable amount of the conversion that would go on line 15b of Form 1040. You would applied applied 1925 of your IRA basis to the conversion which would leave you with 3075 remaining basis on line 14 of the 8606. That would carry forward to the next distribution or conversion you do, and part of that would also be non taxable. A tax program will complete the 8606 by asking you a couple of questions.
  • You should have a 1099R for each rollover. The 10892 will be reported on lines 16a and 16b of Form 1040, with “rollover” showing next to 16b. None of this was taxable. The IRA 1099R showing your conversion distribution will show 5662 as taxable in Box 2a, but your 8606 will override the 2a amount by applying your 5000 IRA basis to the conversion reducing the actual taxable amount. You may need to download an 8606 and enter the figures to see how this should work.

Submitted by Narayan Baral on Tue, 2017-03-21 11:25

Thank You. My CPA says I need to pay tax on a non-taxable contribution that I did in 2010  based on his software. So, his math is $5,000 +$661.19. I keep saying I only have to pay for the increased amount which is $661.19.

Submitted by David Mertz on Tue, 2017-03-21 17:22

Alan’s reply above shows the proper calculation.

Submitted by Alan - IRA critic on Tue, 2017-03-21 17:48

When you change tax preparers the new preparer must have your IRA basis information properly entered into his tax program or the taxable amount of a distribution will be wrong. Sounds like he did not enter any basis, so you not only need to complete the 2010 8606 and send it to the IRS, you should provide a copy to the CPA, so your basis can be applied to the conversion. This is a frequent issue when tax preparers are changed, and even if this CPA was looking at your 2010 return at some point, there was no 8606 with it or he should have captured your IRA basis.

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