Bad Roth Conversion
I have a prospective client who was told to make a non-deductible contribution to an IRA, then convert it to a Roth IRA in both 2016 and 2017. Unfortunately, he has a large SEP IRA that creates an issue with the IRA aggregation rule. He did not calculate the Roth IRA conversion pro rata. Is there a way to undo this mess, or does his CPA need to go back and calculate the tax while also establishing a cost basis in his SEP IRA (which is kind of a pain to keep track of).
Thank you!
Permalink Submitted by Alan - IRA critic on Fri, 2018-06-08 00:01
Client will have to amend the 2016 return to report the SEP IRA 12/31/2016 value on line 6 of the 8606. This will result in much of the conversion becoming taxable. For 2017 he can still recharacterize the conversion as long as the conversion was done in 2017, not 2018. That would result in amending the 2017 return if already filed. Once the funds are back in the TIRA, he can also request that they be returned to him with allocated earnings if he wishes as long as he either filed an extension or the actual return by 4/19/2018. Form 8606 reports non deductible contributions when a non deductible TIRA contribution is made to a TIRA or SEP IRA. This is not considered an excess SEP contribution unless the custodian coded it as a SEP contribution rather than a TIRA contribution.