ND IRA contribution then converted to Roth
Taxpayer makes a non-deductible IRA contribution in the amount of $5,500 during 2017. In March of 2018, they convert the IRA to a Roth resulting in the entire $5,500 to be taxable (Form 8606, line 4). What is rationale for this? Should this have been contributed and converted within the same taxable year for the conversion not to be taxable?
Permalink Submitted by Alan - IRA critic on Fri, 2018-06-15 19:22
Form 8606 should have been filed for 2017 reporting the non deductible contribution. For 2018, that 5500 basis carries over to line 2 of the 2018 8606. Line 4 would not show a contribution unless a 2018 contribution was made in early 2019 for 2018. Assuming taxpayer had no other IRA balance in addition to the 5500 contribution, then only earnings on that contribution would be taxed upon conversion of the IRA balance. In essence, the 8606 forms must be completed correctly for an accurate result.
Permalink Submitted by Henry Woo on Wed, 2018-06-20 14:31
I am considering converting/moving some of my traditional IRA assets into my Roth IRA account. I have some after-tax contribution in my IRA and I understand the non-taxable portion of the conversion is prorated based on a ratio of my after-tax contribution to IRA over total balance of my IRAs at year end. my question is: Do I need to include balance in my (tax-deferred) 401K plan also? If the answer is NO, it seems to be beneficial to delay rolling over my 401K to a rollover IRA.
Permalink Submitted by Alan - IRA critic on Wed, 2018-06-20 17:03
Balances in plans other than IRA accounts are not included in the pro rata calculations done on Form 8606, so it would be beneficial to keep the 401k in place until the year after you are done converting. Also, if you are still working and have an active 401k that accepts IRA rollovers, you could roll the pre tax amount of your IRA into that plan, and then convert your IRA basis tax free. Many plans will then allow you to roll the amount rolled into the plan back out to an IRA.