Reporting Roth IRA Conversions with Form 8606

Tuesday, March 22, 2011

By Jared Trexler

Ed Slott has talked about “Reporting Roth IRA conversions” in all of his seminars, and The Slott Report has touched on the subject in multiple entries over the last few weeks (see the “Taxes” tab at the top for a complete overview of tax tips, secrets and the best ways to save).

Ed wrote a March 20th article for Investment News about the avalanche of questions about to come in (if they haven’t already) on Form 8606. The form for non-deductible IRAs is where clients will report their Roth conversions. It has been around for years–but it will never be as popular as this year because of two key tax law changes in 2010.

1)The repeal of all Roth conversion income limits and filing status restrictions for 2010 and all subsequent years

2) Anyone who converted in 2010 (and ONLY 2010) can split the 2010 Roth conversion income evenly over 2011 and 2012. No 2010 conversion income needs to be reported for the 2010 tax year unless the client elects to do so.

If the funds were converted from an IRA, SEP IRA or Simple IRA, you or your client will need to complete Part II of Form 8606. Line 19 is the taxable amount of the IRA conversion that will be included in 2010.

If the 2-year income split is desired, the line should be left blank. Half of the taxable conversion income is reported on Line 20a, with the remaining portion included on 20b. This is the amount of taxable income that must be included in 2011 and 2012 tax returns, respectively.

Keep this information handy for 2011 and 2012 tax returns. Advisors should keep a copy of this form on file if clients need to project 2011 and 2012 income that includes deferred-conversion income.

Now, if the funds being converted came from a company plan and not an IRA, you or your clients should complete Part III of Form 8606. Line 24 of Part III (and the accompanying check box) should be left blank if the 2-year deal is desired. Half of the taxable income is reported on Line 25a (to be included in 2011) and half on Line 25b (the 2012 income).

If you converted both IRA and plan assets, you must fill out both parts. You or your clients must choose the same income inclusion option for both types of conversions using the boxes on Lines 19 and 24. 

 

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