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Roth IRA Question re: 2019 form 1099-R

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  • Roth IRA Question re: 2019 form 1099-R

    I did my Backdoor Roth last January and followed all the WCI tutorial rules for contributing to T-IRA for 2018 and 19 then immediately converting to Roth IRA. Now I get my Vanguard 1099-R that shows 13,500.86 taxable income. (Same for wife). Is this normal?

  • #2
    If you followed the instructions, primarily that you emptied all your TIRAs, SEP IRAs before 12/31 and all the contributions to the TIRA were after tax, then you are ok. When you do your IRS Form 8606 the conversion to Roth is a taxable event but no tax owed. Review the portion of the tutorial that deals with filling out the 8606.

    I don't split years, so I’ll leave to someone else to comment on how to report the 2018 backdoor Roth done in 2019. I know it is Ok, I just never did the reporting myself. But I’m pretty sure you need a separate 8606.

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    • #3
      a conversion is a taxable event.

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      • #4
        Echoing Peds... You owe taxes because you went from pre-tax to post-tax status with that money.
        $1 saved = >$1 earned. ✓

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        • #5
          If I am understanding you correctly, you put the annual allowable money into a non deductible T-IRA for 2018 (which was $5500) sometime in early 2019. You also put the 2019 contribution in as well at the same time (for 2019, this was $6000). You then immediately converted it to a Roth IRA, as you had read to do. This should have been $11,500.

          On your tax return last year, you should have filled out an 8606 form to document putting $5500 into your T-IRA account (Box 1), even though you did not convert any of it to a Roth. This helps the government know you have basis in the account for 2018 when time comes to convert both year's worth of money.

          This year, you will fill out a 8606 again, indicating that you contributed $6000 for 2019 (Box 1). In Box 2, you will report a basis of $5500 from previous contributions (in your case, the 2018 contribution). You will make note of converting the $11,500 to a Roth account, showing that you converted all $11,500 of your contribution and not more (say, if you have made some gains...which are taxable).

          You receive a 1099 from your financial institution alerting you that this is technically taxable, but there should be a distribution code marked in box 7 ("2") indicating that while taxable, this distribution from your IRA is excepted from taxation. You will only pay taxes on money that is over the contributions you made.

          This is similar to me, but I have 3 years worth of contributions I converted this year. So I had $5500 marked on the 8606 in 2017. $5500 again in 2018. This year, the basis for me will be $11000 (two years worth) and the $6000 for 2019. I converted all of it this year (just below $17,000) after the market had tanked so that the conversion would occur when I had not made any gains. My 1099 shows taxable amount of $16,xxx, but the distribution code "2" is there, so exception applies.

          Just make sure you didn't have any money in a Traditional, Rollover, SEP, or SIMPLE IRA on December 31, 2019 or you will be subject to the Pro-Rata rule. This is also accounted for on your 8606 when you fill it out, just don't ignore it. I personally had a large chunk of money in a Rollover for the last several years, which was why I had to wait to convert all of my T-IRA money after a couple years of contributions. Once I moved the rollover to my employer 401k this year, I was free to convert my T-IRA money without Pro-Rata effect.

          You noted $13,500 in your figure above, which is my only point of confusion. 2018 and 2019 contributions should equal $11,500 and not 13,500. If you made $2,000 in gains, then converted it (the $13,500) then you'll owe tax on the $2,000 gain.

          Make sense?

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          • #6
            If you were simply converting nondeductible IRA basis (+ any growth) to a Roth IRA, then the net result is tax only on any growth in your nondeductible TIRA contributions. Minimal. Your custodian does not know whether or not you have basis in the TIRA that you converted; it is just reporting that you made a Roth conversion and it is potentially fully taxable. You reconcile all of that on your Form 8606, filed with your Form 1040.
            Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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