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IRA to Roth IRA..Tax question

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  • IRA to Roth IRA..Tax question

    First want to say that WCI has changed the way my wife and I look at our finances which has been great, so thank you to everyone on hear for that!!
    So, in 2019 I started to fix the mistakes of the past few years by opening up a path for the backdoor IRA for my wife and myself.
    In 2017 I opened up an IRA for myself through my financial advisor( First mistake, I know). It was a non-tax deductible IRA due to our income level but was told it was another way to save for retirement, so i did.
    I fully funded it 2017 and 2018, before I came across the backdoor Roth through WCI.
    So in 2019 after looking at the funds it was invested in and the FEE's, I wanted to take this into my own hands.
    Signed up for TD Ameritrade, IRA and Roth IRA, since I already had a taxable account with them.

    TD Ameritrade said they would take care of the transfers from my old financial advisor company IRA to them.
    Was told the process would be as follows:
    Transfer the cash from old IRA to TD Ameritrade IRA, let the funds settle and a few days later do an internal transfer of the cash to the ROTH.
    Process took alittle while to get all the paperwork sent back and forth between my old financial advise and TD Ameritrade, but after a while I saw the funds ( approx $12k) arrive to my new IRA. In that same timeframe I also personally funded $4,500 ( to max out my 2019 contribution) to the new IRA, since I had already put in $1500 into the Old IRA for 2019 before I switched it all over..
    Took about 5 days before eventually all the funds settled in the TD Ameritrade IRA ( $12k from the old IRA and $4,500 personal check to get the max for 2019).
    Then we did an internal transfer of the total( approx $16,500) to the Roth IRA..

    I recently received a 1099-R for from TD Ameritrade showing a 2019 Gross Distribution of that $16,500 and all of which is taxable!!!
    I was under the assumption that maybe only the gains from the IRA in 2017 to 2019 would be taxed, but maybe not even that since it was a internal transfer....
    But now I'm even paying TAX money on that personal check I wrote for $4500 and it was basically in the IRA for a few days then moved to my ROTH..

    Please tell me that isn't correct....
    Thanks in advance for any help/feedback.

  • #2
    OK, both is and isn't correct. The reporting is correct, but your understanding of the result is not correct.

    TDA doesn't know whether or not you had basis in your TIRA. You'll work that out and track it when you file Form 8606 with your Form 1040 for 2019. It has been discussed at length on the forum and in the blog. You will also need to go back and file Form 8606 for the years in which you made nondeductible TIRA contributions so you can report the basis. (I feel sorry for that advisor's HIP clients.)

    Did you have any pre-tax IRAs in your name on 12/31/19?
    Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087


    • #3
      You haven't done the 8606 part yet....
      I'm assuming you have records from 2017 on that would have your basis....


      • #4
        I just wrote a response on a similar question in this thread: Roth IRA Question re: 2019 form 1099-R

        Basically, the form says it's taxable. There is a distribution code (Box 7) that should have a "2" marked there, which is an exception to the taxation. You'll receive a 1099 any time you take money from an IRA, even when it's converted to a Roth. There are a large number of exception codes (look further down your 1099 for explanations of all the code) that apply in many situations. I received a similar 1099 last year when I rolled over $100K+ to my employer. Technically I took money out of a retirement account, generating a 1099. There was a distribution code ("G") marked however indicating that it was moved to a qualifying plan, negating a big tax bill for me.

        You get taxed on any gains you make. Whether that's $5 from low percentage interest, or $500 from investments. If you have a few years worth of contributions in a non deductible TIRA then you need to make sure you have reported that to the government on past 8606 forms. Many people get worked up about converting money immediately to the Roth to avoid gaining any interest or investment gain. Personally, I see no reason to wait on investments to dodge a tax bill. Making $10 to pay $4 in taxes is still a $6 gain It's just less tax to pay the sooner you convert it. But if you can't make that phone call for a few days or a few weeks, it's just a few more bucks out of your pocket at tax time.

        I copied this from my other post for someone who had two years of contributions that he/she converted to a Roth:

        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).

        In your specific case, if you have several years of T-IRA contributions, you should have been filling out a 8606 each year to let the government know about those contributions. Make sure that when you fill the 8606 out, you're indicating NON-deductible TIRA contributions, this is what qualifies for Roth conversion. Here's what happened for me:

        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.