8606 - How to report a 401(k) to Rollover IRA to Roth IRA conversion?

[PWMDMD]

My wife had a small $10K 401k at a former employer that we rolled over into a Rollover IRA and then we converted to a Roth IRA

We also made a $6K spousal traditional IRA contribution for her and then did a backdoor Roth conversion.


How do I report this on 8606? I know the rollover will be taxable and I've watched videos on filling out the 8606 for a simple backdoor Roth conversions but for some reason how to report the rollover portion and determine the tax isn't immediately obvious to me.

[spiritrider]

For future reference it is allowed and would have been far simpler to do a direct rollover from the 401k to a Roth IRA.

• If you are using tax software, entering the 1099-Rs from the 401k rollover and Roth conversion should cause this to be entered correctly.
  • The 401k rollover will be reported as a traditional 401k -> traditional IRA non-taxable rollover. The rollover amount will be reported on Form 1040 Line 5a, with line 5b $0.
  • The Roth conversion will be reported on Form 8606 and Form 1040 Lines 4a and 4b.

While there technically will be prorata taxation on Form 8606, it is of no concern. Effectively, the non-deductible basis will be tax-free and the converted amount with any pre-tax earnings will be taxable.

If you had done a direct rollover from the 401k to a Roth IRA, the taxable amount would have simply been reported on Form 1040 Line 5b. There would have been no additional entries on Form 8606. The only cost differential will be any incremental earnings on the rollover before the Roth conversion.

The real risk of doing them separately is if the rollover happens at the end of one year and the Roth conversion at the beginning of the next year. In that case you would have significant prorata taxation.

[Bmac]

I believe, provided the $6000 was contributed in 2021, there were no other non deductible IRA contributions already in the IRA from prior years, the rollover and conversion were all done in 2021, and the traditional IRA balance was 0 on 12/31/2021, then $6000 on line 1 and 5 and the total converted to Roth (rollover + nondeductible contribution + any gains on the contribution) on line 8 and 9, Line 5 ($6000) divided by line 9 (Total conversion amount) on line 10 (a decimal). Multiply line 8 by line 10 = nontaxable amount of conversion (should be $6000). Line 12 would be 0. The rest of Part 1 would be 0. On Part 2, line 16 is the total amount converted fro line 8 and line 17 is the nontaxable amount of the conversion. The difference is the taxable amount which will go on 1040 line 4b. So basically, it should work out that the $6000 is nontaxable and the rollover plus any gains that might have accrued between contribution and conversion would be the taxable amount.

[PWMDMD]

For future reference it is allowed and would have been far simpler to do a direct rollover from the 401k to a Roth IRA.

• If you are using tax software, entering the 1099-Rs from the 401k rollover and Roth conversion should cause this to be entered correctly.
  • The 401k rollover will be reported as a traditional 401k -> traditional IRA non-taxable rollover. The rollover amount will be reported on Form 1040 Line 5a, with line 5b $0.
  • The Roth conversion will be reported on Form 8606 and Form 1040 Lines 4a and 4b.

While there technically will be prorata taxation on Form 8606, it is of no concern. Effectively, the non-deductible basis will be tax-free and the converted amount with any pre-tax earnings will be taxable.

If you had done a direct rollover from the 401k to a Roth IRA, the taxable amount would have simply been reported on Form 1040 Line 5b. There would have been no additional entries on Form 8606. The only cost differential will be any incremental earnings on the rollover before the Roth conversion.

The real risk of doing them separately is if the rollover happens at the end of one year and the Roth conversion at the beginning of the next year. In that case you would have significant prorata taxation.

Thank you! I'm filling out form 8606 by hand:

Since I also did a $6000 spousal backdoor IRA conversion will that and the rollover backdoor conversion be reported on the same 8606? I filled out my 8606 after watching the WCI step-by-step video but I'm not sure how to proceed with my wife's situation since she did a rollover and spousal contribution back door roth. I do have an accountant but I like to understand what's going on as well - what can I say...I trust no one.

[PWMDMD]

I believe, provided the $6000 was contributed in 2021, there were no other non deductible IRA contributions already in the IRA from prior years, the rollover and conversion were all done in 2021, and the traditional IRA balance was 0 on 12/31/2021, then $6000 on line 1 and 5 and the total converted to Roth (rollover + nondeductible contribution + any gains on the contribution) on line 8 and 9, Line 5 ($6000) divided by line 9 (Total conversion amount) on line 10 (a decimal). Multiply line 8 by line 10 = nontaxable amount of conversion (should be $6000). Line 12 would be 0. The rest of Part 1 would be 0. On Part 2, line 16 is the total amount converted fro line 8 and line 17 is the nontaxable amount of the conversion. The difference is the taxable amount which will go on 1040 line 4b. So basically, it should work out that the $6000 is nontaxable and the rollover plus any gains that might have accrued between contribution and conversion would be the taxable amount.

Thanks you! Exactly what I was looking for here!

[PWMDMD]

I believe, provided the $6000 was contributed in 2021, there were no other non deductible IRA contributions already in the IRA from prior years, the rollover and conversion were all done in 2021, and the traditional IRA balance was 0 on 12/31/2021, then $6000 on line 1 and 5 and the total converted to Roth (rollover + nondeductible contribution + any gains on the contribution) on line 8 and 9, Line 5 ($6000) divided by line 9 (Total conversion amount) on line 10 (a decimal). Multiply line 8 by line 10 = nontaxable amount of conversion (should be $6000). Line 12 would be 0. The rest of Part 1 would be 0. On Part 2, line 16 is the total amount converted fro line 8 and line 17 is the nontaxable amount of the conversion. The difference is the taxable amount which will go on 1040 line 4b. So basically, it should work out that the $6000 is nontaxable and the rollover plus any gains that might have accrued between contribution and conversion would be the taxable amount.

Alright...the rollover was $9205.14 and it didn't work out exactly but it's pretty close - do you see any issues?

[spiritrider]

You have an error on Line 17. This should be 6000, because you used Part I. This would have caused Line 18 to result in a tax underpayment.

IRS matching algorithms most certainly would have caught this. This would have either delayed your return or resulted in a CP200 notice.

Use rounding to your advantage and make Part I match Part II. Line 10 says use a minimum of three (3), but four (4) or five (5) are a better idea. This is why using tax software or at least the IRS' Free Fillable Forms for intra and inter form line and calculation checks is a good idea.

• Line 8, round to 15205
• Line 10, round to four (4) decimal places (6000/15205 = 0.3946)
• Line 11, 15205 * 0.3946 = 5999.893 round to 6000
• Line 16, 15205
• Line 17, 6000 from Line 1
• Line 18 , 9205

[GasFIRE]

Alright...the rollover was $9205.14 and it didn't work out exactly but it's pretty close - do you see any issues?

This is fine. The difference is rounding error caused by line 10. In this case using 0.395 instead of 0.3946 works in your favor to the tune of $6 taxable. Don’t spend it all in one place!

[PWMDMD]

You have an error on Line 17. This should be 6000, because you used Part I. This would have caused Line 18 to result in a tax underpayment.

IRS matching algorithms most certainly would have caught this. This would have either delayed your return or resulted in a CP200 notice.

Use rounding to your advantage and make Part I match Part II. Line 10 says use a minimum of three (3), but four (4) or five (5) are a better idea. This is why using tax software or at least the IRS' Free Fillable Forms for intra and inter form line and calculation checks is a good idea.

• Line 8, round to 15205
• Line 10, round to four (4) decimal places (6000/15205 = 0.3946)
• Line 11, 15205 * 0.3946 = 5999.893 round to 6000
• Line 16, 15205
• Line 17, 6000 from Line 1
• Line 18 , 9205

Much appreciated!

[GasFIRE]

Spiritrider is correct as usual. Can’t even use rounding error to your advantage on the 8606.

[Larry Ragman]

Thank you! I'm filling out form 8606 by hand:

Since I also did a $6000 spousal backdoor IRA conversion will that and the rollover backdoor conversion be reported on the same 8606? I filled out my 8606 after watching the WCI step-by-step video but I'm not sure how to proceed with my wife's situation since she did a rollover and spousal contribution back door roth. I do have an accountant but I like to understand what's going on as well - what can I say...I trust no one.

Why are you doing this by hand? If simply to understand, ok, worth doing. But otherwise Turbo Tax or Tax Act will make this pretty easy.

[PWMDMD]

Why are you doing this by hand? If simply to understand, ok, worth doing. But otherwise Turbo Tax or Tax Act will make this pretty easy.

Just to understand the form and how the calculations work. I haven’t used Turbo Tax in years and what could be easier than downloading the actual PDF and filling it out? I love my CPA and I’ve never caught an error but I still scrutinize my return before filling it. Now that I understand, one of the first things I will check are the 8606’s.

[Tim]

Why are you doing this by hand? If simply to understand, ok, worth doing. But otherwise Turbo Tax or Tax Act will make this pretty easy.

TurboTax and I assume Tax Act, are productivity tools. Answer the questions correctly and out come the forms. It is very easy to read instructions AND interpret these tools. However, you don’t understand taxes. You understand data entry.

The IRS instructions are add, subtract, multiply, divide, and >or<, then next step.
” but I like to understand what's going on as well - what can I say...I trust no one.”
I think this is a great step.
Not done yet, you still have to master the data entry! More tutorials on that. As a matter of fact, TurboTax had a transmission error last year with the IRS last year. For sure the phone support blamed it on the user data. NOT. Trust no one, understand your return entirely is a good policy.
Understanding is not really optional.
It is your signature and responsibility..

[spiritrider]

Just to understand the form and how the calculations work. I haven’t used Turbo Tax in years and what could be easier than downloading the actual PDF and filling it out? I love my CPA and I’ve never caught an error but I still scrutinize my return before filling it. Now that I understand, one of the first things I will check are the 8606’s.

While it is a good idea to do Form 8606 by hand to understand how it works. As I previously mentioned; "use the IRS' Free Fillable Forms for intra and inter form line cross checks and calculation checks." Nothing says you have to use FFF to file, just use it to verify your results.

[spiritrider]

I just noticed from re-reading the thread from the beginning that we didn't answer this.

Since I also did a $6000 spousal backdoor IRA conversion will that and the rollover backdoor conversion be reported on the same 8606?

Basis is tracked per individual. Therefore, a separate Form 8606 is required for each spouse. Not that it applies here, FYI each Inherited traditional IRA with basis also requires its own Form 8606/spouse separate from all owned traditional IRAs.