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Filling out Form 8606 Correctly

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  • Filling out Form 8606 Correctly

    Hello,

    I was hoping someone could help me with Form 8606. I had about $15,500 in my Vanguard Traditional IRA in 2021 that I converted to a Vanguard Roth IRA in 2021. This amount consisted of contributions directly to my Vanguard Traditional IRA and rollovers (I believe from my Acorns Traditional IRA to my bank account directly back to Vanguard; I don't know how much of this was contributions and how much was capital gains/losses).

    From what I understand, because there may have been capital gains on this amount, it is subject to the pro rata rule. How do I account for this on Form 8606? Do I put $15,500 on Line 2 as basis or on some other line? Any guidance would be helpful. I don't want to fill the form out incorrectly and cause problems later down the line.

    Thanks!

  • #2
    This might get you pointed in the right direction. https://www.whitecoatinvestor.com/la...door-roth-ira/

    Comment


    • #3
      I apologize if I'm misunderstanding, but I don't know if that article is what pertains to my situation. I don't believe that I made a late contribution for a prior year. I made the 2021 contribution and did the conversion in 2021.

      In my scenario, I had about $15,500 in my traditional IRA from several years of contributions and rollovers. Of that $15,500, $6,000 was a contribution in 2021. The remaining $9,500 was from prior years (contributions, rollovers, and probably capital gains but I'm not sure because I don't have access to the account where I made the rollover from).

      From what I understand, all the money in my traditional IRA (aside from any possible capital gaisn) was already taxed. I contributed to my traditional IRA using money from my paycheck that was already taxed. Unlike my 401k contributions, it wasn't automatically deducted from my paycheck. Since I contributed to both a traditional IRA and a 401k, wouldn't that make all the traditional IRA contributions non-deductible?

      With how I'm filling out the form, I put the following on each line:

      Line 1: $6,000
      Line 2: $0
      Line 3: $6,000
      Line 4: $0
      Line 5: $6,000
      Line 6: $6,000
      Line 7: $0
      Line 8: $15,500 (also goes on line 16)
      Line 9: $15,500
      Line 10: 0.387 ($6,000 / $15,500)
      Line 11: $6,000 (multiplying line 8 by line 10)
      Line 12: $0
      Line 13: $6,000
      Line 14: $0
      Line 15a, 15b, 15c: $0
      Line 16: $15,500
      Line 17: $6,000 (from line 11's instructions)
      Line 18: $9,500

      Does this mean that the $9,500 will be taxed even though much of that was probably already taxed previously? How can I avoid being taxed on this amount again?

      Comment


      • #4
        How much after-tax contributions were made and in what tax years? This will determine what you place on Line 2 and how much of the $15,500 is taxable. Read the post as suggested by Larry Ragman . That will give you a better understanding of the BDR and filling out Form 8606 correctly.

        Comment


        • #5
          Originally posted by bmaniara92 View Post
          I apologize if I'm misunderstanding, but I don't know if that article is what pertains to my situation. I don't believe that I made a late contribution for a prior year. I made the 2021 contribution and did the conversion in 2021.

          In my scenario, I had about $15,500 in my traditional IRA from several years of contributions and rollovers. Of that $15,500, $6,000 was a contribution in 2021. The remaining $9,500 was from prior years (contributions, rollovers, and probably capital gains but I'm not sure because I don't have access to the account where I made the rollover from).

          From what I understand, all the money in my traditional IRA (aside from any possible capital gaisn) was already taxed. I contributed to my traditional IRA using money from my paycheck that was already taxed. Unlike my 401k contributions, it wasn't automatically deducted from my paycheck. Since I contributed to both a traditional IRA and a 401k, wouldn't that make all the traditional IRA contributions non-deductible?

          With how I'm filling out the form, I put the following on each line:

          Line 1: $6,000
          Line 2: $0
          Line 3: $6,000
          Line 4: $0
          Line 5: $6,000
          Line 6: $6,000
          Line 7: $0
          Line 8: $15,500 (also goes on line 16)
          Line 9: $15,500
          Line 10: 0.387 ($6,000 / $15,500)
          Line 11: $6,000 (multiplying line 8 by line 10)
          Line 12: $0
          Line 13: $6,000
          Line 14: $0
          Line 15a, 15b, 15c: $0
          Line 16: $15,500
          Line 17: $6,000 (from line 11's instructions)
          Line 18: $9,500

          Does this mean that the $9,500 will be taxed even though much of that was probably already taxed previously? How can I avoid being taxed on this amount again?
          Without going through it detail, your set up is wrong from the start. You report your prior years basis (the non deductible contributions to your IRA in previous years) on line 2. That part doesn’t get taxed again, but any gain will be taxed.

          By the way, if you have not been, you should have been filling out forms 8606 each year to track your basis. However, if you converted all the funds to your Roth this year it will at least have the benefit of zeroing out the IRA now so that your future BD Roth’s are simpler.

          Comment


          • #6
            IRA contributions are never deducted on a paycheck. They may or may not be deducted on a tax return

            if you have income over the limit to make deductible or Roth contributions then the recommendation is to make after tax contributions and then convert to Roth. The so called back door Roth IRA. This is documented on Form 8606 yearly with your tax return

            the Information presented by you doesn’t tell us explicitly whether your existing IRA that was converted was all pre tax (deduction taken on prior tax returns) or all after tax (should have been recorded on Form 8606 with prior returns) or some mix of the two.

            until that information is known the taxable amount of the Roth conversion cannot be determined

            Comment


            • #7
              Originally posted by Larry Ragman View Post
              Without going through it detail, your set up is wrong from the start. You report your prior years basis (the non deductible contributions to your IRA in previous years) on line 2. That part doesn’t get taxed again, but any gain will be taxed.

              By the way, if you have not been, you should have been filling out forms 8606 each year to track your basis. However, if you converted all the funds to your Roth this year it will at least have the benefit of zeroing out the IRA now so that your future BD Roth’s are simpler.
              My dad had been filing my tax returns in prior years using ProSeries. I just asked him if he filed Form 8606 in prior years, and he said no. So I'm guessing this means that my contributions were not claimed as non-deductible even though they weren't deducted (since I am filing single making over $76,000 with an employee-sponsored 401k).

              Since this would be my first year filling out For 8606, does this mean that I need to pay taxes on the $9,500 again and the $6,000 won't be taxed? The problem for me is that, of that $9,500, I don't know how much are non-deductible contributions and how much are gains. The $9,500 is from a rollover from my Acorns Traditional IRA. I tried to look into the account I rolled over from to see how much I contributed, but that account has been closed out and I don't have access to any historical information. Any advice on how to handle this?

              I'll try to call Acorns to see if they can tell me. If they are able to tell me, let's say $12,000 of the $15,500 consists of contributions (for example), would that $12,000 be the basis that goes in Line 2? If so, where does the remaining $3,500 go?

              Comment


              • #8
                Additional details to the posts from Larry Ragman and GasFIRE
                • You need to have completed a Form 8606 for each year you made non-deductible traditional IRA contributions starting with the first year. You report that year's non-deductible traditional IRA contributions on Line 1 and the previous year's total non-deductible basis on Line 2. If you have not done this, you must retroactively file the appropriate years' Form 8606s.
                • Only if/when previous years' Form 8606s were/have been submitted. Will you be able to complete your 2021 Form 8606 Line 2.
                • Hopefully, Acorn will have records for those years. If not, hopefully you kept your Form 5498s. I'm not sure, but maybe you can request Form 5498s from the IRS.
                • Each Form 5498 will tell your IRA contributions for that year, but not whether they were deducted. You will need copies of your tax returns for those years.
                Last edited by spiritrider; 04-03-2022, 06:48 PM.

                Comment


                • #9
                  Originally posted by bmaniara92 View Post
                  The remaining $9,500 was from prior years (contributions, rollovers, and probably capital gains but I'm not sure because I don't have access to the account where I made the rollover from).

                  From what I understand, all the money in my traditional IRA (aside from any possible capital gaisn) was already taxed….wouldn't that make all the traditional IRA contributions non-deductible?

                  With how I'm filling out the form, I put the following on each line:

                  Line 1: $6,000

                  Line 18: $9,500

                  Does this mean that the $9,500 will be taxed even though much of that was probably already taxed previously? How can I avoid being taxed on this amount again?
                  The part of the $9500 that is contributions is the after-tax portion which is your basis prior to 2021. This is the amount that goes on Line 2. If contributions were made from your own banking or brokerage account you should be able to figure out the amount. You were also supposed to fill out Form 8606 for each tax year you made these contributions. These can be filed separately from your 2021 tax return with a letter of explanation.

                  Comment


                  • #10
                    Regarding your previous contributions, it is unfortunate that you don’t have good records. Hopefully Acorn can tell you how much was contributed and when. Then you could probably just assume the rest was gain. Otherwise you might try to figure out from bank records what contributions were made when. You could also look at past tax returns to make sure none of the contributions were tax deductible.

                    In your hypothetical example, and again I am just trying to follow your numbers, I believe $6k of the $12 was 2021 and $6k was prior year, right? Then $6k would go on line 1, $6k on line 2 and $12k on line 3. You don’t call the $3500 separately but you do report the total of $15.5k on line 8.

                    Comment


                    • #11
                      You will owe taxes on:
                      1. Prior contributions to the TIRA that you have previously deducted, and
                      2. Growth in the account (basically capital gains, dividends, interest)
                      Sounds like you need to check prior year 1040 filings to see if you deducted TIRA contributions in the past and how much. Anything you have contributed and have not deducted on your tax return will not be taxed. The difference will. You need to catch up those form 8606’s - I cannot tell how many years are involved but my guess is only 2020 and 2021. If that’s the case, you’ll need to file an 8606 for 2020, assuming you didn’t deduct all or any of your TIRA contribution that year. Send it in to the IRS with a cover letter.

                      As to what numbers go on what line, I don’t do that here but you s/b able to figure it out. Guessing your dad is a tax pro if he’s using ProSeries, so he s/b able to help.
                      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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