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Tax Question - Roth Conversion - did I get bad advice?

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  • Tax Question - Roth Conversion - did I get bad advice?

    So I think i got some bad advice from USAA... Please help if you can.

    Starting in 2011 and each year since, I've made a non-deductible contribution for the max amount into a traditional IRA. Each year I would then convert the full amount of each traditional IRA over to the the Roth IRA, leaving $0 behind. Each year USAA would then close the traditional IRA after the conversion because of the $0 balance, and the following year I would have to go through the paperwork hassle of opening a brand new traditional IRA from scratch.

    In 2016 the USAA advisor told me to leave $100 behind in the traditional IRA so that it wouldn't be closed, which I did and converted $5400 to the Roth. The $100 is in an "FDIC account", and the current value is now $100.01.

    Now as I start my taxes and look at form 8606, it looks as though I have created a basis for myself for line 2. Line 14 of my 2016 form 8606 says $100, so my understanding is that that $100 now goes to line 2 of my 2017 form 8606.

    1. For 2017 taxes - Am I doing this right? Even though all contributions have been non-deductible, Innow have a basis?

    2. For 2018 - I haven't made an IRA contribution yet. Should I contribute as usual and then convert all $5600 ($5500 and the left over $100) this year and let the traditional IRA close again?

    3. I have some other accounts at Fidelity and am thinking of moving the Roth there. Does Fidelity close $0 dollar traditional IRAs as well?

  • #2
    I'm not going through the lines of the 8606, but the bad advice you got from TIAA is they are causing you unnecessary paperwork each year. For example, most custodians will keep the account open with nothing or even a few cents of earnings until you repeat the annual backdoor Roth process. You should make sure Fidelity is one of those custodians. What TIAA requires, and the fact that they have no better alternative than the one they offered, is surprising.

    Yes, you have basis, but that is natural and has no tax effect. Filing the 8606 reports your basis from contributing to a TIRA that is nondeductible. You just left $100 behind in the TIRA, which you can convert any time you so choose. Not a big deal.

    Yes, convert the full $5,600 and then close the account in favor of a more amenable custodian.
    Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087


    • #3
      I’m not sure about Fidelity, but Vanguard will let your traditional IRA remain intact with a zero balance, so each year it is simple to contribute to IRA and then convert to Roth. Also, if the investment earnings are less than $0.50, I don’t think it will trigger any sort of taxable event when converted.


      • #4
        Most custodians will allow you to leave it open. I know Fidelity, Vanguard, Schwab, and TD Ameritrade will all allow you to keep a zero balance IRA account open for future contributions.

        And yes, there won’t be any taxable income from the conversion of the $100.


        • #5
          I've left about a buck and a quarter in the traditional account at Schwab to save the trouble of re-establishing a traditional IRA every year.  With interest rates as low as they've been, I haven't had to worry about the account going over $1.49 and having to pay any tax on the Roth conversion. :P


          • #6
            Have fidelity and have left open with $.01 after conversion to keep account open.  Forgot to do this one year and spouse's account got closed but just reopened.


            • #7
              1. Sounds accurate. That basis will be included with your 2018 non-deductible contribution and when converted this year will be zeroed out. Non-taxable event.
              2. Yes
              3. Not sure but Vanguard doesn't close mine


              • #8
                If you do the conversion online at Fidelity it’s hard to mess up. After you’ve done the conversion a box pops up and specifically asks you whether you want to keep the tIRA open or not.