Roth IRA re-characterization, how to report on 2015 taxes

[stangorang]

I am struggling to figure out how to report my IRA contributions on my 2015 taxes. The situation is described below, with events taking place in both 2015 and 2016.

 

January 2015: $5500 Roth IRA contribution through Vanguard

May 2015: Get married, now over contribution limit. Didn't realize this until after December 31st.

February 2016:  Call Vanguard to reclassify that Roth IRA to a traditional IRA, now sadly only worth about $4500. On the transaction history in Vanguard this event was called "Recharacterization" for whatever that is worth.

February 2016: Convert this new TIRA back to Roth IRA for a backdoor Roth IRA. ~$4700 converted and this event was called a "conversion" in the Vanguard transaction history.

 

I have I do not have any other TIRA space.

 

So how do I report all this? I am guessing most of the work will be done on the 2016 taxes, but what exactly do I report on the 2015 taxes? The only event that occurred before Dec 31st 2015 was the purchase of a $5500 Roth IRA which I technically should not have done.

 

 

[jfoxcpacfp]

First thought - the January 2015 contribution couldn't be attributed to 2014, could it? Assuming that is not the case...

1. You will report your TIRA contribution of $5,500 for 2015 on IRS form 8606 so the IRS can track your basis.


2. You will receive a 1099R for your conversion for tax year 2016. The conversion will not be taxable because you have basis.

[stangorang]

jfoxcpacfp wrote:

First thought – the January 2015 contribution couldn’t be attributed to 2014, could it? Assuming that is not the case…

1. You will report your TIRA contribution of $5,500 for 2015 on IRS form 8606 so the IRS can track your basis.


2. You will receive a 1099R for your conversion for tax year 2016. The conversion will not be taxable because you have basis.

Click to expand...

Thank you for reply.

 

I spoke with my CPA today (filled an extension) and he was fairly certain I am not eligible to contribute to a backdoor ROTH IRA.

His reasoning as I understood it was:

1) You filed separately, therefore the limit for any IRA contribution is $10k.

2) My wife and I are eligible for employer sponsored retirement plans (ROTH 401k for her, 403b for me).

 

 

I am terribly confused now. I would really prefer not to give up this potential Roth space unless I have to.

 

[jfoxcpacfp]

stangorang wrote:

Thank you for reply.   I spoke with my CPA today (filled an extension) and he was fairly certain I am not eligible to contribute to a backdoor ROTH IRA. His reasoning as I understood it was: 1) You filed separately, therefore the limit for any IRA contribution is $10k. 2) My wife and I are eligible for employer sponsored retirement plans (ROTH 401k for her, 403b for me).     I am terribly confused now. I would really prefer not to give up this potential Roth space unless I have to.

Click to expand...

Your CPA doesn't know what the heck he is talking about. I hope he's at least cheap.

Anyone with a pulse and enough earned income can contribute to a non-deductible IRA. The $10k limit for MFS is for IRA DEDUCTIBILITY.

btw, you have already lost the ability to contribute for 2015 as that window closed on April 18.

[stangorang]

jfoxcpacfp wrote:

stangorang wrote:

Thank you for reply.   I spoke with my CPA today (filled an extension) and he was fairly certain I am not eligible to contribute to a backdoor ROTH IRA. His reasoning as I understood it was: 1) You filed separately, therefore the limit for any IRA contribution is $10k. 2) My wife and I are eligible for employer sponsored retirement plans (ROTH 401k for her, 403b for me).     I am terribly confused now. I would really prefer not to give up this potential Roth space unless I have to.

Click to expand…

Your CPA doesn’t know what the heck he is talking about. I hope he’s at least cheap.

Anyone with a pulse and enough earned income can contribute to a non-deductible IRA. The $10k limit for MFS is for IRA DEDUCTIBILITY.

btw, you have already lost the ability to contribute for 2015 as that window closed on April 18.

Click to expand...

 

Thank you for the response.

 

So if I understand this correctly:

1) Fill out form 8606 for tax year 2015. Line 1: $5500, Line 3: $5500. Line 14: $5500.  The rest of form 8606 remains blank.

2) Fill out form 8606 for Tax year 2016 now with 1099-R information that Vanguard will provide me.

 

I am assuming I can still do a backdoor Roth IRA again during 2016, so that my total conversions for 2016 will be in the neighborhood of $11K.

 

The part, among many, that is confusing to me is that all of the events described in post #1 took place between January 2015 and April 2016. Therefore my gut feeling is that it should all be placed on the 2015 tax returns.

 

 

 

 

[jfoxcpacfp]

stangorang wrote:

So if I understand this correctly: 1) Fill out form 8606 for tax year 2015. Line 1: $5500, Line 3: $5500. Line 14: $5500.  The rest of form 8606 remains blank. 2) Fill out form 8606 for Tax year 2016 now with 1099-R information that Vanguard will provide me.   I am assuming I can still do a backdoor Roth IRA again during 2016, so that my total conversions for 2016 will be in the neighborhood of $11K.   The part, among many, that is confusing to me is that all of the events described in post #1 took place between January 2015 and April 2016. Therefore my gut feeling is that it should all be placed on the 2015 tax returns.

Click to expand...

stangorang - Sorry, I missed the first post from March. Since you contributed to a nondeductible IRA then you will be able to convert (backdoor) to a Roth in 2016 and it will be reported in 2016. Conversions are on a calendar-year basis. Yes, you can contribute to a nondeductible IRA for 2016 and convert, also, so your conversion will total the balance of your nondeductible IRA at the time of conversion.

You are correct about the Form 8606. When you file it for 2016, you will also complete page 2.

Back to my original question - could you not have reported your Roth contribution for 2014 or had you already used that space?

[stangorang]

jfoxcpacfp wrote:

stangorang wrote:

So if I understand this correctly: 1) Fill out form 8606 for tax year 2015. Line 1: $5500, Line 3: $5500. Line 14: $5500.  The rest of form 8606 remains blank. 2) Fill out form 8606 for Tax year 2016 now with 1099-R information that Vanguard will provide me.   I am assuming I can still do a backdoor Roth IRA again during 2016, so that my total conversions for 2016 will be in the neighborhood of $11K.   The part, among many, that is confusing to me is that all of the events described in post #1 took place between January 2015 and April 2016. Therefore my gut feeling is that it should all be placed on the 2015 tax returns.

Click to expand…

stangorang – Sorry, I missed the first post from March. Since you contributed to a nondeductible IRA then you will be able to convert (backdoor) to a Roth in 2016 and it will be reported in 2016. Conversions are on a calendar-year basis. Yes, you can contribute to a nondeductible IRA for 2016 and convert, also, so your conversion will total the balance of your nondeductible IRA at the time of conversion.

You are correct about the Form 8606. When you file it for 2016, you will also complete page 2.

Back to my original question – could you not have reported your Roth contribution for 2014 or had you already used that space?

Click to expand...

The contribution cannot be applied to 2014.

 

Here is what I have pieced together thus far.

 

1) When I recharacterized my January 2015 $5500 Roth IRA contribution to a TIRA in Feb 2016, tax law basically assumes I contributed the $5500 to the TIRA in the first place.

 

2) Fill out 2015 IRS Form as follows 8606: This will establish my nondeductible basis for 2015
Line 1: $5500
Line 2: $0
Line 3: $5500
Line 4: $0
Line 5: $0
Line 6: $0
Line 7: $0
Line 8: $0
Line 9: $0
Line 10: 0
Line 11: $0
Line 12: $0
Line 13: $0
Line 14: $5500
Line 15: $0

 

3) Contribute $5500 to a tradition IRA for 2016 --> Convert to Roth (this time all within the same year)

 

4) Get 1099-R forms from Vanguard and again fill out form 8606. This time it will show a full conversion of around $11k in nondeductible IRA space to Roth IRA.

It should look similar to below:

2016 IRS Form 8606
Line 1: $5500
Line 2: $5500
Line 3: $11000
Line 4: $0
Line 5: $11000
Line 6: $0
Line 7: $0
Line 8: $11000
Line 9: $11000
Line 10: 1.0
Line 11: $11000

Line 12: $0
Line 13: $0
Line 14: $11000
Line 15: $0

Part II
Line 16: $11,000
Line 17: $11,000
Line 18: $0