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Form 8606 help

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  • Form 8606 help

    I opened my 401k account in 2019 so was unable to roll over a 2018 non-dedcutible.  Is it possible for me to do a backdoor for a 2018 contribution?  Here's a part of an email I got from my CPA.

    Back door Roth- I prepared a form 8606 for a $5500 nondeductible traditional IRA contribution for year 2018; HOWEVER, it seems to me that since you hadn’t converted your SEP to the 401k as of 12/31/18 that you might want to make this IRA contribution for year 2019.  See line 6 of form 8606.  This line needs to be filled in for the value of the SEP IRA as of 12/31/18 and this will affect your allocation going forward…I’m not an expert on back doors nor am I an investment advisor, so please advise on how you want to handle this.

    I was under he impression that a non-deductible IRA would have no effect on my taxes.  What does it mean that "this will affect your allocation going forward?"

  • #2
    At least the CPA understands that any amount on Line 6 of your Form 8606 will cause pro-rata taxation of any Roth conversion, but what he does not seem to understand is the fundamental fact that. IRA contributions are for a tax year even if made the following year before 4/15, but Roth conversions are in a tax year.

    Backdoor Roths are simply an advantageous combination of the above two independent actions. There is no requirement that those two actions are for the same tax year.

    1. If you haven't already do so, make a 2018 non-deductible traditional IRA contribution. If you want also make your 2019 contribution.

    2. You/your CPA must report that non-deductible contribution on your 2018 form 8606.

    3. Rollover any pre-tax balances in all traditional, SEP and SIMPLE IRA accounts.

    4. Then and only then do a Roth conversion of 100% of the traditional IRA balance, even if it has a small amount of earnings.

    5. The Roth conversion occurred in 2019, it will be reported on your 2019 Form 8606.

    6. The Form 8606 Line 6 balance on 12/31/19 will be $0 and there will be little to no tax liability.

    However, if you did your contribution and Roth conversion in 2018 and you have a Form 8606 LINE 6 balance, the conversion would be subject to pro-rata taxation until the pre-tax balance is converted or rolled over.


    • #3
      Time to find a new accountant.

      As long as you roll all of your SEP or any other prior deductible IRA $ into a 401k in 2019, your Roth conversion of nondedutible IRA contributions (which should be $5500 for 2018 and $6k for 2019) will not incur any tax on the conversion (unless you had any earning on the money which sat in your tIRA before being converter to rIRA).

      "I’m not an expert on back doors nor am I an investment advisor, so please advise on how you want to handle this."

      That's why you find someone else. You don't need to be an 'expert' on backdoors to be able to read the IRS instructions for form 8606. If he can't handle that, you can surely find someone better to do your taxes.