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Rollover, 8606, Backdoor Conversion, etc

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  • Rollover, 8606, Backdoor Conversion, etc

    Several questions here as fiscal year winds down regarding taxes, filling out 8606 and more.

    Here is situation. This is the first year I am above Roth Limit, so cannot directly contribute to that account.  I also switched employers and at the suggestion of people in this forum, rolled over all my prior 403/457/401 pre-tax investments to a Fidelity Rollover IRA for more investment control, rather than to the new employer 401k plan.  Additionally, I had a small amount of AFTER TAX money that I contributed to the 401a with my old employer that was converted to a Roth IRA with Fidelity as well.  Both my prior employer and new employer use Fidelity for management of money, so now the OLD employer money is sitting in the Rollover and Roth IRA accounts as described above, and the new employer 401k is established and being funded now from new paychecks.

    This week, I placed $5500 into a newly opened Traditional IRA account I have with Schwab (where I keep accounts that aren't associated with employer). I was intending to convert that money to a Roth IRA, but have learned about the Pro-Rata rule, and since I now have a big chunk of money in the Fidelity Rollover IRA from previous employer, converting this $5500 in the Schwab T-IRA to a Roth would be taxed. Another post recently garnered suggestions to NOT convert this $5500 this year to the Roth for this reason.  Question 1: Is this correct? 

    Now onto tax issues: I'm looking at form 8606 and am curious about filling this out this year with both the different contributions listed above.  Here are the numbers:
    Rollover IRA:
    PRE-TAX money from old employer 403/457/401 that was converted to the Rollover IRA at the time of transfer: $103,065
    Account value NOW since the transfer and subsequent investment gains: $107,808

    Roth IRA:
    POST-TAX money from old employer converted to the Roth IRA: $7,700
    Account value now since the transfer and subsequent investment gains: $8,504

    Schwab Traditional IRA:
    Nondeductible contribution I made a couple days ago: $5,500.

    Let's assume these numbers listed here are on December 31st.

    Please correct me if I'm wrong: Line 1 of form 8606 will be $5500 for the nondeductible contribution.  Question 2: What goes on Line 2 of the form? Is it the TOTAL account value of the Rollover IRA ($107,808) or the amount that was initially transferred ($103,065)?

    Question 3: The money that was converted to the Roth IRA ($7,700) does not factor into this equation, correct? That money has already been taxes and can now grow tax free without any further tax reporting?

    Question 4: What would be the wise decision on moving this Rollover IRA money somewhere so I can get back to an annual $5500 back-door conversion? Is the only real option to move the money to my new employer 401k?  I'm not self-employed so as I understand it, I can't create a Solo 401k and move it there...

    Question 5: If I DON'T end up moving the Rollover IRA funds, should I just continue contributing annually the $5,500 to my traditional IRA?

    Question 6: Let's assume I DO decide next year to move all the Rollover IRA to my new employer.  That leaves me with $5500 basis still in my T-IRA and if I contribute another $5500 in 2018, can I just convert the total $11,000 then to my Roth? (I realize that I would pay taxes on any gains in the interim that are converted).  


    I think that's all the burning questions for the moment.  Any advice, corrections, suggestions are greatly appreciated...


  • #2

    1. Yes, from a general standpoint. However, I think a misconception on this forum is that the pro-rata rule causes you to pay tax that you would otherwise never have to pay. That's not the case - you are just prepaying to reduce the TIRA tax later.

    2. Please see Explaining Backdoor Roth IRAs, which has a link to a form 8606 tutorial on WCI.

    3. Yes.

    4. R/o into employer plan or just pay the pro-rata tax.

    5. Maybe for a few years. But you want to invest and start the growth, so the longer you wait to do the conversion, the more taxes you'll owe at your top marginal bracket on the growth. Until the next bear market or oopsie on your part.

    6. Yes.

    Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087


    • #3
      Thanks Johanna, I always appreciate your input and advice.

      Still confused regarding the 8606 form that the tutorial cannot answer.

      Line 1 would be $5500 for my nondeductible TIRA contribution I made.

      Line 2 asks for "total basis in Traditional IRAs".  Not sure if this is meant to include the money that I moved from my old employer 401k to my Rollover IRA.  All of the money in the Rollover IRA is pre-tax contribution from my old 401k.  WCI tutorial states "basis" is money that has already been taxed.  Not sure if Line 2 should read "0" since prior to this year, there was no money in a traditional IRA, or if it should read "107,808" since that's all money in my Rollover IRA I converted from my 401k this year.  Or is it something else entirely? Also, line 6 asks for value of all traditional, SIMPLE, and SEP IRAs... is this the $107,808???  I'm usually a math whiz and can do this stuff easily.  Not sure why I'm struggling so hard.  I don't know if I trust a tax person to figure this out...

      On 8606, even if I plug in the 107,808 (Rollover IRA) into the basis, and follow the instructions with a 2017 $5500 TIRA distribution and a 2017 $5500 Roth conversion, the form computes that I don't owe any taxes on the conversion, which can't be right. Looks like this:

      1: 5500
      2: 107808
      3: 113308
      4: 0
      5: 113308
      6: 107808
      7: 0
      8: 5500
      9: 113308
      10: 1.000
      11: 5500
      12: 0
      13: 5500
      14: 107808
      15: 0
      16: 5500
      17: 5500
      18: 0  (Amount on which taxes are owed)

      Where does the pro-rata rule come into play if it's not being recognized here??

      Would this just all be simplified if I declare a $5500 TIRA contribution for 2017 and nothing else.  Make another contribution in 2018 to the TIRA.  Move the Rollover IRA to the new employer, and then convert the TIRA $11000 to the Roth in 2018 without a tax hit?



      • #4
        I apologize for not getting back to you sooner and also for not going through the above line by line. I'm hoping this example Laura prepared to go with this blog post on the pro-rata rule will give you the answer you need. Please let me know if it doesn't.
        Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087


        • #5
          No need to go through line by line, your link solves the problem perfectly. It was indeed line 2 I was messing up. This link is fantastic. Thanks again!