Author Topic: Conversion to Roth tax question  (Read 408 times)

justchristine

  • Bristles
  • ***
  • Posts: 337
Conversion to Roth tax question
« on: February 13, 2018, 10:55:56 AM »
I'm doing my taxes and want to double check that I'm understanding the basis calculations correctly for a Roth conversion.  I have three IRA accounts, one traditional, one roth and a rollover from an old 401k.  Last January I made my 2017 contribution to my traditional.  Later that month I realized I wouldn't be able to deduct any of that because I would be fully over the income limits for 2017.  So I converted the 2017 contribution to my Roth.  Now I'm trying to fill out the IRS 8606 form and trying to figure out my basis.  The way I'm reading this, I need to add the 12/31/17 balances of both the traditional and rollover IRA to be included on line 6.  Because my rollover is larger (>50k) and entirely pretax contributions, almost all of my conversion amount is taxable.  This seems odd since I never realized a tax deduction because of the contribution, so why do I have to pay taxes on it?  This calculation makes more sense for past tax years but for the current year, it seems like I'm getting double taxed.  Someone please tell me I'm misunderstanding this.

terran

  • Handlebar Stache
  • *****
  • Posts: 1121
Re: Conversion to Roth tax question
« Reply #1 on: February 13, 2018, 11:12:56 AM »
Did you convert traditional to roth or did you recharacterize you 2017 traditional contribution to roth? I know it sounds like the same thing, but it's not.

If you recharacterized, that's basically like making it as if you had contributed to to the roth in the first place, which is what you want since the traditional contribution is not deductible. This assumes you're under the roth income limits, which you should be if you were previously eligible for traditional deduction, unless your income went up ALOT. You'll need to attach a statement to your return explaining what you did.

If you actually converted traditional to roth, that would be a taxable event. I think you should be able to recharacterize the conversion back to traditional (this is the last year you can do that as the new tax bill ended it after the 2017 tax year) and then recharacterize the traditional contribution to roth (you'll continue to be able to do that as conversions won't be able to be recharacterized, but contributions will).

justchristine

  • Bristles
  • ***
  • Posts: 337
Re: Conversion to Roth tax question
« Reply #2 on: February 13, 2018, 11:37:26 AM »
Did you convert traditional to roth or did you recharacterize you 2017 traditional contribution to roth? I know it sounds like the same thing, but it's not.

If you recharacterized, that's basically like making it as if you had contributed to to the roth in the first place, which is what you want since the traditional contribution is not deductible. This assumes you're under the roth income limits, which you should be if you were previously eligible for traditional deduction, unless your income went up ALOT. You'll need to attach a statement to your return explaining what you did.

If you actually converted traditional to roth, that would be a taxable event. I think you should be able to recharacterize the conversion back to traditional (this is the last year you can do that as the new tax bill ended it after the 2017 tax year) and then recharacterize the traditional contribution to roth (you'll continue to be able to do that as conversions won't be able to be recharacterized, but contributions will).

Crap.  I think it was a conversion.  My 1099-R codes the distribution as "Early Distribution, exception applies(under age 59 1/2). "  I'll have to do some digging to see if/how I can recharacterize this back to the traditional.

terran

  • Handlebar Stache
  • *****
  • Posts: 1121
Re: Conversion to Roth tax question
« Reply #3 on: February 13, 2018, 12:05:01 PM »
Yeah, looks like you would want the code in box 7 to be N (2017 contribution recharacterized in 2017) or R (2017 contribution recharacterized in 2018).

I do think you should be able to recharacterize that conversion back and then recharacterize your 2017 contribution. Call your administrator.

MDM

  • Walrus Stache
  • *******
  • Posts: 7940
Re: Conversion to Roth tax question
« Reply #4 on: February 13, 2018, 07:49:30 PM »
See IRA recharacterization - Bogleheads for some thoughts.

justchristine

  • Bristles
  • ***
  • Posts: 337
Re: Conversion to Roth tax question
« Reply #5 on: February 17, 2018, 05:19:58 AM »
Well the recharacterization was easy enough.  A quick call to Vanguard and a short form to fill out and everything is where it needs to be.  Now I just need to figure out how to get this all entered in TaxAct.  What I wouldn't give for a simpler tax system.

radram

  • Pencil Stache
  • ****
  • Posts: 658
Re: Conversion to Roth tax question
« Reply #6 on: February 17, 2018, 06:49:53 AM »
Well the recharacterization was easy enough.  A quick call to Vanguard and a short form to fill out and everything is where it needs to be.  Now I just need to figure out how to get this all entered in TaxAct.  What I wouldn't give for a simpler tax system.

But it already IS simpler. If you would have done this in 2018, you would not have been able to re-characterize out of the Roth, and you would have completely lost all of the deduction. See how easy and simple that is?