Author Topic: tIRA -> rIRA conversion, IRS claims I now owe taxes?  (Read 740 times)

bryan995

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tIRA -> rIRA conversion, IRS claims I now owe taxes?
« on: June 16, 2018, 12:08:40 PM »
In 2015 and 2016 I funded a tIRA (betterment) with after tax dollars (and did not claim the dedication as far as I can remember).  As of late 2016, I had ~8700 in the tIRA ($2500 from 2015, and $5500 from 2016 + gains).  As I learned of the backdoor roth, I then converted the full amount to a roth and went on my merry way.  Moving forward, I now contribute $5500 on Jan1 and immediately convert to roth.

IRS claims that we now owe taxes on the $8700 x 2 (me + spouse) from 2016, as if it were a withdrawal from our retirement accounts, totaling ~$5k in taxes + fees.

I filed taxes with turbotax and obviously did something wrong :)  No taxes should be owed correct? (minus the gains).
« Last Edit: June 16, 2018, 12:23:14 PM by bryan995 »

Systems101

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Re: tIRA -> rIRA conversion, IRS claims I now owe taxes?
« Reply #1 on: June 16, 2018, 01:38:57 PM »

Did you file form 8606 starting in 2015?


MDM

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Re: tIRA -> rIRA conversion, IRS claims I now owe taxes?
« Reply #2 on: June 16, 2018, 06:17:16 PM »
See Backdoor Roth IRA - Bogleheads and links therein for what you should have done, including the 8606 Systems101 mentioned.

See also backdoor cp2000 site:bogleheads.org - Google Search in case one of those situations is analogous to yours.

Good luck!

bryan995

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Re: tIRA -> rIRA conversion, IRS claims I now owe taxes?
« Reply #3 on: June 16, 2018, 07:28:44 PM »
Yeap, thanks.  Did not file 8606 for any of the recent years... I suspect this will be an issue from 2016 onwards.

This year I used a tax pro - I assume they filed 8606, will double check.
Will look into it and thanks for the links!
« Last Edit: June 16, 2018, 07:30:28 PM by bryan995 »

bryan995

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Re: tIRA -> rIRA conversion, IRS claims I now owe taxes?
« Reply #4 on: June 18, 2018, 10:41:47 AM »
Talked with my CPA - they think what I did may be taxable (as backdoor roth conversion must happen in the same funding year?)?

Attached is a table of what I basically did.

I funded my tIRA with $2700 throughout all of 2015 and did not convert (grad school ;)

Dec 5th 2016, I then funded my 2016 tIRA with the full $5500 (ending balance of $5500+2700+gains=$8700) and converted the full $8700 to ROTH, leaving 0 balance.

Jan 17th 2017 I funded $5500 for 2017 year and immediately converted, 0 balance.
Jan 2nd 2018 I funded $5500 for 2018 year and immediately converted, 0 balance.

Perhaps only the $2700 from 2015 + gains are taxable? Instead of the full $8700 that the IRS claims?
Seeing as I use turbotax for 2015-2017, it looks likes I may have the issue for all years (no 8606 submitted, or submitted wrong via TT).?

Many thanks.

MDM

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Re: tIRA -> rIRA conversion, IRS claims I now owe taxes?
« Reply #5 on: June 18, 2018, 10:45:10 AM »
Talked with my CPA - they think what I did may be taxable (as backdoor roth conversion must happen in the same funding year?)?
No, there is no such requirement.

What do you get if you put your numbers into the 'Form8606' tab in the case study spreadsheet?

bryan995

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Re: tIRA -> rIRA conversion, IRS claims I now owe taxes?
« Reply #6 on: June 18, 2018, 11:07:51 AM »
^ Thanks for the link!

Basically I contributed $2750 in 2015, and $5500 in 2016, and then converted $2750+$5500+gains = $8700 in 2016.

Looks like line 15 and 18 are most relevant here?

2015 Line 15  = $1361
2016 Line 18 = $1389



MDM

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Re: tIRA -> rIRA conversion, IRS claims I now owe taxes?
« Reply #7 on: June 18, 2018, 11:51:50 AM »
^ Thanks for the link!

Basically I contributed $2750 in 2015, and $5500 in 2016, and then converted $2750+$5500+gains = $8700 in 2016.

Looks like line 15 and 18 are most relevant here?

2015 Line 15  = $1361
2016 Line 18 = $1389
The numbers you show differ from what I get if I make only these five entries:
C1: 2015
C5: 2750
C10: 2800 (this is just a guess, and anyway has no bearing on the outcome, given other entries)
D5: 5500
D8: 8700

Based on that, it seems $450 was taxable in 2016.

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Re: tIRA -> rIRA conversion, IRS claims I now owe taxes?
« Reply #8 on: June 18, 2018, 04:46:26 PM »
You first need to file Form 8606 for 2015 and 2016 to establish the basis in your traditional IRA because you made non-deductible contributions of $2750 and $5500.  This will be done in Part I of the form.

You'll then need to amend your 2016 taxes to reflect a taxable Roth conversion.  This will be done on Form 8606 also, but in Part II, not Part I.  You should have your converted amount ($8730.07 I think) on line 16, your basis of $8250 on line 17, and the taxable amount of $480.07.  You will owe ordinary income tax on the gains because it flows back to your form 1040 line 15b.

(Since the above two paragraphs would have you fill out two Form 8606's for 2016, I think it would be more proper to just fill out one form with both Part I filled out to establish your basis for your 2016 contribution and Part II to reflect your Roth conversion in late 2016, and then file it with your amended 2016 tax return.)

You also in theory should amend your 2017 taxes to reflect a taxable Roth conversion to pay ordinary income taxes on the gain of $2.79, but that is so small that while technically correct most people wouldn't bother.  If you did so, it would again be Form 8606 Part II.  You'll still want to file the Form 8606 so the IRS doesn't think you made a taxable IRA withdrawal.

Same thing for 2018 - you'll need a Form 8606 so the IRS doesn't think you made a $5,497.81 taxable IRA withdrawal.  Form 8606, part II.

As for how you filled out the case study spreadsheet, I don't think you did it right.  I can't see any reason why you'd have $1389 in C13.

Finally, note that you should get and fill out the Form 8606's for the proper years with the proper year's data - 2015 data on a 2015 Form 8606, etc.  The form changes slightly from year to year, and if you put 2016 data on a 2017 form, then the IRS will just get more confused and you'll create more of a mess.
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bryan995

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Re: tIRA -> rIRA conversion, IRS claims I now owe taxes?
« Reply #9 on: July 08, 2018, 11:43:12 PM »
Thanks for all the help everyone - finally got around to fixing this mess.

Re-did the spread sheet and am now getting the correct numbers (not sure what went wrong first time around).
Anyways, following some advice some bogleheads folk, I've now organized my cp2000 packet and will be shipping off to the IRS tomorrow.

I am including corrected 8086s from 2015, 2016 and 2017 as well as copies of the 1099-Rs.
I decided not amend my 1040s yet - I will await a response from the IRS.

Indeed I owe about $480 tax for both myself and my wife from 2015/2016.  Moving forward, tax will be minimized as we now fully fund and convert on Jan1-2.

Fingers crossed for a satisfactory resolution :)