Author Topic: Taxes, backdoor roth, and form 8606 - what to do?  (Read 4840 times)

dividendman

  • Handlebar Stache
  • *****
  • Posts: 1127
  • Age: 36
Taxes, backdoor roth, and form 8606 - what to do?
« on: February 05, 2015, 11:48:20 PM »
So here's the deal.

Since I've been working in America, ~4 years, I've had enough income to not get Trad. IRA deductions. So naturally I've been contributing the max without a deduction and immediately converting it into a Roth.

I figured since none of this needs to be taxed it's just that simple. Evidently I was wrong and I need to file form 8606 for my non-deductible Trad. IRA contribution even if I'm immediately converting it into a roth (which doesn't make any sense to me, but OK).

On top of this, apparently I have to do some tax stuff with the actual conversion from the trad IRA to the Roth even though that's not taxable either since it's after tax funds already!

Form 8606 (non-deductible contribution to trad IRA) is supposed to be filed each year I did a trad IRA non-deductible contribution. Since this isn't stopping the IRA from getting any taxes from you they don't actually care if you do it, it's for your own good. But if you submit the form late it costs $50. So I'm looking at ~$200.

My question to you all is: what benefit is there to actually doing this at all in my scenario (correcting the previous years)? It's clear that I owe the IRS no taxes and when I do form 1099-r for the backdoor (getting a distribution from my trad IRA and putting it into another retirement account i.e. Roth) I can still say I don't owe taxes there and it looks fine in TurboTax.

Monkey Uncle

  • Handlebar Stache
  • *****
  • Posts: 1475
  • Location: West-by-god-Virginia
Re: Taxes, backdoor roth, and form 8606 - what to do?
« Reply #1 on: February 06, 2015, 04:17:48 AM »
I'd start filing the forms this year and forget about the previous years.  Nobody is going to notice or care, unless you get audited for one of those prior years.  And even if you do get audited, what's the worst that could happen?  They make you file the forms and pay the late fee?

*Disclaimer:  I am not a tax professional and am not qualified to provide tax advice.

Anomalous

  • Stubble
  • **
  • Posts: 125
  • Age: 37
  • Location: Arizona
Re: Taxes, backdoor roth, and form 8606 - what to do?
« Reply #2 on: February 06, 2015, 07:36:38 AM »
Edit: This advice is most likely wrong in regards to the backdoor Roth. See discussion below. I was confused, and should probably refrain from offering advice on topics I just read about the day before!

I was just looking up how to handle taxes for a recharacterization last night (in my case, recharacterizing a Roth contribution into a traditional.) If the backdoor Roth is considered a recharacterization (seems likely), then this IRS publication is relevant:
http://www.irs.gov/instructions/i8606/ch01.html

Quote
Reporting recharacterizations.   Treat any recharacterized IRA contribution, Roth IRA conversion, or Roth IRA rollover from a qualified retirement plan as though the amount of the contribution, conversion, or rollover was originally contributed to the second IRA, not the first IRA.

Quote
You made a contribution to a traditional IRA and later recharacterized part or all of it in a trustee-to-trustee transfer to a Roth IRA. If you recharacterized only part of the contribution, report the nondeductible traditional IRA portion of the remaining contribution, if any, on Form 8606, Part I. If you recharacterized the entire contribution, do not report the contribution on Form 8606. In either case, attach a statement to your return explaining the recharacterization.

That reads to me as if you don't need to file form 8606 since you converted the entire amount of the non-deductible contribution. You do need to "attach a statement to your return explaining the recharacterization." I'm going to have to do this to, and I wonder how to "attach a statement" to a return submitted electronically using tax software?
« Last Edit: February 06, 2015, 09:25:48 AM by Anomalous »

PathtoFIRE

  • Pencil Stache
  • ****
  • Posts: 577
  • Age: 40
  • Location: Dallas
Re: Taxes, backdoor roth, and form 8606 - what to do?
« Reply #3 on: February 06, 2015, 08:08:33 AM »
I was just looking up how to handle taxes for a recharacterization

I'm curious to follow this as 2014 was the first year I did the backdoor Roth. However, my understanding is that recharacterization is very different from conversion. So while I could see that the advice to treat recharacterization as if you had never contributed to the first type of IRA makes sense, for conversions, the whole point is that you very specifically made a traditional IRA (nondeductible of course) contribution, and then decided to CONVERT it and incur any taxes due (which should be none of done right, with no capital gains, etc.). The point being that those of us doing the backdoor Roth can't make an actual Roth IRA contribution in the first place. Hence, the form 8608 keeps track of those conversions and gives you and the IRS the information you need to know when the 5 year seasonings for each conversion are over, and what the conversion amounts are, i.e. how much you can withdraw and when you can withdraw it.

Anomalous

  • Stubble
  • **
  • Posts: 125
  • Age: 37
  • Location: Arizona
Re: Taxes, backdoor roth, and form 8606 - what to do?
« Reply #4 on: February 06, 2015, 09:11:20 AM »
However, my understanding is that recharacterization is very different from conversion.

You may be right. I'm certainly not a tax or accounting professional of any kind. However, the IRS page I linked to does say that any "contribution, conversion, or rollover" is reported the same way. Edit: after a further re-reading, I think I'm wrong since that wording about "contribution, conversion, or rollover" is contained in a section about recharacterizations. I believe my comments below about form 8606 are still correct though.

My interpretation of the instructions is that form 8606 is needed if you have non-deductible contributions left in the traditional account after the conversion, but that if the non-deductible portion was removed entirely and only deductible contributions are left then there's no need to file 8606. If I'm mis-interpreting the instructions then I'd appreciate it if someone can explain how, since I don't want to mess up my own taxes! (Form 8606 is probably not relevant to me personally this year, but it may be in the future.) Edit #2: I believe this was correct when referring to recharacterizations, but now I'm not sure if it applies to a backdoor Roth. Ignore what I say and just refer to the IRS instructions directly.
« Last Edit: February 06, 2015, 09:19:43 AM by Anomalous »

forummm

  • Walrus Stache
  • *******
  • Posts: 7396
  • Senior Mustachian
Re: Taxes, backdoor roth, and form 8606 - what to do?
« Reply #5 on: February 06, 2015, 10:44:07 AM »
Why are you doing this in the first place? Since you have a Roth, just put your contributions in there directly. No need to do the conversion in the first place.

dividendman

  • Handlebar Stache
  • *****
  • Posts: 1127
  • Age: 36
Re: Taxes, backdoor roth, and form 8606 - what to do?
« Reply #6 on: February 06, 2015, 12:15:55 PM »
Why are you doing this in the first place? Since you have a Roth, just put your contributions in there directly. No need to do the conversion in the first place.

I can't do it directly because my income is too high to use a Roth. Hence the "back door".