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Did Roth conversion while having balance in Rollover IRA – help with prorata rule

Home Retirement Accounts Did Roth conversion while having balance in Rollover IRA – help with prorata rule

  • Avatar pulmccmdoc 
    Participant
    Status: Physician
    Posts: 5
    Joined: 06/05/2019

    i think this is complex matter to explain but basically trying to understand the Pro-rata rule with Roth conversions. below is the chronology of events.

    1) March 2018 i contribute 5500$ each for 2017 and 2018 for me and my wife in our individual traditional IRA (total 22k) from my checking account (non deductible contribution)

    2) April 2018 I converted that entire 22k (11K each for me and my wife) into our individual roth IRA

    3) july 2018 I had some 14k$ in my Sep IRA which i converted to Roth also since i was told i cannot have balance in any of the IRAs to do roth conversions

    4) I deposited after tax contribution into my employer sponsored 401A every pay check starting march 2018 and periodically took distribution of that after tax contribution from my 401A plan to my Roth IRA

    5) I rolled over some 2300$ from my prior employer’s 403b plan into Rollover IRA in july 2018

    6) as of dec 31, 2018, i had converted all my balance in SEP IRA and traditional IRAs into Roth except i forgot to convert the 2300$ balance in the Rollover IRA. When i realized this in march 2019, I rolled over the balance in rollover IRA to my current employer sponsored 403b plan.

    question – what is the tax consequence of above? how does prorata rule apply here? Am i correct in understanding that total amount in IRAs in 2018 for me would be 11k(traditional IRA- non deductible)+2300$(rollover IRA)+14k$(sep IRA) =27300$ of which i converted 25000$ into Roth in 2018.

    Fidelity reported 11k that i rolled from traditional IRa to Roth IRA as taxable event although it was non deductible contribution. does that mean i would end up paying tax twice? I would be claiming 5500$ on form 8606 for 2018 contribution towards traditional IRA, how can i claim the 5500$ contribution that i did for the year 2017 in march 2018 in traditional IRA?

     

    #220864 Reply
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 1998
    Joined: 03/01/2018

    Have you completed a 2018 tax return? This all gets reported on Form 8606 which is filed with your return. The form and instructions are pretty clear. You would have been subject to some pro rata taxation of any pretax IRA (traditional, SEP, and SIMPLE) balance remaining on 12/31/18.

    You also should have completed Form 8606 for your 2017 return to report the 2017 contribution which occurred in 2018.

    Form 8606 is completed separately for you and spouse.

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #220941 Reply
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    Avatar spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1750
    Joined: 02/01/2016

    The bottom line is that a percentage of the $11K in non-deductible basis was not in fact converted to a Roth because of pro-rata considerations. That is not a big problem for 2018 taxes, it just means more of that $25K will be taxable. As @jacoavlu pointed out this should have/will be sorted out with your 2018 Form 8606.

    However, you have a bigger problem with the 403b. The pro-rata Roth conversion resulted in some of the non-deductible basis remaining behind in the traditional IRA. You can only rollover pre-tax IRA assets into an employer plan. Your rollover of the non-deductible basis into your 403b was prohibited.

    If/when the 2018 is correct and you know the exact amount of non-deductible basis was rolled over. You will have to contact your 403b plan to rollover the non-deductible basis and any earnings back into the traditional IRA. They should know exactly what you are talking about.

    Once that is done, you can do a Roth conversion of that balance. You will carry forward that non-deductible basis to your 2019 Form 8606. Some of the $2300 will not be taxable in 2019, because it was taxable in 2018. You will want to convert your entire traditional IRA balance in 2019.

    #220958 Reply
    Avatar pulmccmdoc 
    Participant
    Status: Physician
    Posts: 5
    Joined: 06/05/2019

    Thanks, my 2018 tax are still not filed and I plan to file form 8606 for me and my wife to claim the 5500$ non deductible contribution made in march 2018 for the year 2018 in the traditional IRA. however form 8606 was not filed with my 2017 taxes (my CPA didn’t tell me- the contribution for 2017 was made in march 2018 though). so what to do now? file 2017 form 8606? or put those numbers in 2018 form 8606?

    also as mentioned by @spiritrider, some of the 2300$ that I rolled over from my “rollover IRA” to my work 403B is post tax, how to find out how much of that amount is post tax which needs to be rolled back to rollover IRA, this is getting complicated. who should I approach to have this fixed? CPA? Fidelity?

     

     

    #221386 Reply
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 1998
    Joined: 03/01/2018

    regarding 2017 you need to complete form 8606 and mail to the IRS. A brief included letter of explanation is fine. It will not change your tax due as there was no Roth conversion in 2017

    when you complete your 2018 form 8606 (you should go ahead and download the form and work through this now) you should end up with a positive figure for basis on line 14. This is the after tax amount that it would seem you rolled over to your 403b, and this amount as well as any associated earnings will need to be returned to the traditional IRA by the 403b plan administrator

    how about you go ahead and complete 2017 and 2018 forms 8606, then report back here the figures that you get. A smart person here will double check things for you.

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #221422 Reply
    Liked by spiritrider

Reply To: Did Roth conversion while having balance in Rollover IRA – help with prorata rule

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