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Help a newbie with his Backdoor Roth

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  • Avatar NorCal_dental 
    Participant
    Status: Dentist
    Posts: 7
    Joined: 03/11/2019

    Disclaimer.  I feel like an idiot for not properly looking into this.  I didn’t want paralysis by analysis so I jumped in. Not a good move.

     

    I have a retirement plan at work and my wife has one as well at her work.  Our adjusted gross income for 2018 was $215k.  I decided to open a Traditional IRA on 4-2-19 and put in $5500 and I purchased VTSAX.  On 5-16-19 I put in $6000 and purchased VTSAX I did the same for my wife in June of 2019.  I just found out that my contributions are not tax deductible, buy my CPA deducted the $5500 for 2018.  I also wanted to do a backdoor Roth with those accounts.  I have read and watched the tutorial on backdoor Roths and see where I made mistakes and made it difficult for myself.

    I want to clean this up, but I don’t know where to start.  What should my next step be?  Have the CPA amend the taxes?  Do any advisors offer their services to clean up situations like this?

    #234926 Reply
    DMFA DMFA 
    Moderator
    Status: Physician
    Posts: 2136
    Joined: 06/24/2016

    1040X and 8606 should be all it takes. You’ll owe some tax and a little interest. Then when you convert to Roth IRA, you’ll pay taxes on the gains.

    Not the end of the world.

    "I like money." - Frito Pendejo (Idiocracy)

    [Not a financial professional (yet), lawyer, or employee of The White Coat Investor]

    #234938 Reply
    Avatar Peds 
    Moderator
    Status: Physician
    Posts: 4405
    Joined: 01/08/2016

    Your cpa didn’t know……

    #234986 Reply
    Avatar ZZZ 
    Participant
    Status: Spouse
    Posts: 697
    Joined: 06/18/2018

    Get rid of the CPA, too. He should have known your contributions were obviously not deductible based on your income.

    #234987 Reply
    Liked by ENT Doc
    Faithful Steward Faithful Steward 
    Participant
    Status: Financial Advisor, Small Business Owner
    Posts: 509
    Joined: 06/12/2017

    Filing a 1040X and 8606 will fix the existing mistake. Firing your CPA and finding a new tax advisor will hopefully prevent future mistakes.

    Michael Peterson, CFP® | Faithful Steward Wealth Advisors
    https://ProsperousPhysician.com | (717) 496-0900

    #234995 Reply
    Avatar Peds 
    Moderator
    Status: Physician
    Posts: 4405
    Joined: 01/08/2016

    Firing your CPA and finding a new tax advisor will hopefully prevent future mistakes.

    Click to expand…

    and learning the rules and process yourself as well.

    #235005 Reply
    Liked by jhwkr542, ENT Doc
    Avatar NorCal_dental 
    Participant
    Status: Dentist
    Posts: 7
    Joined: 03/11/2019

    Thank you all for your input.  Is the plan below correct?

    1. My first step would be to convert all the money(5500, 6000, plus gains) in the traditional IRA to a Roth account on Vanguard.  Make sure there is 0 in traditional.

    2. Have my CPA amend my 2018 taxes using the 1040x. Do this right away.

    3. Fill out an 8606 and give to my CPA when doing the 2019 taxes.

     

     

    #235091 Reply
    Avatar NorCal_dental 
    Participant
    Status: Dentist
    Posts: 7
    Joined: 03/11/2019

    1040X and 8606 should be all it takes. You’ll owe some tax and a little interest. Then when you convert to Roth IRA, you’ll pay taxes on the gains.

    Not the end of the world.

    Click to expand…

     

    After the 1040x is done, would the IRS send a letter for the amount of extra tax owed for 2018?

    When I convert to the Roth IRA, the taxes on the gains will be paid in my 2019 tax return?

    #235095 Reply
    DMFA DMFA 
    Moderator
    Status: Physician
    Posts: 2136
    Joined: 06/24/2016

    1040X and 8606 should be all it takes. You’ll owe some tax and a little interest. Then when you convert to Roth IRA, you’ll pay taxes on the gains.

    Not the end of the world.

    Click to expand…

     

    After the 1040x is done, would the IRS send a letter for the amount of extra tax owed for 2018?

    When I convert to the Roth IRA, the taxes on the gains will be paid in my 2019 tax return?

    Click to expand…

    You calculate the difference that you owe them based on the 1040X and pay it ASAP without them sending you the bill; you just wrote your own bill, p much.  Basically, box 1B is $5,500, and you plug and play.  Line 20 is just that amount multiplied by your marginal rate.

    For instance, if your taxable income was $5,500 higher because you incorrectly deducted a non-deductible contribution, and your marginal rate was 32%, then you’d simply owe them 5,500 * 0.32 = $1,760.  You pay them what you would have paid on the taxes first as demonstrated by 1040X line 20, and then the IRS will send you a bill for the penalty and interest.  The penalty is usually 0.5%/month, so for 4 months yours would be around $32.50, plus whatever they’re charging for interest.

    2018 Form 8606 will just be the contribution and basis only; $5,500 on lines 1,3,14.  That costs $50 to file late.

    Conversions are added to your taxable income in the year which they occur, regardless of for which year anything was contributed.  So if you convert in 2019, then the income will go on your 2019 Form 1099-R and be taxed in 2019.

    2019 Form 8606 will show $6,000 line 1 (2019 contrib), $5,500 line 2 (2018 basis), $11,500 line 3, and then whatever amount you converted on line 9.  It will then figure out what the taxable portion would be; with some rounding error, it’s just the amount that you converted over what you contributed, i.e. the gains.

    …not a huge mess.  A few dollars and bits of paperwork to clean up.  You’re not going to jail.

    "I like money." - Frito Pendejo (Idiocracy)

    [Not a financial professional (yet), lawyer, or employee of The White Coat Investor]

    #235121 Reply
    Liked by SLC OB
    DMFA DMFA 
    Moderator
    Status: Physician
    Posts: 2136
    Joined: 06/24/2016

    Thank you all for your input.  Is the plan below correct?

    1. My first step would be to convert all the money(5500, 6000, plus gains) in the traditional IRA to a Roth account on Vanguard.  Make sure there is 0 in traditional.

    2. Have my CPA amend my 2018 taxes using the 1040x. Do this right away.

    3. Fill out an 8606 and give to my CPA when doing the 2019 taxes.

     

     

    Click to expand…

    You also need a Form 8606 for 2018.  But yeah, right track.

    "I like money." - Frito Pendejo (Idiocracy)

    [Not a financial professional (yet), lawyer, or employee of The White Coat Investor]

    #235123 Reply
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 2374
    Joined: 03/01/2018

    are you sure the CPA deducted your 2018 IRA contribution? I only ask because that’s a pretty gross mistake for a CPA to make, given the facts. I can’t believe that their tax software would screw that up. I mean it knows your income and usually the fact you have a retirement plan at work is indicated on your W2.

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

    #235127 Reply
    DMFA DMFA 
    Moderator
    Status: Physician
    Posts: 2136
    Joined: 06/24/2016

    are you sure the CPA deducted your 2018 IRA contribution? I only ask because that’s a pretty gross mistake for a CPA to make, given the facts. I can’t believe that their tax software would screw that up. I mean it knows your income and usually the fact you have a retirement plan at work is indicated on your W2.

    Click to expand…

    Agreed, def double-check 1040 Schedule 1 Line 32.

    "I like money." - Frito Pendejo (Idiocracy)

    [Not a financial professional (yet), lawyer, or employee of The White Coat Investor]

    #235129 Reply
    Liked by SLC OB
    Avatar Gamma Knives 
    Participant
    Status: Physician
    Posts: 169
    Joined: 06/25/2017

    are you sure the CPA deducted your 2018 IRA contribution? I only ask because that’s a pretty gross mistake for a CPA to make, given the facts. I can’t believe that their tax software would screw that up. I mean it knows your income and usually the fact you have a retirement plan at work is indicated on your W2.

    Click to expand…

    Indeed it seems pretty mind boggling that a CPA could mess up something so basic.

    As other posters have said it is an easily fixable mistake. Don’t stress. File the correction. You’ll be fine.

    #235191 Reply
    Liked by SLC OB
    Avatar NorCal_dental 
    Participant
    Status: Dentist
    Posts: 7
    Joined: 03/11/2019

    Appreciate all the help. 1040 Schedule 1 Line 32 does say $5500.  I will be calling my CPA tomorrow and asking him a few questions and will report back. I have my own dental practice.  The practice is run by my S corp which employs me.  Wondering if it has something to do with how my taxes were done.

     

    I am in the process of opening the Roth account at Vanguard, but wanted to know if I should first move my money to the settlement fund in my Traditional IRA?  Was thinking it would be the better way to go so the amount will be the most accurate?

     

    #235207 Reply
    Avatar NorCal_dental 
    Participant
    Status: Dentist
    Posts: 7
    Joined: 03/11/2019

    Called him today…

    My modified adjusted gross income was $178k. Line 10 on form 1040.  I was looking at line 7 which is the adjusted gross income of $215k.

    In 2018 I joined a group practice.  It’s essentially my own practice, but it’s under a group practice umbrella.  Hygiene department is shared for expenses and profit.  I have my own S corp and the corp pays me a W2.  We didn’t have the retirement being taken from my W2 so he wrote it off through the corp.  For 2019 it will be taken out and shown on my W2.  Not sure how legit that is.

    The $5500 deduction was taken on my personal taxes because its under the 193k limit for married filing jointly with a spouse who is covered by a plan at work.

     

    So based on this I do not need to do a 1040x and only fill out a 8660 for 2019(My gross income will be significantly higher and both retirements will be reported through W2)?  And do it DMFA mentioned? Quoted him below…

    2019 Form 8606 will show $6,000 line 1 (2019 contrib), $5,500 line 2 (2018 basis), $11,500 line 3, and then whatever amount you converted on line 9. It will then figure out what the taxable portion would be; with some rounding error, it’s just the amount that you converted over what you contributed, i.e. the gains.

    #235452 Reply

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