[Editor's Note: Many high-income professional investors first learned about the Backdoor Roth IRA on this site. One of my most popular posts is the tutorial on the process. In the lengthy comments section of that post, many people asked how to handle a Backdoor Roth IRA (especially form 8606) if you contributed in the next calendar year. While it is “cleaner” to make your contribution and your conversion all in the same calendar tax year, you can make your contribution up until your tax filing date of the next year. I was going to write a post on the subject and then, lo and behold, a guest post on the subject showed up in my email box. The writer wanted to stay anonymous and we have no financial relationship.]
Maybe you are a new reader and just saw the light this January. Maybe you were reading up on the Backdoor Roth and December 31 flew by you. Maybe you are new to financial planning and weren’t sure if you’d have enough money to make the $6k contribution this year (Not very WCI of you! See, that’s where the planning portion kicks in). Or maybe you were waiting to see if you could afford your new boat and still have enough left over from your bonus to make the Backdoor Roth happen (please, please don’t let this be the reason — and if it is, for Pete’s sake, don’t admit it here!).
Whatever the reason, you have found yourself ready to do a Backdoor Roth for the previous year. You’re wondering if you can make a non-deductible contribution in 2015 to your 2014 traditional IRA and still get in the back door. If so, how do you do this?
How to Fill Out Form 8606 for Backdoor Roth Late Contributions
Great question. If you’re like me, you re-read the posts on Backdoor Roths here a million times trying to find the answer. You scour other websites but find yourself back here. You locate WCI’s generous image postings of how to fill out Form 8606 but can’t find an example of a procrastinator such as yourself who is contributing late. So instead, you head over to the IRS website, pull down the Form 8606 yourself, and try to make heads or tails of what seems like a foreign language, realizing of course that you are not a CPA but just a DIYer (that is my caveat emptor, by the way).
Below, you will see a Form 8606 filled out with 2014 values in the appropriate boxes, and the numbers for your 2015 Form 8606 in the margin on the right. Don’t worry, I’ll step you through it. Please note that this setup shows a conversion when there have been no gains in the prior year contributions so that there are no taxes due on gains.
Line 3 is your total tIRA contributions, including previous and current year. For 2014, that would be only the $5500. For 2015, that would be the $5500 for last year and the $5500 for this year. For the 2014 year, the answer to the Question in Line 3 is NO, so you enter the amount from Line 3 into Line 14 and skip the rest of Part 1. For your 2015 taxes, Line 4 represents the late contributions you made in 2016 to your 2015 tIRA ($0 since you were diligent this year) and Line 5 represents the late contributions you made in 2014.
Line 6 is the total value of your tIRA on December 31st, this is the information that will affect the pro rata rules. Since you have no previous non-deductible contributions because you have been a good little WCI minion and cleared out previous IRA accounts, this will be $0 as well.
Line 8 you skipped for 2014 because you answered NO to Line 3. In 2015, you will be converting the full amount in your tIRA to a Roth.
Line 11 is the non-taxable portion of your conversion — which, if you’ve done things right, should be the full amount you are converting — $11,000.
Line 14 is the basis in your tIRA for the current year and prior — which should now be $0 in 2015 because you just converted all of it to a Roth (remember, previously it was $5500 for the contribution year 2014 before you converted.)
Line 16 is the amount you converted to Roth. For 2014, that is $0, for 2015 that should be the full $11,000. Line 17 is the non-taxable portion that you converted. This should be $0 for 2014 and $11,000 for 2015. Line 18 is the taxable portion of your conversion. This should be $0 for both years since you did not do any conversion for 2014 and you converted only non-taxable (i.e. already taxed) portions of the tIRA for 2015. [Editor's Note: Whether you're doing your own taxes or paying someone else to prepare them, be extra sure to check that line and make sure it is zero. Many doctors have accidentally paid taxes twice on their Backdoor Roth IRA money.]
Looking Ahead
That should be it, you’re done! Now make sure to make your contributions in the future during the year for which you are contributing — remember, it’s time IN the market that counts, not timing the market!
What do you think? Any questions? Are you doing a Backdoor Roth IRA? If not, why not? Is there anything we can do here at WCI to make it easier for you? Comment below!
Great timing for an article. I did my conversion for 1014/15 together this year so I will bookmark this and revisit it in a year. The step by step was great, thanks!
Man, your taxes are really late
I do like the tax advantages that Roth’s carry. However, I do not like the (il)liquidity, 0 Guarantee, and lack of control these savings vehicles bring. Other than the tax advantage (which is huge I admit) Roth’s are similar to 401k’s and, truthfully, another governmental run retirement plan just as those from the Revenue Act of 1978 (Revenue means to generate $$, right?).
Monday I wrote a blog with the characteristics of MY perfect savings vehicle. Maybe you should read through them and check through the list before considering a QP as yours.
http://blog.fireyourbankertoday.com/5-reasons-your-401k-is-not-your-perfect-savings-plan
Nothing says liquidity like life insurance…You can get out of it whenever you want, you just might lose 50+% in the process.
It’s good to know that glad that you understand the liquidity of whole life insurance policies. However, no where in my blog did I mention whole life insurance.
But if you want the facts the truth is that, when structured properly, policy owners have access to much more than 50% of their cash values. In fact, when structured properly with many mutual insurance companies, policy owners have access to 60% of its cash in YR1, 90% in YR2, 95% in YR3 and 100% by YR4.
What is unfortunate is the immediate bad reputation these policies get because of the “typically taught” agent who sells the product and structures it for death benefit instead of access to cash. Your need for finance throughout your lifetime MUCH outweighs your need for insurance. Especially as a business owner.
If your perfect savings vehicle includes a cap that is in a penalty phase the majority of its life than by all means max your QPs.
I disagree. I have no need to refinance, haven’t for years, and probably won’t again. Cars, boats, college, retirement, second homes, real estate investments etc can all be bought with cash. No need for a bank. No need for an insurance agent.
Take your discussion of infinite banking to an appropriate post.
Wow. I hope WCI readers are too smart to fall for this. Maybe there should be a link to all of the other articles discussing life insurance.
I suggest removing the life insurance comment. He’s trying to leach off the WCI website to get free advertising, but his message is not consistent with the WCI recommendations.
I’ve asked him to take his comments to an appropriate place on the site. I don’t think he’s going to mislead many when you guys have already pointed out all the issues with his statements before I even get out of bed.
Doesn’t matter what the post is on, there’s always a way to bring whole life insurance into the conversation, isn’t there? I write often enough about whole life insurance, I wouldn’t think it would be so hard for salesmen to limit their comments on the subject to those posts.
Will, I’ve been blogging for three times as long as you’ve apparently been out of college. Your arguments for whole life insurance have been addressed many times on this website, starting when you were a sophomore in college.
The reason there are contribution limits on Roth IRAs is not because they’re a bad deal, it’s because they’re a really good deal. Why do you think there are all these people doing Roth conversions, backdoor Roth IRAs, mega backdoor Roth IRAs etc. Anyone who buys cash value life insurance prior to maxing out their Roth IRAs is almost surely making a mistake.
I find illiquid to be a far better descriptor of whole life insurance than retirement plans. Guarantees aren’t free. The real lack of control on returns comes when you simply have to accept whatever dividend rate the insurance company decides is appropriate to give and have to accept whatever insurance costs they feel like charging.
At any rate, if you wish to spend more time commenting about infinite banking, please do so on this post: https://www.whitecoatinvestor.com/a-twist-on-whole-life-insurance/
If you want to talk about all the ways agents like to use to inappropriately sell this stuff to their clients, I have a whole series on it:
https://www.whitecoatinvestor.com/debunking-the-myths-of-whole-life-insurance/
Let’s keep the comments in this post on topic, and the topic is not screwing up your 8606.
I was going to contribute to my backdoor roth, but it looks like the guy above has a better plan… All joking aside, great post. I ran in to this problem this year. I did my roth in the 2014 year but did my wifes roth in 2015 (we were going to see if we could make in in the budget after paying student loans). I already did my taxes this year and was definitely confused about this issue. This will be helpful for next years taxes. And for simplicity, I will definitely try to make both contributions prior to 2016.
I didn’t mean for my original comment to come off wrong- a Roth is a popular savings vehicle and does have its advantages. But, limiting yourself to a $5,500 annual contribution is not one of them. Why do you think those who are in control of these retirement plans put contribution limits on them?
William,
There is not a single person on this blog who is interested in any permanent insurance policy you are trying to sell. You are either unaware of the shortfalls of such a policy, or looking to scam some unsuspecting physician out of their hard earned money. Very likely it is a combination of the two.
It sounds like you have had a bad experience with an agent in your past. I am very well aware of the shortfalls of a poorly structured permanent life insurance policy. The majority of them are all true. My goal here was not to bring up whole life insurance nor life insurance of any kind. My goal was simply to explain and shed light on the characteristics that I would want my savings vehicle to have (hence my original post with link to a recent blog). Qualified plans do not meet all of the characteristics that I want my savings vehicle to have.
Hopefully some of your readers can better understand my original intention to explain this through this clip that teaches more on traditional qualified plans.
[Link deleted.]
Oh come on. Give me a break. This is a well-known sales technique for selling whole life insurance. Point out the problems/downsides of retirement plans, then talk about how life insurance may or may not have those (without mentioning the downsides of the life insurance) and then voila- you’ve got a ready buyer for your high commission product.
Seriously though, I don’t mind you courteously discussing whole life/infinite banking/alternative “retirement” accounts, but take it to the right place on the site as previously pointed out. I’m not going to allow you any more links on this post.
I wonder how much whole life $5,500 would buy…. a few hundred thousand? Or you could buy 10+ million of a laddered term.
I guess it’s good for everyone to see how dumb these whole life agents are, but man it would be nice to delete these comments like those above have said.
I don’t delete comments just because someone disagrees with me. Now, if they’re sock puppeting, selling, spamming, deliberately aggravating, or using ad hominem attacks etc….different story.
Do you have the 2nd page available?
The poster did not include it in his submission. Was there a specific question you had about it?
The lines the author references in the post do not match the image. There is a disconnect starting around line 11.
I remember thinking that when I was editing, but when I went back and carefully re-read it I realized I was mistaken. Take a close look and see if you’re making the same mistake I did. If it really is off, we’ll get it fixed.
Thank you so much for this guest post. I was arm-wrestling with TurboTax for 2 hours last night, dealing with this situation for 2013-2014 years (a year earlier than the example), figuring out how to report it, for my better half’s procrastinatory 2013 backdoor contribution in 2014. Hopefully I’ll stop making the TurboTax think that this was taxable – it appears that making the basis 5,500 would be the key that I was missing.
You’ve seen Harry’s Sit’s excellent tutorial on the Backdoor Roth via turbotax, right?
I think you mean this?
http://thefinancebuff.com/how-to-report-backdoor-roth-in-turbotax.html
I haven’t read through the whole thing but looks like it is exactly what I was looking for as well.
That’s it.
Thanks! I used the link last night to “fix” my own 8606 from 2013. I thought initially I was the cause the TurboTax was having issues (I’ve been spanked with pro-rata taxes on past conversions, and my 8606 is not “clean” at all). By the time it was midnight, I realized that it was my partner’s backdoors. Then it was 2 hours past bedtime, I was too tired to fix those. Now back to TurboTax.
Great article, very helpful. Lets say someone (we’ll call him me) has been doing Backdoor Roth IRAs successfully for several years (after reading the WCI tutorial, of course). Lets say that person performed the IRA contribution and Roth conversion in July of this past year, but that his old retirement account got dumped into a traditional IRA two weeks before that, and that person didn’t realize it when he made his IRA contribution. Is there any way, prior to tax day, to backdate a conversion of that traditional IRA money into something else (my active 401K, for example) in order to avoid the pro rata rule? I suspect the answer is a resounding “No”, but thought there may be others who are in the same boat and may benefit from any insights.
No.
But there is a silver lining to the situation. You have 2 choices how to proceed in this situation.
1) recharacterize your conversion back to non-deductible TIRA. this way pro-rata won’t affect you, because it’s as if your conversion never took place. for your 2014 contributions you have till October 15, 2015 to get this done. but better to get it done by tax return date.
or
2a) pay taxes with the pro-rata (you’ll deal with the left column of 8606 form). what happens at that point, part of your combined TIRA’s money gets classified as “having been taxed”, and won’t get taxed again.
2b) at some future point you need to get rid of this TIRA money altogether. you can convert it to Roth, or roll over to 401k. if you choose to convert, you will get taxed on the portion of your conversion that you’ve been not taxed on, on the earnings of not previously taxed portion, and also on the earnings of the portion that has been taxed (but not on the portion itself that got taxed with 2014 taxes).
this is at least how i understand this situation to work. i’ve been through 1), and 2a). i will try to do 2b) during 2015 tax year – so it may not work in practice how i imagine it would…
also, for continuation of 1) – what’s gonna happen when you in the future get rid of you deductible TIRA balances (one way or another), is that your basis will be 5,500 (in your non-deductible TIRA), assuming you maxed out your backdoor. when you roll this over into Roth, you will not be taxed on 5,500, but only on its earnings. so this would still be doing a backdoor, just delayed.
the sooner you do either 1) or 2b), the sooner you will start having tax-free growth.
let me know if you need any references for some of the process i described, or if you have questions.
The pro-rata rule is applied on December 31st. It doesn’t matter what you do throughout the year, assuming you used two different IRAs. Just be sure to roll that IRA into a 401(k) prior to year end.
I think the request for a second page refers to the image only showing up to line 15, while the author mentions lines 16-18.
I wonder if I lost the image. I’ll try to find the attachment he sent me and see if I lost it in editing. That means I’ve got to remember who wrote this anonymous piece…
Does it make sense to do a backdoor roth IRA if you have a six figure Simple IRA?
Employer will be changing to 401K beginning next year. So looks like I could rollover to the 401K after a few years. Then the benefit seems more clear cut.
Yes, you could do the contributions now and wait until you roll the SIMPLE into a 401(k) before doing the conversions.
What kind of documentation would be required for these conversions if someone is audited in the future? Would it be as easy as providing the transaction history for the Roth account?
Hopefully I won’t find this out through an audit. But each year you get sent a 1099-R sometime in January. Then each year after April you also get sent a 5498. Also each year you fill out an 8606 with your taxes. Info on these forms seems to cover what your transactions are.
They’re documented on your taxes each year.
Thank you WCI for all of this incredible information! I’m a second year FP resident, learning as much as I can to get my financial goals in order. I unfortunately learned about you, your blog and book after I foolishly put $5500 into a tIRA in December of 2014 instead of a Roth. My (relatively) low resident income would allow a Roth conversion, but I’m not sure if I should just do a backdoor conversion or do a conversion through the bank. I supplied after-tax money(I’m not claiming a deduction) to that tIRA and I’m worried I will be taxed on the conversion if I don’t do the 8606 right. I have no other tIRA or 401k money so I’m trying to avoid ever being set up for the pro-rata rule. Any advice would be appreciated!
You can recharacterize it, or convert it (recharacterization probably better as it would save a little in taxes assuming you have gains since the contribution, maybe not if its at a bank). Probably ought to move it away from a bank to a mutual fund company though.
I have 2 questions that I would love for folks to help me understand. The first is what happens when the amount converted is more than the total basis? In this example only nondeductible contributions have been made to the tIRA, but the whole account is converted. Am I correct in understanding that the end result for the taxable amount is the simple math of total converted – contributions(since they were all nondeductible). For my second question I am making the assumption that in an ideal world one is able to convert contributions immediately after making them so that there isn’t any gains or losses to deal with. Any recommendations on how to go about making that ideal a reality? Thanks to all for the advice and especially to WCI for sharing his expertise and point of view.
No, you only pay taxes on the gains.
Contribute on day one to a money market fund. Convert on day two. No gains or losses.
I almost smacked my forehead for not having thought of using a money market fund. Thanks for the help!
Laura, it is not the worst thing in the world to have made a little bit of gain either. This was my first year and as I incrementally put money in, ended up with a little extra. It all gets transferred over with tax on the gain. No big deal. 🙂
I agree. If you’re going to leave the money in the traditional IRA for a few months or a year out of concern for the step doctrine, it’s best to just invest it and deal with the tax on the gains. But if you’re comfortable converting it the next day, the money market fund sure makes the paperwork easier.
Quick question…
I was going to start contributing to a backdoor Roth this year. I have already converted all of my IRAs over to my 401K. I also now have an empty Vanguard account for the conversion purpose. My question though is whether I should contribute to the IRA all at once and then do the conversion the next day or if it is possible to contribute to a Vanguard money market on a monthly basis and then do the conversion in December? Does this mess up the taxes if the MMA had interest paid throughout the year?
It messes it up a little, but not much. Especially since MMFs don’t actually pay any interest. Why not save it up in your high-yield savings account where you have your emergency fund and then fund it all at once? I find it unusual that someone who makes enough money that he can’t contribute directly to the a Roth IRA can’t come up with $5500 all at once to fund it in one fell swoop.
Just to clarify my understanding of this excellent post: Form 8606 (2014) looks like one just made a “late” traditional IRA contribution ($5500) for tax year 2014, then for tax year 2015 Form 8606 (2015) will reflect an $11000 conversion to a Roth IRA (combined tIRA contributions for 2014 and 2015)?
I ask because WCI’s original tutorial and sample Form 8606 is filled out to reflect both a $5500 tIRA contribution and Roth IRA conversion within the same year, and looks slightly different than the 2014 column of the Form 8606 posted above.
Many thanks for the anonymous contribution and posting by WCI.
That’s right. The goal is to eventually keep things simple by doing your contribution and conversion all in the regular calendar year-so 2015 contribution and conversion in 2015.
Do you have a turbotax tutorial if we use online version for backdoor Roth?
No, but Harry Sit does:
http://thefinancebuff.com/how-to-report-backdoor-roth-in-turbotax.html
Very timely post–thanks! I am in this exact situation with an $11,000 1099-R and using TurboTax I keep ending up with $5,500 in taxable income on 1040 Line 15b…if I let that slide I would be allowing myself to be double-taxed on that $5,500. What am I doing wrong? Is there way to deal with this using the data-entry screens in TurboTax? If not, I am considering printing the return on paper (instead of filing electronically) and then manually including the $11,000 1099-R and maintaining the “zero” figure on line 15b, which is what it should be.
You probably messed up line 2. Be sure to see Harry Sit’s Turbotax Backdoor Roth Tutorial.
Ditto with Paul’s situation. I found this site during the end 2013. Then in early 2014 I made two backdoor Roth contributions for my wife and myself. One for 2013 the other for 2014. Now for the 2014 tax year Vanguard reported $11,000 on a 1099-R for both of us. I’m afraid that if I just report the 2014 amount in turbo tax the IRS may wonder where the other $11,000 went and audit me. Of course it’s explainable, but what a hassle. I’m not completely sure how to proceed (paper file?). Certainly all my future conversions will be within the same tax year.
Newbie question –
I just finished up residency and am new to investing seriously. I started with a 3-fund portfolio with vanguard after consulting WCI and bogleheads in Jan 2015. I have never contributed to a 401k or IRA, and thus have never opened an account. Can I still perform a backdoor roth IRA for the 2014 tax season? Many sites seem to suggest the account would have needed to be created/started before December 31, 2014. Thanks in advance.
Tristan
No. You can still do it up until you file your taxes.
Please clarify for me.
For tax year 2014 on the 8606 form, if you made the 2014 TIRA contribution in 2015, then shouldn’t line #4 be $5500 and not left blank?
Read line 3:
In 2014, did you take a distribution
from traditional, SEP, or SIMPLE IRAs,
or make a Roth IRA conversion
If the answer is no, you leave 4-13 blank.
Where do you recommend to open roth IRA account? I read in one of your posts that you opened solo 401K in Vanguard. Did you open roth IRA also there? My colleagues tell me to open in scottrade or etrade. I’m just to open account for the first time this year and make my first contribution. Thanks a lot! I’m sorry if you mentioned that in one of your posts and I missed it.
Scotttrade and etrade are fine. Mine is at Vanguard.
Thanks for all your great advices. I opened roth in Vanguard. Now I need to open one for my wife. Would you open in the same place, or for diversification with different provider? Thanks in advance.
For simplicity, you can keep it the same.
If you want diversification, you can pick from hundreds of different options within your/spousal account.
Or you can test the waters and open at new brokerages. Your choice.
Great, thanks a lot!
I see no reason to diversify away to another provider. Keep it simple here.
Dear WCI,
Thank you so much for your wonderful website. I hope you find the following scenario sufficiently intriguing to warrant its length.
My fiancée is a second year Attending at a private practice, where she works as an employee (though partnership option is now on the table). In 2013 she started a $5000 IRA. In 2014 she became eligible for their 401k, which includes 3% non-elective, and she contributed the full $17K. In addition, she has a small 403b retirement fund with about $40K from her residency. Her substantial student loan debt over $300K, which we are trying aggressively pay down, keeps our cash flow thin.
I have a $55K total income working at a private non-for-profit research institute. They offer a 403b retirement plan through TIAA-CREF that includes 6% non-elective employer contribution (downscaled in 2012 from an even more generous 13%). I used to contribute an additional 4%, but in 2012 increased my contribution to 10%. It has grown to about $100K. I do not have any other investments.
We live together in a rented apartment, and are about to file our taxes as “single” for the last time, as we intend to marry in 2015. So I think it makes sense for me to convert $5500 of my 403b funds to start a Roth (also with TIAA-CREF). At my current low 2014 tax rate, it seems we we never be able to get such a good deal on a Roth again. But simply paying for one with cash essentially comes out of our combined cash flow, which effectively means that it largely comprises money that was taxed at her substantially higher rate. Whereas funds entering my retirement account originally deferred a low tax liability, and rolling some into a Roth now will only incur my current tax rate.
I plan to deny authorization for TIAA-CREF to pay the taxes on the Roth with extra 403b monies, in oder to avoid 10% early withdrawal penalty on the portion used to pay the taxes. Instead I believe it gets treated as a disbursement and generates a 1099 from TIAA-CREF, thus I incur the tax on the conversion by adding that amount to my 2014 total income.
My specific Roth questions are:
1. Do you agree with our reasons for starting this Roth?
2. Does our rational/strategy of converting the Roth from my 403b plan make sense, or would you recommend funding it from elsewhere?
3. Am I correct in thinking that I do NOT need to fill out form 8606 for this type of conversion from 403b to Roth? (If I do need to fill out form 8606, can you talk me through it?)
General question:
4. Do you or any other readers have any other financial advice for a couple of unequal salary at our particular juncture?
Assuming you actually do get married and stay married,
then yes it makes sense for you to do as much Roth, both contributions and conversions, as possible this year. Best to do both if possible, paying taxes and contributions with otherwise taxable money, but cash flow is obviously an issue, so do what you can. I guess I’d lean toward a new Roth IRA contribution rather than a conversion if you had to choose between them. Obviously be sure to get your entire match.
No 8606 required.
Thanks for replying. The idea of converting my 403b money to a Roth rather than funding with cash contribution is that the 403b funds will get taxed at my lower tax rate, whereas our available after -tax cash is essentially a mixture of our intermingled money that has already been largely taxed at her higher rate. But perhaps that is a false distinction, and there is no real tax difference between funding the Roth from converted 403b vs new contributions.
Regarding the 8606, does this mean that Roth conversions rolled over from 401K/403b are not considered “backdoor” as they are if coming from non-deductible IRA rollover?
Not sure what match you are talking about. Both her 3% and my 6% (formerly 13%) are non-elective employer contributions that do not require a matching contribution on our part.
You seem confused. If you put taxable money into a Roth IRA, no taxes are due. If you convert a 403b to a Roth, taxes are due. I suggest you do both. But if you’re only going to do one, why not do the one where no taxes are due? It seems silly to do a Roth conversion when you’re not even maxing out your Roth contributions. Am I missing something?
And no, 403B to Roth IRA conversions are not done through the backdoor.
Dear WCI,
First, thank you for the information that this site (and your book) provides. I have referred two colleagues to your book and they are currently reading it. I have been pouring through it all over the last 2 months or so, and am beginning to incorporate the advice into my financial life.
I would like clarification on the following related to BackDoor Roth IRA:
The pro-rata rule confuses me. My wife and I currently contribute to non-deductible IRAs and we have been converting mine to backdoor Roth for the last 2-3 years. We have not been converting my wife’s contribution as she has (relatively) sizable IRAs from two prior jobs and is not currently working. I have two small IRA accounts that I have kind of forgotten about when I did backdoor: One is $2700 Rollover IRA from Residency (traditional), and the second $4900 Roth from many years ago. Should I not be doing the backdoor conversion as I have these accounts? Or does the small amount of these accounts still make it worth while? My Roth IRA account from the backdoor conversions is currently worth about $16,000. I am confused…..
Sincerely,
BMK
The Roth doesn’t count. The Rollover certainly does. You should have just converted that in the beginning. It sounds to me like you’ve been filling out your 8606s wrong for the last few years and may need to do some 1040Xs. Not a huge deal, but probably worth fixing.
Dear WCI,
preparing to take the plunge and convert my tIRA to Roth this year. I have only non-deductible contributions and I am in the process of moving all my gains to my current employer’s 401K plan. That should leave only my cost basis (non-taxable) in the tIRA.
Two questions:
1. Would it make any difference if I converted before or after April 15th? I am concerned that if I make it before, my tIRA for 2014 will show the gains (were there by December 31st 2014) and they might be taxed (per form 8606 it does not appear to matter as once line 3 is answered “no” then you skip to line 14 not having to answer line 6
2. Why should future contributions to tIRA (pre rollover to Roth be invested? Some say money market, others other types of investments, but why not leave it in cash until rolled over?
Thanks a bunch!
First, make sure your 401(k) really only takes the gains. That depends on the plan. I’ve had 401(k)s that do that and it’s really a useful feature to separate out the basis.
1) No. Because you’re doing the conversion in 2015, it goes on your 2015 taxes. But if you’re worried, wait until after April 15th. It’s no big deal.
2) I leave mine in cash before rolling it over the next day. I guess if you were worried about the step doctrine and were waiting a few months or a year between contribution and conversion, then it might make sense to invest it in something with a higher expected return.
I made the non-deductible contribution of $5,500 for the year 2014 to Traditional IRA mid March of 2015. About 6 days later, I converted it to Roth IRA. I did all this on the Fidelity website.
Now Fidelity has deposited interest into my Traditional IRA account of $0.01!!!! What do I do with this.
This was planning to do the same for the year 2015 but now I have an income of $0.01 and am worried that this will make things more complicated. 🙁
Thanks a lot for this article!
Don’t worry about it. Who uses cents on their tax forms anyway? It all gets rounded to the nearest dollar.
Instead of 0.01 I had interest of 2.96 in tIRA. I converted it to ROTH as well I think this is how 8606 changes. it would be great if WCI reads and confirms the numbers. it will help many people like me.
Line# Amount Math Notes
6 0 this minion converted those 2.96 from tIRA to ROTH before Dec 31. fu pro-rata
7 0 It says don’t include `conversion to ROTH IRA` right there
8 11003 11000+3 2.96 rounded // goes to line 16
9 11003 0+0+11003 line6+line7+line8
10 0.999 11000/11003 line5/line9 rounded to 3 places
11 11002 11003*0.999 line8*line10 = 1101.897 = 1102 // goes to line 17
12 0 line7*line10 = 0
13 11002 1102+0
14 2 11002-11000 line13-line3
15 0 0-0 line12-line7
16 1103
17 1102
18 1 1103-1102 pay tax on this. goes to respective From 1040 lines as mentioned in the form
The conversion amounts should all just be $3 higher if that’s the only difference. So in the end you should owe taxes on $3. I think the fact that you only round to three digits on line 10 might have given you a tax free dollar or two!
I think you’re missing zeros in 16,17, and 18 no? But yea, looks like you’ll owe taxes on $1 instead of $3. Cool trick eh?
If only everyone felt the need to use four exclamation points over a one cent deposit in their favor…
But honestly, I was unsure about this originally also. I make multiple smaller contributions throughout the year and then convert. The tax paid will be minimal anyways.
My accountant is telling me I don’t need an 8606 filed because the deposit to the traditional ira & the conversion were done within a few days & there is no need to track the basis because it is not taxable. I have a 403b but no other traditional or non-deductible IRA. Thoughts?
I believe that is incorrect. But your accountant is right that the tax bill is exactly the same- $0. But the form is pretty clear:
Nondeductible Contributions to Traditional IRAs and Distributions From Traditional, SEP, and SIMPLE IRAs
Complete this part only if one or more of the following apply.
• You made nondeductible contributions to a traditional IRA for 2014
Which part of that doesn’t your accountant understand?
Just caught this. Unfortunately after doing my taxes.
Last year (2014), I missed the backdoor Roth option and also ended the year with money in an IRA (rollover from a 401k, which I eventually rolled back into a 401k).
So…
Can I still use the backdoor Roth for 2014? If I correct my taxes? (The latter sounds like a really bad idea.)
And does the backdoor Roth require an empty IRA mix at the end of the calendar year to which it is applied, or the year during which it happens?
Thanks!
When you ask if you can “still use the backdoor Roth IRA” you need to be more specific. Yes, you can still contribute to a non-deductible IRA. Yes, you can still do a Roth conversion. But thanks to the pro-rata calculation, your conversion wasn’t exactly what you hoped it would be. It can all be fixed in 2015, of course, but it sounds to me like you definitely botched your 2014 8606 and will need to refile that.
Help! If I contributed and converted $3000 in 2020, then contributed and converted another $3000 in 2020 for the 2021 year how does that look on form 8606? I haven’t filed taxes yet so the total $6000 is for year 2020.
1. 6000
2. 0
3. 6000
4. 3000
5. 3000
6. 0
7. 0
8. 3000
9. 3000
10. 1
11. 3000
12. 0
13. 3000
14. 3000
15. 0
16. 3000
17. 3000
18. 0
You can’t contribute anything in 2020 for 2021; that’s not allowed. So I assume you miswrote and meant $3K of your 2020 contribution was done in 2020 and $3K of it was done in 2021 and you did a $3K Roth conversion in 2020. So your 2020 8606 should include a $6K contribution and a $3K conversion. Looks like you did that. Nice work.