401K Rollover to IRA after Back Door Roth Conversions Form 8606 Prorata rules | Ed Slott and Company, LLC

401K Rollover to IRA after Back Door Roth Conversions Form 8606 Prorata rules

I have used the back door Roth Plan for several years. I made a $5500 nondeductible traditional IRA contribution in March of 2019 for the 2018 year and immediately converted it to a Roth IRA. I have a 2019 Form 1099R for $5500. Normally form 8606 produces results that you would expect -0- taxable income on the conversion since I have $5500 nondeductible basis. However in December of 2019 I changed jobs and rolled over $5000 of my 401K to my IRA account. So my IRA Fair Market value on 12/31/19 is $5,000.

Should form 8606 be producing taxable income on the earlier Roth conversion when at that time the conversion was made 100% of my value was nondeductible basis ?

I plan to convert this amount to a Roth IRA in 2020 so this wont be a problem moving forward.

Thank you,

  • "Should form 8606 be producing taxable income on the earlier Roth conversion when at that time the conversion was made 100% of my value was nondeductible basis ?"
  • Yes.  It doesn't matter when during 2019 that the Roth conversion actually occurred.  For the purpose of calculating the taxable amount, traditional IRA distributions are effectively treated as happening on December 31.  With a $5,000 2019 year-end balance in traditional IRAs and no basis other than the $5,500 carried into 2019 from your 2018 Form 8606, the non-taxable amount of your $5,500 Roth conversion is $5,500 * $5,500 / ($5,500 + $5000) = $2,881 and the taxable amount is $2,619.  $2,619 of your basis remains in your traditional IRAs to be applied proportionately to future distributions with the last of it being applied in the year that your traditional IRA balance is zero at year end (which I think you indicate will be the case in 2020 after converting the $5,000 plus any traditional IRA contributions you make in 2020).
 

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