By Sarah Brenner, JD
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Dear Mr. Slott,
I am writing because I have what may be an unusual IRA reporting situation and would like advice, or if you will, a judgement as to how I may handle the reporting for 2017. This particular situation is one I have not heard of or seen discussed in any article or seminar in over 20 years.
Briefly, I have yet to make withdrawals from my IRAs, but in 2017, I converted one account to a Roth. This account was separate from all others since inception and was solely funded with non-deductible contributions. It is the only IRA I have that has basis… all others are zero-basis employer roll-overs.
To succinctly put the question… is there precedent or procedure allowing me to separately report the tax basis of a traditional (non-deductible funded) IRA, separate from all other IRAs that I have I may have? Section #1 of the 8606 is driving a consolidation that is understandable as I suspect most persons have mixed the accounts and funding over time… not me. The net result of such a consolidation is to spread the basis over all the accounts and increase the current year’s tax.
This brings me to the 2017 return… I expect to pay tax for the conversion. The instructions and forms seem to require me to consolidate the non-deductible conversion with the traditional rollover IRA values… thus greatly diluting the recognition of the non-contributory portion (basis) to about 3% of the $39k and resulting in about $17k more tax than I expected.
What did I expect…? Back in the 1990’s reporting of IRA accounts was separate and some consolidation was allowed when withdrawals were made. The 8606s distinguished between deductible and non-deductible funds. I expect that the non-deductible account will maintain segregation and be reported separately as long as it was always and only non-deductible funded (“do not cross the streams.”) This is the case, at no time did I put deductible funds into the non-deducible account and I have maintained segregation. I had this understanding confirmed at a 1996/7 tax seminar lead by an IRS arbitrator (can’t remember the guy’s name).
I expected to report the non-deductible IRA conversion on a separate 8606 and be taxed on the conversion that exceeds the basis of $39k; irrespective of and excluding the rollover IRA valuations. The rollover IRA has value of $1M... yes, big difference between recognizing 100% of the basis or 4%.
Here is where I need some sort of feedback: am I on the right track or did something, like a law, change that prohibits the separate treatment? For want of a better understanding, it is my intention to file a separate 8606 for the non-deductible conversion claiming the full $39k of basis on the grounds that I have at no time crossed the non-deductible account with the deductible Rollover IRAs. I would exclude any reference to the values of the roll-over IRAs as there has been no activity; I consider these rollover accounts to be a separate from the non-deductible account and conversion. Am I on thin ice?
Local practitioners seem to be locked into "the from" and its instructions....I think the IRS has taken an easy, broad interpretation ... So, I am in process of re-reading The Code (section 4xx) and have yet to find a specific requirement or statement that precludes segregated treatment. I see where proportional recognition of basis is required, more in reference to individual contracts… I think individual IRA accounts represent an individual contract.
It appears that you were misinformed. Forms 8606 for 1988 and 1998 both ask for the total amount in all IRAs in order to do the pro-rata calculation. There are very limited exceptions to the pro-rata rule. Two exceptions are for QCDs (qualified charitable rollover distributions) and rollovers from an IRA to an employer plan. There are no exceptions to the rule for distributions to the IRA owner or for Roth conversions. However, there is one bit of good news. Since this is a 2017 Roth conversion, you can still recharacterize all or part of the conversion to undo it. This option is no longer available for conversion done in 2018 or later.
I converted a traditional IRA to a Roth in 2017. The tax laws have changed and it would be less expensive to do it in 2018. If I re-characterize my Roth back to a traditional in 2018, how long to I need to wait to reconvert the same money into a Roth?
Is it 30 days or I can't do it until 2019.
The rule is that you must wait more than 30 days or until the year after the conversion, whichever is later. Your conversion was in 2017, so the year after the conversion is 2018, a deadline that you have already met. That leaves the "more than 30 days" as being the later deadline. If you recharacterize your Roth IRA conversion on April 15th, the "more than 30 days," would mean you could reconvert on May 16th.