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After learning that having two IRA accounts and converting only one of them to a Roth creates ongoing tax problems, I recharacterized the IRA contributory to Roth conversion that I made in 2012. Unfortunately I learned about the problem at the last minute and, though I gave online instructions to my broker to transfer the money back to my IRA before April 15, 2013, the transfer was not completed until April 15th. I received a Form 5498 for the IRA to Roth conversion.

Turbotax does not seem to recognize the problem of converting just one of two IRA accounts to a Roth. It must recognize that something is wrong, however, because it tells me I will have to pay a penalty for having too much income to have made the conversion in the first place. I contacted Turbotax, but neither of two TT representatives I spoke to was able to keep TT from indicating I have to pay a penalty for the conversion and neither was aware of the arcane two IRAs problem, which I also was unaware of when speaking to them.

Should I manually fill out the 8606 as I have in other years when making an IRA to Roth conversion before having two IRAs (the second came about this year as a conversion from a retirement plan).

Can I avoid the IRS assessing me an added tax resulting from the conversion that didn’t get recharacterized before April 15th?

Thanks, ever so much for any help.
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There is no income limit for conversion of an TIRA to a ROTH IRA.

Is the additional taxes a really a penalty or from pro-rating your cost basis across the balance of both IRAs?
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After learning that having two IRA accounts and converting only one of them to a Roth creates ongoing tax problems,

I have never heard of this before. Either you've misinterpreted something or we have radically different concepts of what a problem is. Could you please elaborate on the nature of this problem and why a partial Roth conversion creates it?

I recharacterized the IRA contributory to Roth conversion that I made in 2012.

We need to pause and clarify here since "IRA contributory" doesn't mean anything in tax speak. What did you recharacterize, a contribution or a conversion? I'm assuming it's a conversion, but I just want to be sure.

Unfortunately I learned about the problem at the last minute and, though I gave online instructions to my broker to transfer the money back to my IRA before April 15, 2013, the transfer was not completed until April 15th. I received a Form 5498 for the IRA to Roth conversion.

Relax. You have until 10/15/2013 to complete a 2012 recharacterization. See the instructions for Form 8606.

Turbotax does not seem to recognize the problem of converting just one of two IRA accounts to a Roth. It must recognize that something is wrong, however, because it tells me I will have to pay a penalty for having too much income to have made the conversion in the first place.

Leave poor TT out of this. I recognize that something is wrong because

1. There is no income limit for Roth conversions and
2. You have somehow told TT that the conversion was a contribution.

Find it and fix it. If you need to talk to TT about this again, at least you know what the problem is.

As far as your return is concerned, line 15a of the 1040 should show the amount converted, and line 15b should show zero. See the Recharacterizations section of the Form 8606 instructions for what all you need to do.

Phil
Rule Your Retirement Home Fool
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Yes. It is a pro-ration on the cost basis. From what I understood, I would continue to be taxed yearly until there was no longer a second IRA even if I made no further conversions.

"Cost basis" is where I think I had stumbled. I guess the problem should not apply to me as both my IRA's have only nondeductible contributions made to them.

Thank you for the question! -IMBonzi
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After learning that having two IRA accounts and converting only one of them to a Roth creates ongoing tax problems,

I have never heard of this before. Either you've misinterpreted something or we have radically different concepts of what a problem is. Could you please elaborate on the nature of this problem and why a partial Roth conversion creates it?

The problem, if I understood what I was reading, is that the IRS considers lumps all IRA’s of an individual together when determining the tax on a conversion to a Roth. The accountant writing this warned that taxes on a partial conversion continue to be levied in succeeding years. It only just now occurred to me the previous reply that this should apply only where IRA’s contained deductible as well as nondeductible contributions, which mine do not.

I recharacterized the IRA contributory to Roth conversion that I made in 2012.

We need to pause and clarify here since "IRA contributory" doesn't mean anything in tax speak. What did you recharacterize, a contribution or a conversion? I'm assuming it's a conversion, but I just want to be sure.

Yes. It was a conversion.

Unfortunately I learned about the problem at the last minute and, though I gave online instructions to my broker to transfer the money back to my IRA before April 15, 2013, the transfer was not completed until April 15th. I received a Form 5498 for the IRA to Roth conversion.

Relax. You have until 10/15/2013 to complete a 2012 recharacterization. See the instructions for Form 8606.

I was/am under the impression that had I transferred the money back to my IRA before April 15, 2013, I could have considered the conversion to the Roth as never having been made, and thus would not have had to recharacterize it and then pay more tax on the larger amount I had after the recharacterization when I converted it again to the Roth.

Turbotax does not seem to recognize the problem of converting just one of two IRA accounts to a Roth. It must recognize that something is wrong, however, because it tells me I will have to pay a penalty for having too much income to have made the conversion in the first place.

Leave poor TT out of this. I recognize that something is wrong because

1. There is no income limit for Roth conversions and
2. You have somehow told TT that the conversion was a contribution.

Find it and fix it. If you need to talk to TT about this again, at least you know what the problem is.

I tried all iterations of entries into TT and received the same response each time. The two TT reps I worked with were also
unable to plug in my figures without getting the same response. They were as frustrated as I still am. However, I will follow your instructions in filling out the 8606.

As far as your return is concerned, line 15a of the 1040 should show the amount converted, and line 15b should show zero. See the Recharacterizations section of the Form 8606 instructions for what all you need to do.

Thank you very much for your reply and for your help with the 8606. -IMBonzi
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The problem, if I understood what I was reading, is that the IRS considers lumps all IRA’s of an individual together when determining the tax on a conversion to a Roth. The accountant writing this warned that taxes on a partial conversion continue to be levied in succeeding years. It only just now occurred to me the previous reply that this should apply only where IRA’s contained deductible as well as nondeductible contributions, which mine do not.

You didn't quite understand it, but now I know what "it" is. When you have after-tax money in any traditional IRA account every distribution from any traditional IRA account is a mix of pre- and post-tax money. A conversion to Roth is a distribution subject to this rule. Even though you have made no pre-tax contributions to your traditional IRA accounts, we'll hope that they're worth more than the total of your after-tax contributions. Those earnings are pre-tax money, so you'll have to do the proportional calculation in Part I of Form 8606 should you do a conversion. The balance of your after-tax "basis" carries forward to the next year, but that's the only aspect that crosses years. There's no ongoing tax due from a conversion after the conversion year.

This is all academic for you and 2012 since you recharacterized your 2012 conversion. For planning purposes, if you want to do a 2013 conversion you calculate the taxable portion as shown in Part I of Form 8606. If you need some help with that or would like confirmation that you've done it right, just holler.

I was/am under the impression that had I transferred the money back to my IRA before April 15, 2013, I could have considered the conversion to the Roth as never having been made, and thus would not have had to recharacterize it and then pay more tax on the larger amount I had after the recharacterization when I converted it again to the Roth.

Well, we need to kill that impression. I don't think you realize that the effect of a recharacterization is that the conversion never happened. That's exactly what you wanted and is the way that you "transfer the money" back to your traditional IRA.

I tried all iterations of entries into TT and received the same response each time. The two TT reps I worked with were also
unable to plug in my figures without getting the same response. They were as frustrated as I still am.


Maybe I misunderstood you. I thought you said TT was calculating a penalty based on the conversion. If that's correct, please tell me the following:

1. What percentage of the gross conversion amount is the penalty?
2. What is the code in Box 7 of the 1099-R for the amount converted?
3. Is TT generating a Form 5329? If so, what Part of that form is it completing?

If TT isn't generating a penalty, exactly what is the TT problem?

Phil
Rule Your Retirement Home Fool
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Yes. It is a pro-ration on the cost basis. From what I understood, I would continue to be taxed yearly until there was no longer a second IRA even if I made no further conversions.

"Cost basis" is where I think I had stumbled. I guess the problem should not apply to me as both my IRA's have only nondeductible contributions made to them.


If you have no nondeductible contributions, then there is no basis to pro-rate.

If you hadn't undone the conversion, TT should have calculated taxes due on the converted amount for the current tax year. The additional taxes could have created an under withholding penalty. Taxes for a conversion are for only the current year. There is an annual penalty for over-contribution, but that doesn't apply to conversions.

I use H&R Block, and haven't use TT in a few years. Both have the issue that once a question is answered incorrectly, it can be very difficult to fix. Starting a new return is often easier than trying to untangle a wrong answer.

2012 is over. You need to generate a return that properly reflects the conversion and its reversal.

Taxes for a ROTH conversion are no different whether you have one or several IRAs. TT allows entering of individual accounts for your convenience. If you really believe it is a problem with TT handling multiple IRAs, you could test that by just entering the total value of your IRAs as one IRA.
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TmfpMarti and VKG, thank you very much for your generous responses.

I have been away from my computer for several pleasant weeks and have just returned see if I will be able to fill out my 2013 Form 8606.

But first, to go back to one of your queries, I knew that there is no income limit for Roth conversions. So did the two TT helpers who plugged in my numbers on their computers and got the same error msg stating that my income was too high. The TT chaps each threw in the towel after several attempts.

“If you need some help with that [2013 8606] or would like confirmation that you've done it right, just holler.” I really appreciate this offer as the 8606 instruction sections on recharacterizations are beyond my comprehension.

Here are the approximate numbers I’m working with:

$5,000 - 2013 nondeductible contribution to traditional IRA
$5,500 - 2013 1099-R for the IRA distribution resulting
from the recharacterization of my 2012 conversion to
Roth, $500 of which is "related earnings" ?)
$10,500 - 2013 conversion to Roth of the above funds

These entries are my best guess (I'll include a statement):

5000 - line 1
5000 - line 2
10000 - line 3
10000 - line 5
10500 - line 8
10000 - line 13
0 - line 14
500 - line 15
10500 - line 16
10000 - line 17
500 - line 18

I'm converting my other IRA to Roth also and would add the corresponding figures to those same lines on the 8606.

Many thanks in advance, (if you’re still checking back two weeks on the board).
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I have been away from my computer for several pleasant weeks and have just returned see if I will be able to fill out my 2013 Form 8606.

Let's burn the 2013 bridge when we come to it. Right now we're trying to get your 2012 return done with good numbers. To recap (stop reading and correct me if I'm wrong):

In 2012 you did a conversion from traditional IRA to Roth IRA.

In 2013 you recharacterized that 2012 conversion and the earnings on it back to your traditional IRA.

You seem to be having some TurboTax problems with a penalty it's generating on your 2012 return.

You should have received one 2012 1099-R. Box 1 should be the amount converted from traditional IRA to Roth IRA. Please advise what the code in Box 7 is. There should be no other 2012 1099-R's in your possession. Please advise if this is wrong, along with all details from the "new" 1099-R('s).

At this point is there no need for a Form 8606 on your 2012 return. You attach a statement describing the recharacterization in accordance with the instructions for Form 8606. Line 15a of your 1040 is equal to Box 1 of the 1099-R. Line 15b of your 1040 is zero. Line 58 of the 1040 should be zero. Please advise of anything that doesn't meet this description.

I'm unsure what, if any, IRA contribution you made for tax year 2012. Please advise, including whether the contribution was made to your traditional or Roth IRA (if a contribution for that year was made) and when it was made.

Phil
Rule Your Retirement Home Fool
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In 2012 you did a conversion from traditional IRA to Roth IRA.

- I am embarrassed to say that I just reread my original post to discover I had omitted stating that both my nondeductible 2012 IRA contribution and the conversion to my Roth were transacted in February, 2013.

In 2013 you recharacterized that 2012 conversion and the earnings on it back to your traditional IRA.

- Yes. The recharacterization transaction went through on April 16, 2013. Then in June, 2013, I again converted the entire IRA (2012 contribution + earnings) to my Roth.

You seem to be having some TurboTax problems with a penalty it's generating on your 2012 return.

- Yes!

You should have received one 2012 1099-R. Box 1 should be the amount converted from traditional IRA to Roth IRA. Please advise what the code in Box 7 is. There should be no other 2012 1099-R's in your possession. Please advise if this is wrong, along with all details from the "new" 1099-R('s).

- I received no 1099-R for 2012, and assume I will receive one in January, 2014 for the 2012 IRA contribution that I did not make until February, 2013

At this point is there no need for a Form 8606 on your 2012 return. You attach a statement describing the recharacterization in accordance with the instructions for Form 8606. Line 15a of your 1040 is equal to Box 1 of the 1099-R. Line 15b of your 1040 is zero. Line 58 of the 1040 should be zero. Please advise of anything that doesn't meet this description.

- Under the circumstances, am I right in thinking I should report my 2012 IRA nondeductible contribution made in February, 2013, on my 2012 Form 8606? I have tentatively entered the contribution on Form 8606 as follows: Lines 1, 5000; 2, 0; 3, 5000; 4, 5000 5, 0; 14, 5000.

I'm unsure what, if any, IRA contribution you made for tax year 2012. Please advise, including whether the contribution was made to your traditional or Roth IRA (if a contribution for that year was made) and when it was made.

- For tax year 2012, I made my maximum allowable non-deductible contribution to my traditional IRA in February, 2013.

Recap:
February, 2013 - IRA nondeductible contribution made for 2013
February, 2013 - Conversion of IRA (which held only the contribution for 2012)to Roth IRA
April, 16, 2013 - Recharacterization of Roth + earnings
June, 2013 - Conversion of IRA (2012 contribution + earnings) back to Roth

Thank you so much for your help and your patience. I apologize for the confusing and time consuming omission on my original post.
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- I am embarrassed to say that I just reread my original post to discover I had omitted stating that both my nondeductible 2012 IRA contribution and the conversion to my Roth were transacted in February, 2013.

No problem. That actually makes things easier.

The only thing to report on your 2012 return is your traditional IRA contribution made in 2013. You do this in part I of Form 8606. It doesn't affect any of the numbers on your 1040.

Since the conversion and recharacterization of the conversion were both done in 2013 you'll not report anything on those until your 2013 return.

In 2013 you recharacterized that 2012 conversion and the earnings on it back to your traditional IRA.

- Yes. The recharacterization transaction went through on April 16, 2013. Then in June, 2013, I again converted the entire IRA (2012 contribution + earnings) to my Roth.


I hope this is the first time you've mentioned the reconversion, because you can't do that! Well, you can do it, obviously, but it's illegal and won't count as a conversion. It is a failed conversion, which counts as a Roth contribution, which I think we've established you can't make because of your income. If you do a conversion in 2013 and then recharacterize it the earliest you can reconvert is 1/1/2014. See "recoversions" in Pub 590.

Just to be sure here, I am correct in saying that your income was too high for a 2012 Roth contribution and will again be too high for 2013?

So, here's what you need to do:

1. Recharacterize the second conversion and the earnings on it back to traditional. I'll sleep better if you report back that you've done it.

2. You may, if you're eligible and so inclined, make your 2013 contribution at your leisure.

Other than that, do nothing until January, and then only after checking in first with the details of what you want to do.

Now on to the TurboTax problem.

You should have received one 2012 1099-R. Box 1 should be the amount converted from traditional IRA to Roth IRA. Please advise what the code in Box 7 is. There should be no other 2012 1099-R's in your possession. Please advise if this is wrong, along with all details from the "new" 1099-R('s).

- I received no 1099-R for 2012, and assume I will receive one in January, 2014 for the 2012 IRA contribution that I did not make until February, 2013


Kinda, sorta, not really. You'll get a 2013 1099-R not for the contribution, but for the conversion. In fact, you'll get two of them, one for each conversion.

- Under the circumstances, am I right in thinking I should report my 2012 IRA nondeductible contribution made in February, 2013, on my 2012 Form 8606? I have tentatively entered the contribution on Form 8606 as follows: Lines 1, 5000; 2, 0; 3, 5000; 4, 5000 5, 0; 14, 5000.

Almost right. Since you didn't take a distribution or make a conversion in 2012, leave lines 4 and 5 blank. Otherwise, this is correct.

I cannot for the life of me figure out what's triggering a TurboTax penalty. Without the information about the penalty I asked for last time my best guess is that you've convinced TT that you made an unallowed $5,000 Roth contribution (or you told it about the failed reconversion in the wrong tax year), and it's generating a $300 (6%) excess contribution penalty. If you provide the missing info about the penalty I'll take a stab at it.

In proofing this post I came to the realization that you might be confused about when transactions can be made for a tax year. The rules are different for contributions and conversions. We'll use TY 2013 for examples.

You can make a TY 2013 contribution any time between 1/1/2013 and 4/15/2014. You can recharacterize a TY 2013 contribution any time before 10/15/2014.

You can do a TY 2013 conversion any time during calendar year 2013. You can recharacterize a TY 2013 conversion any time before 10/15/2014.

Phil
RYR Home Fool
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Hats off to TMFPMarti! Spot
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I've come to rely on alerts and Fool.com doesn't send me any for msgs received. Incredibly, I totally forgot about taxes until this afternoon when I read your msg and right off arranged to have the second conversion recharacterized!

Just to be sure here, I am correct in saying that your income was too high for a 2012 Roth contribution and will again be too high for 2013?

Correct.


Almost right. Since you didn't take a distribution or make a conversion in 2012, leave lines 4 and 5 blank. Otherwise, this is correct.

Lines 4 and 5 on Form 8606 are now blank.

1. Recharacterize the second conversion and the earnings on it back to traditional. I'll sleep better if you report back that you've done it.

Done!

2. You may, if you're eligible and so inclined, make your 2013 contribution at your leisure.

Yes, I will.


Other than that, do nothing until January, . . .

Phew.

. . .and then only after checking in first with the details of what you want to do.

Thank you so much!

I cannot for the life of me figure out what's triggering a TurboTax penalty. Without the information about the penalty I asked for last time my best guess is that you've convinced TT that you made an unallowed $5,000 Roth contribution . . .

As best I remember, Turbotax kept giving me an error msg saying my income was too high to make a tax deductible contribution and that I would receive a penalty. That was it. Never said what the penalty would be. Never asked further questions. Never recommended I go back and redo something. I gave the two TT fellows, I spoke with, all the figures they asked for and they got the same response when they plugged in the numbers on their computers. That is when I started searching around the Web and came upon the impression that the "penalty" might be from converting just one of two IRAs, when one of them had some earnings which would be taxed each year until it had also been converted. I thought maybe TurboTax recognized a problem but had it mis-recorded it somehow in their system.

You must know how appreciative I am to have been directed so patiently and clearly out of such a string of errors.

Thank you so very much, again! -IMBonzi
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Recharacterize the second conversion and the earnings on it back to traditional. I'll sleep better if you report back that you've done it.

Done!


Yay! That should take care of things for 2012 (except don't forget to finish and file your return). See you next year when we'll deal with tax year 2013.

Phil
Rule Your Retirement Home Fool
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