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In 2006, I converted a traditional IRA to a Roth.

On 4/21/03, I had an traditional IRA worth $30,700. In December 2006, I converted it to a Roth and it had a value of $51,600. The difference between those two numbers is pure profit.

The problem, though, is that I don't know:

(1) how much of the initial $30,700 is contribution vs profit.

(2) how much of the contribuion was made with after-tax dollars.

I've always been under a company pension plan. If I remember correctly - and I'm not at all sure this is true - doesn't this mean all my traditional IRA contributions would have been made with after-tax dollars?

If so, it seems like I really need to do some research to see if there's any way at all I can figure out what portion of the $30,700 was actually contributed. Failing that, should I just try to estimate the number?

I don't ever recall my tax preparer asking me about filling out a form for IRA contributions....

TDeF
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On 4/21/03, I had an traditional IRA worth $30,700. In December 2006, I converted it to a Roth and it had a value of $51,600. The difference between those two numbers is pure profit.

The problem, though, is that I don't know:
(1) how much of the initial $30,700 is contribution vs profit.
(2) how much of the contribuion was made with after-tax dollars.


Well in an ideal world, you'd want to know that before you do a Roth conversion.

I've always been under a company pension plan. If I remember correctly -and I'm not at all sure this is true - doesn't this mean all my traditional IRA contributions would have been made with after-tax dollars?

Very possibly, but it depends on your income and filing status.

If so, it seems like I really need to do some research to see if there's any way at all I can figure out what portion of the $30,700 was actually contributed. Failing that, should I just try to estimate the number? I don't ever recall my tax preparer asking me about filling out a form for IRA contributions...

Start out working backwards in time, over the years when you made IRA contributions. Is there a Form 8606 included? That would tell your basis in your IRAs. (And it should reflect the totals of all your IRA accounts, if there are more than just the account you converted this year.) Otherwise, compare the history of your IRA account, for when you made contributions, and see if you took a deduction on your tax return that year. If not, that year's contribution gives you basis; and it could be all or part of that year's contribution.

Bill
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>> On 4/21/03, I had an traditional IRA worth $30,700. In December 2006, I converted it to a Roth and it had a value of $51,600. The difference between those two numbers is pure profit.

The problem, though, is that I don't know:

(1) how much of the initial $30,700 is contribution vs profit.

(2) how much of the contribuion was made with after-tax dollars.
<<

Sounds like you converted an IRA with commingled assets (pre-tax and after-tax).

I'll simplify this a bit, assuming I understand tht situation correctly. All you really need here is the answer to number (2), because the taxable conversion amount is just the value at conversion ($51,600) minus the amount of nondeductible contributions which have already been taxed -- in other words, all the value in the original IRA which has not yet been taxed.

As for the answer to (2), if you've commingled assets you (or your tax preparer in this case) should have filed Form 8606 in any year you added to a position in an IRA with commingled assets. Did your tax preparer know about this situation? If so, he/she definitely should have filed the 8606 with the appropriate returns.

#29
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All you really need here is the answer to number (2), because the taxable conversion amount is just the value at conversion ($51,600) minus the amount of nondeductible contributions which have already been taxed -- in other words, all the value in the original IRA which has not yet been taxed.

A caution. This is true only if the account converted is the only traditional IRA account OP had.

Phil
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The IRS will deem that you had a zero basis in your Traditional IRA (and thus that the entire conversion amount is taxable) unless you had filed a Form 8606 for the years when you contributed.

If you know which years you contributed, you need to file amended returns for those years, including a Form 8606.
http://www.irs.gov/newsroom/article/0,,id=108657,00.html

Unfortunately, there's a three-year deadline for filing an amended return, so you are out of luck.


I've always been under a company pension plan. If I remember correctly - and I'm not at all sure this is true - doesn't this mean all my traditional IRA contributions would have been made with after-tax dollars?


No. Being under a company pension plan sets an upper limit on income in order to be able to deduct. But since you didn't file the 8606 it's moot.

The whole conversion is taxable.
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Unfortunately, there's a three-year deadline for filing an amended return, so you are out of luck.

I disagree. That deadline is for changing your tax for the year in question. An 8606 reporting nondeductible traditional IRA contributions has no effect on the tax for the year in question.

It seems to me that the pre-tax basis in the traditional IRA is established by the contributions, not the reporting of them on Form 8606. If OP has proof of undeducted contributions older than the 3-year limit, I'd recommending amending the open years (2003-2006), including on line 2 of the 2003 8606 all undeducted contributions for 2002 and prior.

I have no idea whether there's case law on this.

Phil
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Unfortunately, there's a three-year deadline for filing an amended return, so you are out of luck.

I agree with Phil, too, but for a different reason.

During my VITA/TCE training, a seasoned volunteer preparer described a scenario where a client had neglected to claim eligible credits for a number of previous years. The preparer corrected the oversight, even for returns that exceeded the three year deadline, and refiled the amended returns.

Apparently there was no complaint from the IRS, and they issued the amount due to the individual for all years.

So I'm falling in the camp of "try it anyway." What's the worst that happens? The IRS says no. Then you're no worse off than before the amended return was filed. If they say OK, then you win.

Bill
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I guess, for now, what I'm thinking is that the money for the traditional IRA came from *somewhere* and if the amount isn't deducted on my 1040's then whatever that amount is had to have been paid for with after-tax dollars. The question is, what portion of that $30K is in contributions?

I have kept my tax records for the last 25 or so years, but I'm one of those people who dread the subjects of taxes and accounting so I've always had taxes done for me. To date, nobody has ever mentioned filing a form for a non-deductible IRA contribution. I'm going to dig back through everything in those tax records maybe just by happenstance I have some information on contributions but I highly doubt it.

Since IRA contributions were $3K/yr (at least as I recall), my SWAG is that $15K of the total $51 is contributions. I don't think that's an unreasonable number, but I'd have a hard time substantiating it. (I haven't made a contribution to a traditional IRA in over a decade and any number of funds ago.)

But while we're on the topic, I've not heard of filing a form for Roth IRA contributions either. Is there one for them which I should have been filing?

TDeF
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>> But while we're on the topic, I've not heard of filing a form for Roth IRA contributions either. Is there one for them which I should have been filing? <<

There's no requirement to file anything with the IRS. Plus, once you've reached age 59.5 and you've had that particular Roth open for at least five years, it becomes moot as to which dollars are contributed and which are not.

Still, it's a good idea to know what your Roth *contributions* are, because if you need to tap into the Roth before age 59.5, you want to know what portion you can take out tax-free and penalty-free. Of course, premature withdrawal from a retirement account is almost never a good idea, but you never know when a calamity might strike and it's the last line of defense between you and bankruptcy or foreclosure.

#29
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Looking at Form 8606, it appears to be specific to that year so I'm not sure how filing it for prior years would work.....

Also, the conditions for the 8606 are:

(1)You made nondeductible contributions to a traditional IRA for 2006.
(2)You took distributions from a traditional, SEP, or SIMPLE IRA in 2006 and you made nondeductible contributions to a traditional IRA in 2006 or an earlier year. For this purpose, a distribution does not include a rollover (other than a repayment of a qualified hurricane distribution), qualified charitable distribution, conversion, recharacterization, or
return of certain contributions.
(3) You converted part, but not all, of your traditional, SEP, and SIMPLE IRAs to Roth IRAs in 2006 (excluding any portion
you recharacterized) and you made nondeductible contributions to a traditional IRA in 2006 or an earlier year.

(1) and (2) don't apply to my situation. For (3) I converted *all* of the IRA so it doesn't seem to apply either.

Maybe I'm overthing this and should just let my tax preparer figure all this out? He's been doing my taxes for about 20 yrs and handles a number of small businesses as well as individuals such as myself....

TDeF
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He's been doing my taxes for about 20 yrs and handles a number of small businesses as well as individuals such as myself....

Let's find out if he's been doing them right first.

IRS isn't nuts about SWAGs, so we really need to nail down what contributions you made. So dig out those 25 years worth of returns you've saved. If you happen to have saved the source information documents, such as W-2's and 1099's that will help a lot since the custodian sends a Form 5498 for any year in which you make a contribution.

Your account statements may also be helpful.

Assuming we can come up with a figure for after-tax contributions, it will go on line 17 of your 2006 Form 8606, where you calculate the taxable portion of the conversion.

Phil
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During my VITA/TCE training, a seasoned volunteer preparer described a scenario where a client had neglected to claim eligible credits for a number of previous years. The preparer corrected the oversight, even for returns that exceeded the three year deadline, and refiled the amended returns.

Apparently there was no complaint from the IRS, and they issued the amount due to the individual for all years.

So I'm falling in the camp of "try it anyway." What's the worst that happens?


In the case of the story you were told, the government sues for repayment of the erroneous refund. They have 2 years after the date of the check.

Unless a lot got lost in the translation, the seasoned volunteer ill served the client. Except in a somewhat bizarre Oprah scenario, there is no statutory authority for IRS to make a refund if no claim is made by the deadline. It would be nice if IRS never made a mistake, but then we wouldn't need the established law and procedures for getting the money back when someone finds the mistake down the road.

I strongly urge you to eschew the "try it and see what happens" approach.

Phil
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I strongly urge you to eschew the "try it and see what happens" approach.

Well put, and understood.

For reference, here is IRC TITLE 26, Subtitle F, CHAPTER 66, Subchapter B, Sec. 6511 describing the period of limitation on filing a claim:

http://www.fourmilab.ch/ustax/www/t26-F-66-B-6511.html

The only way I see that the three year filing deadline (the period of limitation) can be extended is if the taxpayer fails to file due to a disability. See Sec 6511(h).

Bill
that's enough IRC digging for today.
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The only way I see that the three year filing deadline (the period of limitation) can be extended is if the taxpayer fails to file due to a disability. See Sec 6511(h).

There are some esoteric cases in which the limit is more than 3 years, but 6511(h) is the only authorization for honoring a late claim. It's the Oprahesque provision I was referring to. It was added by Congress, probably in an election year, in response to some sob story. Assuming that the story that motivated the action was worthy of honoring a late claim, a private bill would have been the right way to handle it. But you can't really make any good campaign use of private bills.

Luckily I had retired before this one made its way into the Code. I wasn't as fortunate back in the '70's when some boob in Pennsylvania bought real estate without title insurance, everybody except the IRS missed the properly filed notice of lien encumbering the property, and the stupid but innocent purchaser got hosed.

Congress to the rescue. They amended the Code to require IRS to maintain an "index" of all notices filed in the proper recording offices. IRS spent millions of bucks building and maintaining this totally useless database, which never benefited a single person that I heard of, until Congress quietly repealed it.

Phil
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It was added by Congress, probably in an election year,

I decided to check the date. Is the kid psycho, or what?

Pub. L. 105-206, 1998

Phil
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I decided to check the date. Is the kid psycho, or what?

Pub. L. 105-206, 1998


That's awesome.

Phil in '08!

Bill
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Unfortunately, there's a three-year deadline for filing an amended return, so you are out of luck.

That's not so. The general rule is that you have three years to amend a return to claim and receive a refund. However, even then there are exceptions for certain NOLs, bad debt/worthless securities, and medical incapacities. You can always amend a return to show more tax liability or to correct errors even if you forfeit the cash benefit.

Ira
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Looking at Form 8606, it appears to be specific to that year so I'm not sure how filing it for prior years would work.....

You file the appropriate Form 8606 for the year in question. Back year forms for the past 15 years or so are available at the IRS website and many accountants have copies of forms going back even further.

Ira
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Phil in '08!

He's got my vote!!!

foolazis
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