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I had someone do my taxes this year. I put $5500 into a traditional IRA and converted it to a Roth. I did this because my wife and I are currently filing as "married filing separately" which essentially eliminates Roth contributions without doing the IRA to Roth conversion method.

The tax preparer put the distribution on line 15b which is then added to my total income on line 22. It seems like this would result in double taxation. The money I put into the IRA was for tax year 2015 and was money I earned in 2015. I simply use the IRA as the go between to get to the Roth and since I did not take a deduction for the money put into the IRA, why should I be taxed on it again? It's post tax money put into my IRA converted to a Roth and no deduction was taken on any money put into the IRA.

Any help?

Thanks!

Patrick
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There's a lot of potential moving parts here, but in general, if you did not deduct the IRA contribution, the conversion must be less than fully taxable. Anything from a few dollars not taxable to completely not taxable is possible depending on facts you haven't mentioned.

Let's start with a couple of questions.

You said that you didn't deduct the IRA contribution. Did you tell your tax preparer about the IRA contribution? If so, do you see a Form 8606 as part of your tax return?

--Peter
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I had someone do my taxes this year. I put $5500 into a traditional IRA and converted it to a Roth. I did this because my wife and I are currently filing as "married filing separately" which essentially eliminates Roth contributions without doing the IRA to Roth conversion method.

Do you have ANY other IRAs that have pre-tax contributions/gains, like a rollover IRA?

If so, you can't convert ONLY the after-tax portion - it has to be pro-rated across the entire value of all your IRA accounts. That calculation would be done on Form 8606.

If not, I would ask if you told your preparer specifically you made a $5500 after-tax contribution and that the 1099-R that you provided was due to a conversion, and was not a withdrawal.

The tax preparer put the distribution on line 15b which is then added to my total income on line 22.

The entry for line 16b for conversions should come from Form 8606 - so what does your Form 8606 say? Look for Part II - that's the part that has to do with conversions. Do you agree with the amounts in that section?

If you didn't get an 8606, then I would suggest asking your preparer why not. If you didn't tell the preparer that you made a $5,500 after-tax contribution to a traditional IRA and then did a $5,500 conversion, they would not have known to prepare an 8606 for you. (That said, they should have asked about the 1099-R,and why you got it.)

It seems like this would result in double taxation. The money I put into the IRA was for tax year 2015 and was money I earned in 2015. I simply use the IRA as the go between to get to the Roth and since I did not take a deduction for the money put into the IRA, why should I be taxed on it again? It's post tax money put into my IRA converted to a Roth and no deduction was taken on any money put into the IRA.

Assuming the preparer filled out the 8606 correctly, it's not double-taxation. If you have other IRA balances, you will be taxed on a pro-rata basis. So, if your total IRA balance in all non-Roth IRAs (including the after-tax contribution that you made) was $55,000 when you made the conversion (so you had a remaining balance in ALL your IRA accounts of $49,500), 10% of the conversion ($550) would be non-taxable and 90% ($4,950) would be taxable. Your remaining $49,500 IRA balance would now have $4,950 in after-tax basis, and $44,500 in pre-tax funds.

That basis will be used in the future to reduce your taxes when you make withdrawals. Let's say in 25 or 30 years, when you are ready to start making withdrawals, you haven't put any other after-tax money into your IRAs, only pre-tax, and your balance has grown to $495,000. You still have the $4,950 basis, or 1% of the balance. So, if you withdraw $10,000, you will be taxed on 99% of it, or $9,900.

AJ
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So here is what I've been doing;

Because of IRA income limits imposed, my wife and I put $5500 into an IRA and then once funds have settled, we do the conversion right to the Roth IRA. That's it. Other than that my IRA accounts remain at a zero balance. I do have employer 401k contributions but have not taken distribution on any of those.

There is an 8606; under line 15 it lists a taxable amount; which brings me back to my question. If line 15 says taxable amount why am I being taxed on that amount when I've already paid taxes on that money as an employee wage. I never took a deduction for an IRA contribution.

It seems like the amount should be entered into line 8; "Enter the amount you converted from traditional to Roth IRAs" Nothing on page 2 of the 8606 is entered.

I see what you mean when you say there are a lot of moving parts; I was just under the impression that if post tax money was put into an IRA and converted to a Roth, that wouldn't be a taxable event provided no deduction was taken on the original contribution that was converted.

Thanks for the quick response!

Patrick
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Because of IRA income limits imposed, my wife and I put $5500 into an IRA and then once funds have settled, we do the conversion right to the Roth IRA. That's it. Other than that my IRA accounts remain at a zero balance. I do have employer 401k contributions but have not taken distribution on any of those.

Okay, it sounds like you are doing things correctly to take advantage of the 'back-door Roth' option. Are both the Traditional and the Roth at the same broker? What code does the 1099-R have in box 7? Assuming you are under age 59 1/2 (because you are only contributing $5500, which implies you are under 50), the code would probably be a 2 or a 1. If it's something other than a 2 and the accounts are at the same broker, I would suggest asking the broker to issue a correct 1099-R, with a 2 in box 7, so that it's documented to both your preparer and the IRS that a conversion was done. If the accounts are at different brokers, then it's up to you to provide documentation to your preparer so that s/he will account for the conversion, and to the IRS if they ever ask for it. (Although, if the conversion was done as a trustee to trustee transfer, and the receiving account was titled "mispoken - Roth IRA account", I would argue that the sending broker still should have issued the 1099-R with a 2 in box 7.)

If the code in box 7 is a 2, then your preparer should have accounted for the withdrawal as a conversion.

There is an 8606; under line 15 it lists a taxable amount;
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It seems like the amount should be entered into line 8; "Enter the amount you converted from traditional to Roth IRAs" Nothing on page 2 of the 8606 is entered.


What is the amount on line 15? Assuming that it is the $5500, line 8 has no entry and none of Part II (on page 2) is filled out, it sounds like the preparer did not account for the conversion. You need to go back and talk with the preparer about that and find out why not.

which brings me back to my question. If line 15 says taxable amount why am I being taxed on that amount when I've already paid taxes on that money as an employee wage. I never took a deduction for an IRA contribution.

Based on what you've said, there should not be a taxable amount on line 15. Again, you need to talk to the preparer about why there is a taxable amount on line 15, since you converted the entire amount.

Have you already signed the forms and/or the authorization for the preparer to e-file for you? If not, have the discussion before you sign, so that you don't have to amend a filed return.

If you have signed, and the preparer has already filed for you, there will need to be an amended return to get the correction made. And you should take this as a lesson to yourself that when someone else does your taxes (or if you do them yourself using software), you should never sign/file unless you have gone through every number and you are comfortable that they are correct.

AJ
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There is an 8606

What is on line 1 of the 8606?

--Peter
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Great question; it says 1800. Before I knew about the income limit imposed for Married Filing Separate I contributed $1800 to a Roth, then reclassified it to a Traditional and then converted it again back to a Roth. The reality is that the 1800 was part of the 5500, but the full $5500 is not listed in line 1. I'm going to have to e-mail this guy and see where he's coming up with this stuff, and the fact that I paid over $600 to have him do our taxes kind of annoys me. Are accountants like financial advisors?
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Before I knew about the income limit imposed for Married Filing Separate I contributed $1800 to a Roth, then reclassified it to a Traditional and then converted it again back to a Roth. The reality is that the 1800 was part of the 5500, but the full $5500 is not listed in line 1.

Okay, that's not just put(ting) $5500 into an IRA and then once funds have settled, we do the conversion right to the Roth IRA. There's a lot more to recharacterizing (not reclassifying) and then converting back than doing a contribution and converting it immediately.

I take back my previous statement that you appear to have been doing everything to use the 'back-door Roth option' correctly. Given this set of circumstances, there actually appear to be a lot of potential issues, like not waiting the required time period (until the next tax year) to convert a recharacterization from a Roth back into a Roth, and not properly accounting for any differences between the original contribution and the amount(s) transferred due to multiple moves. This scenario is way beyond where you should be getting advice from a message board.

I'm going to have to e-mail this guy and see where he's coming up with this stuff

Presumably, it's based on the information he got from you, probably through a questionnaire, an interview and/or documentation that you provided. If you haven't already done so, you need to precisely document what was done for your entire 2015 contribution/conversion process, backed up by brokerage statements and 1099-Rs. Then you need to make an appointment with your tax preparer (not just e-mail him) and sit down and figure out what, if any, rules you broke, and how to fix and/or pay for those issues, as well as how to have them documented in your tax return.

the fact that I paid over $600 to have him do our taxes kind of annoys me. Are accountants like financial advisors?

Well, it's not clear that your tax preparer ever got the full story, as at least with us, you seem to have 'tossed in' things that you apparently didn't think were important, but actually are very important, like the recharacterization of the $1800. So, if you didn't give him the precise documentation of what was done, then he would have a hard time getting your taxes right - GIGO. If you did give him precise documentation of what you did, then it may be that there should be a taxable amount on 16b because you broke rules.

All of that is why you need to sit down and talk with him about what you did and how it's documented.

The best time to get tax advice is BEFORE you decide to make a change, like recharacterizing from a Roth, and then converting back into a Roth or deciding to file Married, Separate but still wanting to take advantage of contributing to a Roth. The fact that you didn't understand that Roth contributions are severely limited when filing MFS leads me to believe that you didn't consult a tax professional until you decided your taxes were going to be too complex for you to do on your own, after you had already taken the actions that made them complex.

AJ
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Thanks for the response AJ; I went back and retraced EXACTLY how this went down and this is the timeline as it happened.

1-$1000 Roth contribution made; recharacterized to traditional IRA

2-$5500 contributed to Traditional IRA

3-$5500 moved to traditional IRA (2 box 7 on 1099)

4-$1000 redistributed as an excess contribution (8,1 box 7 on 1099)

The codes 8,1 seem to make it sound like it's a taxable situation. Since I never took a IRA deduction on that excess contribution is it correct that it would be a taxable situation?

Thanks again!

Pat
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The codes 8,1 seem to make it sound like it's a taxable situation. Since I never took a IRA deduction on that excess contribution is it correct that it would be a taxable situation?

Again, I would suggest you sit down with your tax preparer and ask him, as this situation is too complex to try to resolve via message boards or e-mail. There is still information (like dates and which year you were contributing for) missing. And the $1000 in the timeline doesn't match up with the $1800 that you said was on line 1.

That said, if you contributed a total of $6500 in new funds ($1000 originally into the Roth and $5500 more originally into the Traditional), and you were only eligible to contribute $5500, then, yes, you made an excess contribution. Excess contributions can incur taxes and/or penalties, depending on if/how/when they are removed. Again - a situation to discuss with the tax preparer face to face.

AJ
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