Form 8606 madness - suggestions?

[FEDUKE404]

Background: During 2013, client puts $3000 into Roth IRA. Later finds out he can't do that, due to income issues. After much deliberation on his part, he recently removes the offending funds/earnings from the Roth IRA account. Within past week or so, $3,500 has (perhaps) gone into a non-deductible traditional IRA. The $500 represents the calculated earnings and amount was determined by firm holding the IRAs. There was no traditional IRA in existence until recently.

Question #1: Assuming a 2013 Form 8606 is needed, what dollar amount goes on line 1 for "non-deductible contributions" ? $3,000 or $3,500 or another amount? (My vote is currently $3,000.)

Question #2: Since we already know, to the penny, the amount of "bad" funds that were withdrawn ($3,500), is it possible to report NOW the (taxable?) earnings on the current/pending 2013 income tax return? Otherwise, at some point in the distant future (next spring) there *WILL* be a Form 1099-R issued, apparently of the 2014 type but with the proper coding, to report that income. Tis far better to fix problem now than have to amend (US+two states) 2013 at a later date. OTOH, my concern is....what happens if the forthcoming Form 1099-R ends up with a different dollar amount?

Now you know why I generally advise people never to fund a non-deductible traditional IRA!!

Thanks for any input.

FE

[Burke]

Wouldn't this qualify simply as a "recharacterization" of the ROTH to a traditional, non-deductible IRA? Or not.....?

[Gretel]

Replying from a vague memory years ago, forgot which client it was but did not forget the agony of reporting. Sorry, it's too vague, I am just sending my sympathy.

[FEDUKE404]

Form 8606 issue here

Wouldn't this qualify simply as a "recharacterization" of the ROTH to a traditional, non-deductible IRA? Or not.....?

Perhaps. Even if so, would a Form 8606 (to establish "basis" of the new traditional IRA) not perhaps still be needed? That cost basis for non-deductible funds in an IRA account has to be carried, for perpetuity, somewhere. . . correct??

Basic problem related to taxable issues (not reporting issues) is we already know (well, perhaps) the dollar amounts but we don't know when/how those amounts will be properly reported to the IRS. I think it will be on a 2014 Form 1099R with the coding to make the distribution a "2013" event....hello, amended return!

And Gretel has nailed it completely!!

FE

[Burke]

A contribution to a non-traditional IRA is supposed to be reported on Form 8606. I don't think it has to be carried on 8606 from year to year unless a new contribution is made. See part III: you do not include recharacterizations of ROTH's on Line 19 with other distributions. But, as you say, how you complete an 8606 may depend on how the institution reports it. If the ROTH is recharacterized to a non-traditional IRA, I would not think the earnings would be taxable -- just moved to the new IRA and taxed when withdrawn. A recharacterization (do you know how hard it is to spell that word three times?) is supposed to be treated as if it was put in the correct vehicle in the first place and the old one disregarded as if it had never been done.

[sandigi]

due to INCOME Issues?

[QUOTE=FEDUKE404;163527]Background: During 2013, client puts $3000 into Roth IRA. Later finds out he can't do that, due to income issues. After much deliberation on his part, he recently removes the offending funds/earnings from the Roth IRA account. Within past week or so, $3,500 has (perhaps) gone into a non-deductible traditional IRA. The $500 represents the calculated earnings and amount was determined by firm holding the IRAs. There was no traditional IRA in existence until recently.

If he couldn't contribute to a Roth IRA due to income issues . . . how can he contribute to a Traditional IRA? You can't Recharacterize a bad contribution. Isn't this an "excess contribution"?

[joanmcq]

No ANYONE can contribute to an IRA, but the contribution may not be deductible.

It's a recharacterization, and it will be for 2013. I would report the basis as the 3000. You can always file the 8606 on its own if you get a 1099-R in 2014 that says differently. You should get a 2013 1099-R. A recharacterization means the Roth contribution is treated as if it never occurred. So the earnings would be in the IRA.

[FEDUKE404]

Getting the rules straight

If he couldn't contribute to a Roth IRA due to income issues . . . how can he contribute to a Traditional IRA? You can't Recharacterize a bad contribution. Isn't this an "excess contribution"?

It's actually both quite easy and allowable. Many people routinely choose that option. It is call a non-deductible traditional IRA contribution. Such a contribution is not deemed an "excess contribution" although if the funds had stayed in the Roth those funds would have been deemed an excess contribution.

FE

[FEDUKE404]

Update from client

1 - The client has been told that the amount that will appear on the Form 5498 will be $3,500 (amount of original Roth funds + amount of earnings from same) for calendar year 2013
2 - No one has any idea of what dollar amount will appear on the 2014 Form 1099R
3 - No one has any idea of what code(s), to include code P ("Excess contributions + earnings -- Taxable in 2013"), will appear on the 2014 Form 1099R
4 -This entire event may fall under the umbrella of recharacterization, namely moving "bad" funds + "bad" earnings from the Roth IRA to a new, non-deductible traditional IRA prior to 04/15/2014.

Now, back to my original questions.

A - What amount, if any, do I place on line 1 of Part I of the 2013 Form 8606 ?
B - If your position is that no Form 8606 is needed, how does the "basis" for the non-deductible traditional IRA funds ever get established to the satisfaction of the IRS?

I do not feel that an "excess contributions" scenario now exists, although such would have been correct had the funds remained in the Roth IRA account.

Yes, we know the document itself does not necessarily have to be created for each future year tax return, but certainly one would think a Form 8606 *IS* needed for the 2013 income tax return with the circumstances given.

Maybe someone knows the answers. . .

FE

[sandigi]

TTB 13-10 EXCESS Contribution

It's actually both quite easy and allowable. Many people routinely choose that option. It is call a non-deductible traditional IRA contribution. Such a contribution is not deemed an "excess contribution" although if the funds had stayed in the Roth those funds would have been deemed an excess contribution.

FE

I'm getting more confused by the minute. And I also wish I knew how you get your quotes in that blue box. But for the tax issue TTB 13-10 says
"An excess contribution results when a taxpayer has contributed more to a traditional IRA or Roth IRA than allowed by statute."

????

[Burke]

There are income limits on ROTH contributions depending on filing status. There are no such limits on a non-deductible IRA.

[joanmcq]

A. I guess I'd go with $3500, although I think it should be $3000. Client gets a gimme of basis.
B. You ALWAYS file an 8606 when there's been nondeductible contributions. Anyone that says otherwise shouldn't be preparing taxes.

No there aren't any excess contributions. And yes, this all goes on the 2013 return.

[FEDUKE404]

My final answer - I think

I would think this excerpt (see page 3 of Form 8606 instructions) pretty well nails it:

Reporting recharacterizations:

Any recharacterized conversion or Roth IRA rollover from a qualified retirement plan will be treated as though the conversion or rollover had not occurred. Any recharacterized contribution will be treated as having been originally contributed to the second IRA, not the first IRA. The amount transferred must include related earnings or be reduced by any loss. In most cases, the related earnings that you must transfer are figured by your IRA trustee or custodian. . .. Any earnings or loss that occurred in the first IRA will be treated as having occurred in the second IRA.

SOURCE: http://www.irs.gov/pub/irs-pdf/i8606.pdf

I'm going WITH filing a 2013 Form 8606, and entering $3000 on line 1.

Any comments from the peanut gallery ? ?

Thanks to all for responding.

FE

[Burke]

I think that's going to work. (For this year.) I understand how the IRS treats recharacterizations under the statute, and that is all fine and good. But practically speaking, I bet the custodian can't just go into the existing IRA set up as a ROTH and simply change it to a regular, non-deductible IRA. They will probably cancel the old one and start a new one, which may generate a 1099R next year for the "distribution."

[FEDUKE404]

1099R issue

I think that's going to work. (For this year.) I understand how the IRS treats recharacterizations under the statute, and that is all fine and good. But practically speaking, I bet the custodian can't just go into the existing IRA set up as a ROTH and simply change it to a regular, non-deductible IRA. They will probably cancel the old one and start a new one, which may generate a 1099R next year for the "distribution."

A 2014 Form 1099R is fully expected by all parties.

But no one seems to have a good idea as to what will be shown on it, although "the numbers" already exist once the funds+earnings went from Roth IRA -->> non-deductible traditional IRA in late March.

That will be next year's problem, I guess !!

FE