Wiki page UPGRADE: Backdoor Roth

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FiveK
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Re: Wiki page UPGRADE: Backdoor Roth

Post by FiveK »

David Jay wrote: Thu Mar 25, 2021 4:39 pm
FiveK wrote: Wed Mar 24, 2021 12:07 pm In the Convert section:
"one would normally convert the entire balance, even if the balance is higher or lower than the amount that was contributed."
This edit has already been made (March 22nd).
Yes.

The question now is does that conflict with the wording below, and if so how should we reconcile things?
In Example 1b:
" Leaving a dollar in the account and converting $5,939 might make it more likely she will retain $61 basis instead of losing $60 basis."
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David Jay
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Re: Wiki page UPGRADE: Backdoor Roth

Post by David Jay »

HomeStretch wrote: Thu Mar 25, 2021 4:46 pm
David Jay wrote: Thu Mar 25, 2021 4:35 pm Any change in basis in one’s IRA accounts needs to be documented in the year when the change occurs. ...
I like your idea of adding the 3rd section called “Documents” to better segue into the current Form 8606 discussion. To do so, I like your “short and sweet” option better.

I just don’t think the “any change in basis...” wording is entirely accurate/factual per posts, above. I’d suggest replacing with the first and third bullets from the IRS “who must file” language per Form 8606 instructions per FiveK’s post.

Thanks again for working to improve this BH wiki page.
I don't mind a different opening phrasing if someone else can come up with something, but I am unwilling to add the "FiveK" list because there is a lot of experience here similar to the following (I read this and went back and checked, TT did not file an 8606 for me):
retiredjg wrote: Tue Mar 23, 2021 9:49 amThat makes sense, but turbotax has not kicked out a Form 8606 for me even though I've done conversions for 3 or more years. Have not heard from the IRS yet.
I think there may well be exceptions to the list further down in the detailed instructions (i.e. if Line x is zero one does not need to file) which is why I included the "everyone should do a test 8606". That covers the bases without being dogmatic about who must file.
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David Jay
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Re: Wiki page UPGRADE: Backdoor Roth

Post by David Jay »

FiveK wrote: Thu Mar 25, 2021 4:59 pm
David Jay wrote: Thu Mar 25, 2021 4:39 pm
FiveK wrote: Wed Mar 24, 2021 12:07 pm In the Convert section:
"one would normally convert the entire balance, even if the balance is higher or lower than the amount that was contributed."
This edit has already been made (March 22nd).
Yes.

The question now is does that conflict with the wording below, and if so how should we reconcile things?
In Example 1b:
" Leaving a dollar in the account and converting $5,939 might make it more likely she will retain $61 basis instead of losing $60 basis."
"normally"
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
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FiveK
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Re: Wiki page UPGRADE: Backdoor Roth

Post by FiveK »

David Jay wrote: Thu Mar 25, 2021 5:04 pm
FiveK wrote: Thu Mar 25, 2021 4:59 pm
David Jay wrote: Thu Mar 25, 2021 4:39 pm
FiveK wrote: Wed Mar 24, 2021 12:07 pm In the Convert section:
"one would normally convert the entire balance, even if the balance is higher or lower than the amount that was contributed."
This edit has already been made (March 22nd).
Yes.

The question now is does that conflict with the wording below, and if so how should we reconcile things?
In Example 1b:
" Leaving a dollar in the account and converting $5,939 might make it more likely she will retain $61 basis instead of losing $60 basis."
"normally"
Yes. It seems you think I'm arguing with you, when in fact I think your "convert the entire balance" is appropriate and the "leave a dollar in the account" accomplishes nothing. ;)
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David Jay
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Re: Wiki page UPGRADE: Backdoor Roth

Post by David Jay »

FiveK wrote: Thu Mar 25, 2021 5:53 pm
David Jay wrote: Thu Mar 25, 2021 5:04 pm
FiveK wrote: Thu Mar 25, 2021 4:59 pm
David Jay wrote: Thu Mar 25, 2021 4:39 pm
FiveK wrote: Wed Mar 24, 2021 12:07 pm In the Convert section:
"one would normally convert the entire balance, even if the balance is higher or lower than the amount that was contributed."
This edit has already been made (March 22nd).
Yes.

The question now is does that conflict with the wording below, and if so how should we reconcile things?
In Example 1b:
" Leaving a dollar in the account and converting $5,939 might make it more likely she will retain $61 basis instead of losing $60 basis."
"normally"
Yes. It seems you think I'm arguing with you, when in fact I think your "convert the entire balance" is appropriate and the "leave a dollar in the account" accomplishes nothing. ;)
Sorry, I was being a bit defensive...
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Re: Wiki page UPGRADE: Backdoor Roth

Post by celia »

I don’t think we should use the term “Document” as that sounds like you can make a note or use Form 8606 and just file it away (in case it is needed in the future). Instead we should use “Report” or “IRS Reporting”.

I realize there is an updated proposed addition further in the thread, but I prefer changes closer to the first suggestion. I think my other proposed edits are self-explanatory:
David Jay wrote: Mon Mar 22, 2021 10:36 am IRS Reporting

Any change in basis in one’s Traditional IRA accounts needs to be reported for the year when the change occurs. IRS Form 8606 is the form for reporting the basis to the IRS. If you use tax software and answer the questions appropriately, it should be generated as part of your tax return. But if this is the first time you are doing a Backdoor Roth (and since the year has not yet ended), it is recommended that you download the form and fill it out manually, so there aren’t any surprises later on. (bold the last sentence)

If one has pre-tax balances in any Traditional IRA and one makes an after-tax contribution for a given tax year then it is almost certain that a Form 8606 will need to be filled out for that tax year. This is the case because the Roth conversion will be taxed in a pro-rated manner and some basis will remain in the Traditional IRA accounts at the end of the tax year.

If one had no after-tax basis in the previous tax year and ends this tax year with no after-tax basis then a form 8606 does not need to be filed in most cases. It is recommended that a trial 8606 be filled out in all cases to understand whether or not the form needs to be submitted to the IRS.

One special circumstance is the case where a contribution is made for the previous tax year with a contribution by April 15th of the current calendar year. The conversion occurs in the current tax year as conversions are recorded in the calendar year in which they occur. In this case the contribution is recorded on Form 8606 for the filing year and the basis is carried forward to the current tax year where the conversion is recorded. The tax year offset is resolved with the following year’s 8606.


For past year’s unfiled Form 8606s, the IRS will accept 8606 forms for past years without the need to file an amended return, if the tax liability hasn’t changed.. If one discovers that they have failed to file an 8606 for previous years when an 8606 was required, one can file one or more 8606 forms for past years.
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Re: Wiki page UPGRADE: Backdoor Roth

Post by David Jay »

celia wrote: Thu Mar 25, 2021 7:31 pm I don’t think we should use the term “Document” as that sounds like you can make a note or use Form 8606 and just file it away (in case it is needed in the future). Instead we should use “Report” or “IRS Reporting”.

I realize there is an updated proposed addition further in the thread, but I prefer changes closer to the first suggestion. I think my other proposed edits are self-explanatory:
David Jay wrote: Mon Mar 22, 2021 10:36 am IRS Reporting

Any change in basis in one’s Traditional IRA accounts needs to be reported for the year when the change occurs. IRS Form 8606 is the form for reporting the basis to the IRS. If you use tax software and answer the questions appropriately, it should be generated as part of your tax return. But if this is the first time you are doing a Backdoor Roth (and since the year has not yet ended), it is recommended that you download the form and fill it out manually, so there aren’t any surprises later on. (bold the last sentence)

If one has pre-tax balances in any Traditional IRA and one makes an after-tax contribution for a given tax year then it is almost certain that a Form 8606 will need to be filled out for that tax year. This is the case because the Roth conversion will be taxed in a pro-rated manner and some basis will remain in the Traditional IRA accounts at the end of the tax year.

If one had no after-tax basis in the previous tax year and ends this tax year with no after-tax basis then a form 8606 does not need to be filed in most cases. It is recommended that a trial 8606 be filled out in all cases to understand whether or not the form needs to be submitted to the IRS.

One special circumstance is the case where a contribution is made for the previous tax year with a contribution by April 15th of the current calendar year. The conversion occurs in the current tax year as conversions are recorded in the calendar year in which they occur. In this case the contribution is recorded on Form 8606 for the filing year and the basis is carried forward to the current tax year where the conversion is recorded. The tax year offset is resolved with the following year’s 8606.


For past year’s unfiled Form 8606s, the IRS will accept 8606 forms for past years without the need to file an amended return, if the tax liability hasn’t changed.. If one discovers that they have failed to file an 8606 for previous years when an 8606 was required, one can file one or more 8606 forms for past years.
You clearly feel some ownership on the subject so I will just back out and let you proceed with the edits as you see fit.
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celia
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Re: Wiki page UPGRADE: Backdoor Roth

Post by celia »

David Jay wrote: Thu Mar 25, 2021 5:03 pm I don't mind a different opening phrasing if someone else can come up with something, but I am unwilling to add the "FiveK" list because there is a lot of experience here similar to the following (I read this and went back and checked, TT did not file an 8606 for me):
retiredjg wrote: Tue Mar 23, 2021 9:49 amThat makes sense, but turbotax has not kicked out a Form 8606 for me even though I've done conversions for 3 or more years. Have not heard from the IRS yet.
I think there may well be exceptions to the list further down in the detailed instructions (i.e. if Line x is zero one does not need to file) which is why I included the "everyone should do a test 8606". That covers the bases without being dogmatic about who must file.
I don’t think we need to define who needs to use Form 8606 in the wiki page. But as far as backdoor Roth’s go, the following taxpayers would need to use it: (for editor info)

Anyone who increased or decreased their basis by:
* made a non-deductible contribution
* withdrew or converted from an IRA where the IRA (for another IRA of the same taxpayer) has some basis remaining before withdrawal or conversion. This also applies to heirs of any of the IRAs, unless they aren’t aware of any basis or want to simplify their life by assuming there isn’t any. (You can always pay tax on any already-taxed dollar again.)
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Re: Wiki page UPGRADE: Backdoor Roth

Post by celia »

DavidJay wrote: You clearly feel some ownership on the subject so I will just back out and let you proceed with the edits as you see fit.
Here’s some back-story, in case you weren’t aware. I was the primary editor of the page 2 years ago when it needed a major overhaul. The previous page had factually wrong pro rata calculations which many posters kept referring to and I got tired of seeing them talk about it wrong. So that’s when I think I became a wiki editor but eventually backed away when the page went live.

I appreciate those who have helped maintain it since and will add the above text in a few days unless someone else improves on it.

I regard the wiki as belonging to all of us . It’s just that I happen to have put in lots of time on this particular page and know the IRS rules involved. The “funny” thing is that I’ve never had to use the Backdoor Roth. It’s just the Roth Conversion part that I advocate for. :beer
Last edited by celia on Thu Mar 25, 2021 9:18 pm, edited 1 time in total.
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FiveK
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Re: Wiki page UPGRADE: Backdoor Roth

Post by FiveK »

celia wrote: Thu Mar 25, 2021 7:52 pm But as far as backdoor Roth’s go, the following taxpayers would need to use it: (for editor info)

Anyone who increased or decreased their basis by:
* made a non-deductible contribution
* withdrew or converted from an IRA where the IRA (for another IRA of the same taxpayer) has some basis remaining before withdrawal or conversion. This also applies to heirs of any of the IRAs, unless they aren’t aware of any basis or want to simplify their life by assuming there isn’t any. (You can always pay tax on any already-taxed dollar again.)
The phrase "increased or decreased their basis by" could be deleted without changing the accuracy of those bullet points, and may make the text easier to read for many.

It may also be worth emphasizing the first point applies to the tax year "for which" the contribution is made, while the second point applies to the tax year "in which" the withdrawal/conversion occurs. This is a recurring point of confusion for many new posters.
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Re: Wiki page UPGRADE: Backdoor Roth

Post by retiredjg »

Agree that this page needs contribute, convert, and report/document.

This Wiki page is not about Form 8606 and its uses. It is also not about documenting changes in basis.

The Wiki page is about backdoor Roth. A simple introduction/transition is missing and needed. Maybe something as simple as....

Tax Reporting

The backdoor Roth process is reported to the IRS using Form 8606. And go from there.

I think Cautions should be after report/document.

I like the warning at the top. Because of the way humans are, it will only help a few people...but that is better than nothing.
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celia
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Re: Wiki page UPGRADE: Backdoor Roth

Post by celia »

I have made minor changes to the wiki page and decided against an intro to Form 8606 on this wiki page as it is now mentioned eight (8) times before the examples start. The wiki page needs to focus on the Backdoor Roth, not be distracted by related topics. I am also concerned that having 3 sections listed as:

Contribute
Convert
IRS Reporting
<----- possible new section
would cause new readers to contribute one day, convert the next day, and fill out and mail Form 8606 the following day. :oops: :oops:


Calling
Alan S. wrote:
While reviewing the wiki page, one thing looks strange to me. That is the second clause in the Basis definition:
Basis
is the total amount of nondeductible contributions in your Traditional IRAs.[2] It is a fixed dollar amount and does not grow as the account value grows. It stays steady until one of the following occurs: 1) another nondeductible contribution is added (the basis increases), 2) a rollover of an after-tax 401K contribution is made to a Traditional or Rollover IRA (the basis increases), 3) a Roth conversion or withdrawal from the account removes some/all of it (the basis decreases).

The basis also is not associated with any particular account. Rather, it is an accounting device that the taxpayer needs to report to the IRS each year the taxpayer increases or decreases it. The increase or decrease in basis is reported using IRS Form 8606.

This is the same word, but has a slightly differently meaning than the cost basis used when calculating capital gains.
I question whether that clause should even be there, since how would this data get onto Form 8606? Isn't the After-tax contribution supposed to be rolled into the Roth IRA only?
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Re: Wiki page UPGRADE: Backdoor Roth

Post by HomeStretch »

celia wrote: Tue Mar 30, 2021 2:54 pm Basis
is the total amount of nondeductible contributions in your Traditional IRAs.[2] It is a fixed dollar amount and does not grow as the account value grows. It stays steady until one of the following occurs: 1) another nondeductible contribution is added (the basis increases), 2) a rollover of an after-tax 401K contribution is made to a Traditional or Rollover IRA (the basis increases), 3) a Roth conversion or withdrawal from the account removes some/all of it (the basis decreases).

... I question whether that clause should even be there, since how would this data get onto Form 8606? Isn't the After-tax contribution supposed to be rolled into the Roth IRA only?
The way it is worded, it sounds like only those 3 events (one of which is questionable) can cause a basis change. If the list is intended to be all inclusive, it's missing a change in basis due to a transfer of an IRA with basis between spouses per a divorce or separation agreement (source: IRS Instructions to Form 8606 page 2 "Basis" section).

Perhaps not every reason for a change in basis needs to be listed and something more general or just related to a backdoor Roth can suffice? Suggested wording for your editorial consideration -
"... The basis may change as the result of, among other things, a nondeductible contribution, a Roth conversion or distribution from the IRA."
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Re: Wiki page UPGRADE: Backdoor Roth

Post by celia »

celia wrote: Tue Mar 30, 2021 2:54 pm I question whether that clause should even be there, since how would this data get onto Form 8606? Isn't the After-tax contribution supposed to be rolled into the Roth IRA only?
On this page of the IRS documents, I think I found the answer that After-tax contributions are not eligible to be rolled over (to pre-tax accounts):
Ineligible Distributions
Certain distributions from an eligible retirement plan can't be rolled over, including:

1. Generally, the nontaxable part of a distribution, such as your after-tax contributions to a retirement plan, ....
Therefore, I will remove that clause from the wiki page.
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Re: Wiki page UPGRADE: Backdoor Roth

Post by celia »

HomeStretch wrote: Tue Mar 30, 2021 4:05 pm The way it is worded, it sounds like only those 3 events (one of which is questionable) can cause a basis change. If the list is intended to be all inclusive, it's missing a change in basis due to a transfer of an IRA with basis between spouses per a divorce or separation agreement (source: IRS Instructions to Form 8606 page 2 "Basis" section).
Although I never considered this case, it is outside of the scope of explaining Backdoor Roths. It seems that both parties (and their lawyers and a judge) would first need to understand the ins and outs of Backdoor Roth’s, before trying to divide them up.
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Re: Wiki page UPGRADE: Backdoor Roth

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celia wrote: Tue Mar 30, 2021 2:54 pm
celia wrote: Tue Mar 30, 2021 2:54 pm I question whether that clause should even be there, since how would this data get onto Form 8606? Isn't the After-tax contribution supposed to be rolled into the Roth IRA only?
On this page of the IRS documents, I think I found the answer that After-tax contributions are not eligible to be rolled over (to pre-tax accounts):
Ineligible Distributions
Certain distributions from an eligible retirement plan can't be rolled over, including:

1. Generally, the nontaxable part of a distribution, such as your after-tax contributions to a retirement plan, ....
Therefore, I will remove that clause from the wiki page.

After PM-ing Alan S., I rolled back the phrase in the wiki that the basis can contain:
"a rollover of an after-tax 401K contribution is made to a Traditional or Rollover IRA (the basis increases), 3)".

Although this is rare, there was a time the After-Tax rollover was supposed to go to a TIRA and some TIRAs out there still have it as part of the basis. Here was his explanation: [posted with his permission]
Alan S. wrote: I think the QRP after tax contribution source of basis should be restored as it was.

Background: Before 2002, after tax money could not be rolled to an IRA. It was paid out by check to the participant, obviously non taxable. From 2002-present rolling after tax amounts to a TIRA is allowed, but since Notice 2014-54 this is rare and only happens due to a failure to request a split rollover which would sent the after tax money to the Roth IRA. From 2009 through Notice 2014-54 the IRS stated that direct rollovers should be pro rated as a single rollover, but some people got around this by doing indirect rollovers and many custodian cooperated by reporting split rollovers even before the Notice.

In any event, moving after tax money to a TIRA is allowed, just not advisable, but it still happens, just much less often.

A related reason for losing track of this basis that Kitces did not mention is that IRS Pub 590 A has contained the following instruction for years. This year it's on p 15. However, it is NOT in the 8606 Inst and should be for consistency, or better yet this rule should be eliminated:
A Form 8606 isn’t used for the year that you make
a rollover from a qualified retirement plan to a
traditional IRA and the rollover includes nontaxable
amounts. In those situations, a Form 8606 is completed
for the year you take a distribution from that IRA. See

Form 8606 under Distributions Fully or Partly Taxable in
Pub. 590-B.
So a participant rolled over AT contributions in 2003, but did not take a distribution for 15 years. They were supposed to remember after 15 years to show the after tax amount rolled over on line 2 of the 8606 when they took the distribution. This poor rule is the cause of many forgotten after tax rollovers.

Not sure I agree with Kitces to file an 8606 every year contrary to the instructions, but I would definitely recommend filing it in the year of the AT rollover (like you would a ND IRA contribution) to make it a matter of record and to be consistent with IRA ND contributions.

Finally, one reason you may have thought that after tax could not be rolled to a TIRA is the rollover chart itself.
https://www.irs.gov/pub/irs-tege/rollover_chart.pdf

Note that under Qualified Plan it shows (pre tax) which gives the impression that after tax money cannot be rolled over. However, the reference to pre tax is just to distinguish it from the Roth 401k, it does not mean that after tax contributions in the pre tax portion of the 401k cannot be rolled over to a TIRA (or to a Roth IRA).

Alan
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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Re: Wiki page UPGRADE: Backdoor Roth

Post by okwriter »

Hello, here's a simple block diagram of the backdoor Roth process. If it looks ok, we could add it to the article.

(There is a similar figure in the new Mega-backdoor Roth article.)
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Re: Wiki page UPGRADE: Backdoor Roth

Post by LadyGeek »

Thanks! It looks OK to me - nothing is changed with regards to content. Being bold, I added the figure to the wiki.

It makes a great companion to the figure in the newly minted Mega-backdoor Roth article. You can easily see how the two processes differ.
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