Form 8606

[Greta]

I made a mistake in 2022 tax return, I did not notice a small Roth (code BB) in client's W-2. With her husband's income, she was over the income limit for the $7500 traditional IRA I suggested. I will amend using Form 8606, and taxes will be owed. Client has $16K total in the IRA including the ineligible $7500 from 2022. Client is age 52. Does she have to wait till age 59.5 to move the funds to a Roth without penalty, or can she do it now without penalty and deduct the $7500 from taxable income? Form 8606 is a pain to digest for the next 3 decades and pay a future accountant to file it.

[PATAX]

@Greta I am not an expert on that situation. I think @TaxGuyBill  is very knowledgeable on that.

[TaxGuyBill · Accepted solution]

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@Greta wrote:

I did not notice a small Roth (code BB) in client's W-2.

With her husband's income, she was over the income limit for the $7500 traditional IRA I suggested ...  including the ineligible $7500 from 2022

Client has $16K total in the IRA

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There is no income limit for a Traditional IRA.  But because the husband had an employer retirement plan, there is an income limit for a deductible IRA.  She was still allowed to contribute to the Traditional IRA.

If you put the checked the retirement box on the W-2, ProSeries should have automatically made some or all of the Traditional IRA non-deductible.  Look at Schedule 1 to see the deduction.

If you did not check the retirement box on the W-2, then yes, ProSeries would have deducted the IRA when it should have been nondeductible (or at least partially nondeductible).

She can convert it to a Roth if she wants to, with no penalty.  Some of the conversion will be taxable though, but the amount subject to tax depends on how much of the Traditional IRA was made from nondeductible contributions.

[Taxprohere]

You're referring to a Roth 401k sponsored by the employer (code BB), it's not a Roth IRA nor limited by those restrictions.   Never mind!  Guess you can't delete posts?

[qbteachmt]

There are at least three different things just in this one part:

"I did not notice a small Roth (code BB)"

That's a Roth 403(b), employer plan?

"in client's W-2."

That means she is the employee with a plan.

"With her husband's income, she was over the income limit"

That's different than the first two issues, as well.

"for the $7500 traditional IRA I suggested."

When did the funds get deposited? in 2022 or in 2023?

"including the ineligible $7500 from 2022."

+ earnings. There needs to be an action, such as corrective distribution in 2024 for the 2023 tax year filing (removal of contribution + earnings).

"or can she do it now without penalty and deduct the $7500 from taxable income?"

One option is to pay the penalty and leave the funds, roll it to the next year, if she qualifies. But amending as nondeductible, then moving to Roth, means there never is deductibility. That's the point.

There's plenty of time for this.

"I will amend using Form 8606, and taxes will be owed."

She has a choice to make from the various options:

https://www.investopedia.com/articles/retirement/04/042804.asp

https://www.nerdwallet.com/article/investing/excess-contribution-to-ira

"for the next 3 decades and pay a future accountant to file it."

Leaving it in means penalties every year, on and on. Why not deal with it now?

[Greta]

Thank you very much! So did understand you correctly: I first amend 2022 return to change the $7500 IRA to a non-deductible IRA and incur a tax. (I had neglected to put code BB in the W-2, otherwise Proseries would have found my mistake.) Next, in 2024, I suggest she take the entire IRA kitty worth $16,500 plus the whopping $2 in earnings and turn it into a Roth without penalty. The $7500 nondeductible IRA will not be taxed, so only 9K will incur a tax in 2024. That sounds like a better option than to file the pesky Form 8606 starting at age 75 for the rest of her life for a minuscule fractional deduction.

[qbteachmt]

"amend 2022 return to change the $7500 IRA to a non-deductible IRA and incur a tax."

Yes.

"(I had neglected to put code BB in the W-2, otherwise Proseries would have found my mistake.)"

And that's part of the amendment, because that is part of Payroll. Your taxpayer might qualify for the Saver's Credit.

"Next, in 2024, I suggest she take the entire IRA kitty worth $16,500"

Yes, that will avoid pro rata tax being computed with every distribution or conversion.

"plus the whopping $2 in earnings"

There are multiple years of contributions in the highest interest and fastest growing era we've seen in these past few years, and there are only $2 of earnings? Any growth is considered taxable income, as well.

"than to file the pesky Form 8606 starting at age 75 for the rest of her life for a minuscule fractional deduction."

There wouldn't be any deductions. It changes how much is taxable income. It's a consideration for Basis = funds that were already taxed going into the deferred account as a pro rated % of the whole tax deferred account, every time any amount is distributed or converted.