Personal Investments • Mega Backdoor Roth/Roth IRA question

I think once you read the instructions for line 22 (contribution basis), you will see that it says exactly that.

And once you read the instructions for line 24 (conversion basis), you will see that it says not to include rollovers from designated Roth accounts (including IRRs).

Yes! I finally got the time to read the 8606 Form instructions. You are right. For line 24, as you said, they have the following text that double-confirm that IRRs should go in line 22:

Don’t include amounts rolled in from a designated Roth, Roth SEP, or Roth SIMPLE account because these amounts are included on line 22.

Okay, so all the IRRs go in line 22. From a tax perspective, these amounts are deemed not taxable for the distribution (Roth 401K -> Roth IRA rollover). Interestingly, the IRS has decided to treat the IRRs (taxable and non-taxable) as investments in contracts. But I won't argue that decision --more on this later.

I checked my form 1099-R, and my IRRs have a taxable portion, usually no more than ~4 dollars per year. So basically, I am in the situation that @ssel described below:

But strangely... if any of the IRRs had a taxable component, there'd be a complication. An IRR would have a taxable component if there was a bit of time between the after-tax contribution and the subsequent rollover to the Roth 401k, and in that time there were some earnings. Let's say it's $100. (This won't happen to OP since their IRRs happen immediately.) The IRR would start a 5-year clock before that $100 could be distributed without penalty. Even after a rollover to a Roth IRA, and even though the entire IRR -- including the $100 -- would count as Roth IRA contribution basis on Form 8606, the 5-year penalty clock would continue running for purposes of computing the 10% penalty on Form 5329.

Unfortunately, this happens because in-plan rollovers don't always occur immediately when the after-tax contribution is made in the 401K. The logic described above by @ssel is mentioned in the Designated Roth Account FAQ https://www.irs.gov/retirement-plans/re ... h-accounts section "How are in-plan Roth rollovers taxed?":

In-plan Roth rollovers are not subject to the 10% additional tax on early distributions. However, they are subject to a special recapture rule when a plan distributes any part of an in-plan Roth rollover within a 5-taxable-year period, making the distribution subject to the 10% additional tax on early distributions under IRC Section 72(t) unless:

* an exception to this tax applies, or
* the distribution is allocable to any nontaxable portion of the in-plan Roth rollover.

The 5-taxable-year period begins January 1 of the year of the in-plan Roth rollover and ends on December 31 of the fifth year. This special recapture rule does not apply when you roll over the distribution to another designated Roth account or to your Roth IRA, but does apply to a subsequent distribution from the rolled over account or IRA within the 5-taxable-year period.

I guess I will have to use the form 1099-R to keep track of the taxable portion of the IRR when I withdraw them from my Roth IRA account.

Statistics: Posted by queloco — Mon Oct 21, 2024 10:53 pm — Replies 25 — Views 2815

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