Did I make Roth Conversion of My IRA Basis Taxable? Any Way Out? Sorry, Long Po

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  • #3203
    cjmassey
    Participant

    Fidelity’s Pitch:
    In late 2016, I was contacted by a representative of Fidelity, my company 401 K provider, to see if I was interested in rolling my IRA from Vanguard to a Rollover IRA with them. The purpose of this was to allow me to perform a Roth conversion without any tax consequences. This would be done by rolling only the taxable funds in the new Rollover IRA into my 401K , leaving my basis of $59K that came from non deductable IRA contributions over the years (IRS Form 8606 Line 14, ). This remaining basis in the Fidelity Rollover IRA could then be converted to a Roth IRA. When I filed my taxes for 2018 and filled out the form 8606, on Line 6 where it asks for the value of all my traditional IRAs as of 12/31/18, I would then be able to put in $0, since all my IRA funds had been rolled over into my 401K. This would take the pro rata rule out of play and the entire $59K conversion would not be taxable.

    Roll taxable IRA Funds to 401K, Convert Non Taxable Basis to Roth

    This sounded good to me, so in late 2016 and early 2017 I rolled my IRA from Vanguard to a Rollover IRA at Fidelity. On 1/12/98, we started the rollover of all my taxable funds in My Fidelity Rollover IRA into my company 401K (also with Fidelity) to isolate my basis of $59K. They then converted those funds to a Roth IRA.

    The Problem

    In April 2018 I was laid off from my job. I was fortunate to get a very generous several package. In September of 2018, after reading about the pros and cons of leaving my 401K at my company, I decided to roll my 401k (which now had my former IRA funds) back to Vanguard. I had to call Fidelity to do this, and they did try to get me roll the funds back to my Fidelity IRA instead of Vanguard because they didn’t want to lose this significant amount of money. Unfortunately, They didn’t mention the tax implications of rolling my 401K money into any IRA since I had done the Roth conversion in 2018, namely, that I would now have to report very large IRA balance on Form 8606 Line 6, which would make all of my $59K rollover of my basis taxable.
    Best I understand, since Roth recharacterizations are prohibited under the new TCJA tax plan, I am stuck with this huge increase in my taxes for 2018. Am I missing something? Is there a way out?

    #3205
    kaneohe
    Participant

    I’m assuming the reference to 1/12/98 really was meant to be 1/12/18? Sounds like you understand the issue. I don’t see a way out at this point. You just paid the tax early since you have the remaining basis in the TIRA which won’t be taxed later.

    This is a good example of why you need to be the quarterback since you have the global picture. Unless you have a dedicated advisor at Fidelity, the individual reps there may not have been aware of the backdoor Roth conversion you were trying to do even tho they may been aware of the Roth conversion you did.

    You might want to post your issue in the retirement forum to catch Alan S.
    for the best advice.

    • This reply was modified 2 years, 5 months ago by kaneohe.
    #3207
    cjmassey
    Participant

    Thanks for taking the time to read and reply. I will re post in the Retirement forum.

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