Form 8606 and Roth Conversions
Form 8606 and How It Relates To Roth Conversions
What is it and why is it Important
One of the most beneficial financial planning strategies is using Backdoor Roth Conversions. This strategy allows anyone, regardless of income level, to get the IRS maximum IRA contribution limit into a Roth IRA account where it can grow tax-free. As part of this strategy, you must remember to file Form 8606 with your tax return. A backdoor Roth conversion works when a non-deductible IRA contribution is made to a Traditional IRA account (In 2022, $6,000 max per person, $7,000 if you are over 50). Before the funds are invested and have time to grow, you roll the money into a Roth IRA, where the money can grow and be withdrawn tax-free. No formal documentation needs to be filled out when you do a backdoor Roth conversion, but you must remember to file Form 8606 with your tax return.
Form 8606 is titled “Nondeductible IRAs.” Its purpose is to let the IRS know and keep track of your nondeductible IRA contributions. This is because Traditional IRA accounts usually only hold pre-tax “deductible” contributions in them. Once you make an after-tax “nondeductible” contribution to an IRA, there is the possibility that these funds are in an IRA account with the pre-tax amounts and need to be tracked separately. This could also mean that the IRA is subject to the pro-rata rule. This rule comes into play when there have already been deductible contributions to an IRA account. For more information on the pro-rata rule, please see our article here. It is essential to coordinate with your financial advisor and CPA when trying to perform backdoor Roth conversions to ensure that Form 8606 is correctly filled out and filed with https://rgwealth.com/website/insights/how-to-avoid-the-pro-rata-rule-with-backdoor-and-mega-roth-conversionsyour tax return.
Need Some Help?
If you’d like some help from a CPA or CERTIFIED FINANCIAL PLANNER (CFP®) advisor regarding this strategy and how it applies to you, the Rhame & Gorrell Wealth Management team is here to help.
Our experienced Wealth Managers can help you review your financial and tax situation inside the 401(k) and come up with a custom tax optimization strategy going forward – all at no cost to you!
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