Honestly, the backdoor Roth process is unnecessarily complicated. I've been doing them for years and here's my simplified approach: For each person: 1. Contribute to traditional IRA 2. Convert to Roth 3. File Form 8606 for each person who did a conversion The key thing that messes people up is when the value changes between contribution and conversion. If you convert quickly there's minimal growth (or loss). Make sure you track your "basis" (non-deductible contributions) correctly or you could end up paying tax twice on the same money!

This is exactly the kind of situation where getting professional help pays off, even if it costs a few hundred dollars. Form 8606 mistakes can be really expensive down the road. One thing I don't see mentioned yet - make sure you keep detailed records of all your IRA transactions with dates and amounts. The IRS can ask for documentation going back several years, especially with basis tracking on Form 8606. Also, for future years, consider timing your conversions closer to your contributions to minimize any growth between the two events. Even small amounts of growth can complicate the paperwork significantly. If you're doing regular backdoor Roths, it might be worth setting up a system or spreadsheet to track everything year over year. The basis calculations get more complex as time goes on, especially if you have multiple IRAs or miss filing a Form 8606 in any given year.

Great question about timing conversions during sabbaticals! I actually did something similar when I took 6 months off between jobs. There are no minimum distribution requirements for Roth conversions until you reach age 73 (for traditional accounts), so you have complete control over how much and when to convert. The only real limitation is the annual contribution limits, but those don't apply to conversions - only to new contributions. You can convert as much or as little as you want in any given year, which makes sabbaticals perfect for larger conversions since your income will be lower. One thing to keep in mind: make sure you have enough cash set aside to pay the taxes on the conversion since you won't have regular income during your sabbatical. I learned this lesson when I did a $60k conversion during my break and had to scramble to cover the $13k tax bill! The timing flexibility is actually one of the best parts of Roth conversion strategies - you can really optimize based on your specific life circumstances.

I've been following this thread closely since I'm in a similar situation, and wanted to add one important consideration that hasn't been mentioned yet - the 5-year rule for Roth conversions. Each conversion you do starts its own 5-year clock before you can withdraw the converted principal penalty-free (if you're under 59.5). So if you're planning multiple smaller conversions over several years like many people suggested, keep in mind that each conversion amount has its own 5-year waiting period. This doesn't affect the tax treatment that everyone's been discussing - you'll still pay ordinary income tax rates on the conversion regardless. But it's something to factor into your timing strategy, especially if you think you might need access to some of those funds before traditional retirement age. Also, regarding the earlier comment about using a 401k loan to pay conversion taxes - I agree that's generally not recommended. A better approach might be to do a partial conversion of an amount where you can comfortably pay the taxes from other sources, even if that means converting less in the first year.

dont overlook the local zoning rules!! my neighbor got a $5000 fine because our neighborhood wasnt zoned for accessory dwelling rentals. had to kick out tenants and everything. check with ur city planning dept before u do anything!!!

Great thread everyone! As someone who's been through this exact situation, I want to emphasize a few key points: 1. **Federal taxes**: No business license needed for rental income - you'll use Schedule E on your personal return. The IRS treats most rental activity as passive investment income. 2. **Local requirements**: This is where it gets tricky. Even if you don't need anything for taxes, you may still need: - Rental permits/licenses from your city/county - Zoning compliance (as Emma mentioned - this is HUGE!) - Safety inspections for rental units - Business registration if your area requires it 3. **Insurance**: Definitely get landlord insurance before your first tenant moves in. Regular homeowners won't cover rental activities. 4. **Record keeping**: Start tracking everything NOW - receipts, mileage for property visits, renovation costs, etc. Good records will save you headaches at tax time. Since you mentioned the unit is currently vacant while renovating, this is actually perfect timing to get all your ducks in a row before you start actively renting again. I'd recommend calling your city's planning department first to confirm zoning, then checking on any local rental requirements. The tax stuff is actually the easier part!

They might also ask about prior year returns if there's any discrepancy or if you're dealing with multiple tax years. Sometimes they'll verify your employer name from your W-2 or ask about dependents if you claimed any. Pro tip: have a pen ready to write down reference numbers and the rep's name/ID number - you'll need those if you have to call back later. Good luck getting through! 📞

Been through this recently and can confirm what others are saying. They'll definitely ask for your SSN, full name, date of birth, and address from your most recent return. The AGI (Adjusted Gross Income) from your last filing is a big one - they almost always ask for that. If you're married, they might ask about your spouse's info too. Also bring any notices or letters you've received from the IRS if that's what you're calling about. The whole verification usually takes 3-5 minutes once you actually get through to someone. Just stay calm and speak clearly - the reps are generally pretty patient if you need a second to find something in your paperwork.

Brooklyn, congratulations on taking the initiative to understand your tax transcript! 🎉 Code 806 is absolutely something to be excited about - it represents all the federal income tax that was withheld from your paychecks throughout the year, essentially acting as prepayments toward your tax liability. Since you mentioned being meticulous about your finances, here's a quick way to verify this is correct: take all your W-2 forms and add up the amounts in Box 2 (Federal income tax withheld). If you have any 1099 forms showing federal withholding, add those too. The total should match your Code 806 amount exactly. Regarding your investment income question - yes! Any backup withholding from your investment accounts (typically 24% if there were TIN issues) would also be included in this Code 806 total. You'd see this reflected on your 1099-DIV or 1099-INT forms in the federal tax withheld box. The beautiful thing about Code 806 is that it's a dollar-for-dollar credit against your tax liability. So if you owe $15,000 in taxes but have $12,000 in Code 806 withholdings, you'd only owe the IRS $3,000 more. It's basically the IRS saying "Hey, you already paid us this much throughout the year!" Keep up that attention to detail - understanding these codes will serve you well in managing your tax situation year-round! 📊

Brooklyn, I'm so happy you asked this question! As someone who was completely mystified by tax transcript codes when I first started looking at them, I totally understand that mix of excitement and confusion. 😊 Code 806 is definitely good news - it represents your federal income tax withholding credits, which is essentially all the tax money that was already taken out of your paychecks throughout the year. Think of it as the IRS acknowledging "Hey, you already paid us this much!" Since you mentioned being meticulous about finances, here's what I do to verify everything matches up: I grab all my W-2 forms and add up Box 2 (Federal income tax withheld) from each one. If you have any 1099 forms showing federal withholding (like backup withholding on investments), those get added too. That total should match your Code 806 amount perfectly. For your investment income question - absolutely! Any backup withholding from dividends, interest, or other investment income would be included in this Code 806 total. You'd see this on your 1099 forms in the federal tax withheld section. What I love about understanding Code 806 is that it shows you how much you've already contributed toward your tax bill throughout the year. It's like having a running tab that's been paid down month by month! Keep asking these great questions - understanding your tax situation is such valuable financial knowledge. 💪