dogmatagram
Level 1

Transferred IRA Basis Is Different Than Basis Entered, After Backdoor Roth IRA

First, some context.

 

I have been making backdoor Roth IRA contributions (converting nondeductible/after-tax traditional IRA contributions) since 2017.

 

Every year, including during tax years 2020 and 2021, I have made one single maximum-amount-allowed traditional IRA contribution, and then converted all funds in the traditional IRA to Roth (again, backdoor Roth), leaving $0 in the traditional IRA after each conversion.

 

For tax year 2019, I contributed the maximum allowed amount of $6,000 to my traditional IRA, giving it a balance of $6,000 after that contribution. The account went down in value before I was able to convert it, and my 2019 1099-R shows a gross distribution from the traditional IRA of $5,972.10 due to the conversion. The 2019 Form 8606 I filed, as generated by TurboTax, had the following information:

 

  • Box 1 - nondeductible contributions: $6,000
  • Box 2 - total basis in traditional IRAs: $0
  • Box 3 - box 1 plus box 2: $6,000
  • Box 5 - $6,000
  • Box 13 - $5,972* (with an asterisk), "this is the nontaxable portion of all your distributions", which looks right since that's what was distributed from the traditional IRA, $28 less than what I contributed
  • Box 14 - box 3 minus box 13: $28 - "This is your total basis in traditional IRAs for 2019 and earlier years"

Now, my question.

 

While trying to enter this information into TurboTax for my 2020 taxes, TurboTax showed me the following prompt:

 

Let's Find Your IRA Basis

 

Remember, most people with traditional IRAs do not make or track nondeductible contributions that give a basis other than zero.

 

If [name] did make any nondeductible contributions, look at your most recent Form 8606. Find the box called total basis and enter the number from that box below. If you never filed a Form 8606, just enter 0 (zero.) (Learn More)

[Name]'s Total Basis as of December 31, 2019 [input box]

 

If I enter $28 in that box, which was Box 14 from my 2019 Form 8606 as explained above, TurboTax shows the following:

 

"The IRA basis we transferred from 2019 is different from the basis entered. Include a brief explanation of why your IRA basis changed with your return."

 

My main question is this:

 

Why is TurboTax saying the basis it transferred from 2019 is different than what I entered ($28)? TurboTax is seemingly expecting me to enter $0 in that box instead of $28 (though it won't show explicitly show me the value that it transferred from 2019), even though it seemingly previously calculated that that number should be $28 for 2019.

 

In the end, this seemingly boils down to the distributions being lower than the contribution was, even though I converted the entire account.

 

A few other questions:

 

  • In that box, should I type the $0 it seemingly expects, or the $28 with an explanation, and if the latter, what would that explanation be? ("Value from Box 14 on my 2019 Form 8606?")
  • Based on this information, was the basis on my 2019 Form 8606 actually calculated correctly by TurboTax? I ask because TurboTax's "learn more" link for IRA basis says the following: "You will only have a basis in an IRA if some part of these contributions was not deductible. If all contributions were deducted in full, the basis is zero." All of my contributions were exclusively nondeductible contributions.
macuser_22
Level 15

Retirement tax questions

Zero.      While you could not use all the basis because it decreased in value, the dollars that the basis represents are gone if the year end value was zero.      You cannot carry forward a basis that does not exist because of market loss.

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**

View solution in original post

dogmatagram
Level 1

Retirement tax questions

So by this logic, it would seem the basis on my 2019 Form 8606 was calculated correctly, but also that rote following TurboTax's instructions to "Find the box called total basis and enter the number from that box" is incorrect in my case?

macuser_22
Level 15

Retirement tax questions

I do not think the IRS has ever given guidance on this.   Some people believe any leftover basis can be carried forward if new contribution are made to the IRA.     My own believe is the basis disappears with the loss.

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**
geraniums9999
New Member

Retirement tax questions

I plan to call Turbo Tax  and maybe the IRS today as I am was concerned before and am very concerned. For regular IRAS I see that Turbo Tax carries forward a reduced basis  figure from last year's 8606 but  the IRS instructions are different from what Turbo Tax does. The IRS 8606 instruction book refers each year to the last 8606 you filed for Line 2 I think it is. So I may have several years

of incorrect reporting. I even called the IRS last year and they said the basis does not change.  If there is anyone else that can speak to the IRS instructions which are online and what Turbo Tax does,please let me know soon.

macuser_22
Level 15

Retirement tax questions


@geraniums9999 wrote:

I plan to call Turbo Tax  and maybe the IRS today as I am was concerned before and am very concerned. For regular IRAS I see that Turbo Tax carries forward a reduced basis  figure from last year's 8606 but  the IRS instructions are different from what Turbo Tax does. The IRS 8606 instruction book refers each year to the last 8606 you filed for Line 2 I think it is. So I may have several years

of incorrect reporting. I even called the IRS last year and they said the basis does not change.  If there is anyone else that can speak to the IRS instructions which are online and what Turbo Tax does,please let me know soon.


The transferred basis comes from the prior years "IRA Information Worksheet" line 3 (year end basis)  which would come from that years 8606 form line 14 if a 8606 was required for that year.  If no change in basis for a year then the carried forward basis form the prior year line 12 and line 3 will be the same.

 

An incorrect 8606 will make all following 8606 forms also incorrect.   Unless there is a change in basis the last filed 8606 remains in effect.

 

What do you think that TurboTax does different from  the 8606 instructions?

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**