1099-R reports tax on already after tax distribution

[coolbean]

I contributed $6000 to traditional IRA in March 2021 and another $6000 in Aug 2021, thinking that the first $6000 counts toward the 2020 limit. Today, I realized I forgot to report my 1099-R on my 2021 tax. While I was amending it, I found that 1099-R says my backdoor IRA distribution has $12000 taxable even though I contributed to traditional IRA with after-tax money. When I entered 1099-R into turbotax, it says "Good News: You don't owe extra tax on this money", but after I clicked "continue", the federal tax due went from $0 to $2100. It seems to think I have over contributed. Where did I make a mistake?

[DanaB27]

Please verify, that the contribution made on March 2021 was for 2020 (check your IRA statements from 2020 and 2021). If this was a nondeductible traditional IRA contribution for 2020 then you should have reported it on your 2020 return. Then you should have a 2020 Form 8606 with a $6,000 basis on line 14 and this amount gets entered on your 2021 tax return (steps 7 and 8 during the IRA contribution interview or steps 6 and 7 in the retirement section).

Please review the instructions below.

To enter the nondeductible contribution to the traditional IRA:

1. Login to your TurboTax Account 
2. Click on "Search" on the top right and type “IRA contributions” 
3. Click on “Jump to IRA contributions"
4. Select “traditional IRA”
5. Answer “No” to “Is This a Repayment of a Retirement Distribution?”
6. Enter the amount you contributed for 2021 
7. Answer “No” to the recharacterized question on the “Did You Change Your Mind?” screen
8. Answer the next questions until you get to “Any Nondeductible Contributions to Your IRA?” and select “Yes” if you had a nondeductible contribution before this tax year.
9. Enter your basis in the Traditional IRA from your 2020 Form 8606 line 14 (if you had a basis in the prior year)
10. On the “Choose Not to Deduct IRA Contributions” screen choose “Yes, make part of my IRA contribution nondeductible” and enter the amount (if you have a retirement plan at work and are over the income limit it will be nondeductible automatically and you only get a warning and then a screen saying $0 is deductible).

To enter the 1099-R conversion: 

1. Click on "Search" on the top right and type “1099-R” 
2. Click on “Jump to 1099-R”
3. Click "Continue" and enter the information from your 1099-R
4. Answer questions until you get to “Tell us if you moved the money through a rollover or conversion” and choose “I converted some or all of it to a Roth IRA”
5. On the "Review your 1099-R info" screen click "Continue"
6. Answer "yes" to "Any nondeductible Contributions to your IRA?" if you had any nondeductible contributions in prior years.
7. Answer the questions about the basis from line 14 of your 2020 Form 8606 and the value of all traditional, SEP, and SIMPLE IRAs

[dmertz]

The Form 1099-R also has box 2b Taxable amount not determined marked to indicate that the IRA custodian has no way to know if you've made any nondeductible traditional IRA contributions, only you know that.  You were required to report any nondeductible traditional IRA contributions on Forms 8606 for the years for which such contributions were made, with line 14 of each of those forms carrying forward to line 2 of the subsequent Form 8606.  If you had reported everything correctly, the amount on line 3 of your 2022 Form 8606 will show $12,000.

TurboTax saying "Good News: You don't owe extra tax on this money" is just acknowledging the that code 2 in box 7 of the Form 1099-R means that the conversion is not subject to an early-distribution penalty, which is an excise tax.

[coolbean]

Hi,

Thanks for your response! I confirmed the contribution on March 2021 was indeed for 2020. You mentioned "then you should have reported it on your 2020 return", but when I searched how to report it, I found "

Form 5498 is for informational purposes only. You are not required to file it with your tax return.

This form is not posted until May because you can contribute to an IRA for the previous year through mid-April. This means you will have finished your taxes before you receive this form." my form 5498 was issued on 05/2021, so I don't understand how I could have reported on my 2020 return.

[dmertz]

Nondeductible traditional IRA contributions made for a particular year are required by the IRS to be reported on Form 8606 for that particular year.

[Tyson509]

What should I do if I've been making non-deductible contributions to a Traditional IRA for years and didn't fill out the 8606? 

[AmyC]

Go back and fill one out for each year and mail each one in  separately. You can go back and use software or just fill it out by hand. You need the form and instructions. You will need to print the correct year for each one. You can go as far back as necessary. It is better to do it now rather than when the IRS asks later.

See:

About Form 8606, Nondeductible IRAs

For prior years, search the IRS here

@Tyson509 

[Tyson509]

Thanks Amy C. A TurboTax "tax expert" I was talking to through live chat named Marilyn S told me I do NOT need to submit the 8606 forms for previous years, which sounded wrong and you confirmed it was wrong, and when I told her that another TurboTax export told me I did need to submit forms and asked Marilyn S how to do that, she stopped answering my questions until our session timed out! Can you tell me how to submit the 8606 for previous years using the software? 

[VolvoGirl]

You don't use the software.  You get the blank IRS forms and fill them out by hand and mail them in.  Search for 8606

https://www.irs.gov/prior-year-forms-and-instructions 

[DawnC]

You can't submit them using the software.   You could print the form from the software, but it would be easier and more cost-effective just to print the forms from the IRS website.  Furthermore, you have to mail them in.   @Tyson509

Form 8606	Nondeductible IRAs	2023
Form 8606	Nondeductible IRAs	2022
Form 8606	Nondeductible IRAs	2021
Form 8606	Nondeductible IRAs	2020
Form 8606	Nondeductible IRAs	2019
Form 8606	Nondeductible IRAs	2018

For additional years, use this link.

[taejune1205]

Do you submit the Form 8606 by itself? Do you need any other attachments along with it? 

[DanaB27]

If you missed to file Form 8606 in prior years it is probably to attach a statement with the Form 8606, since technically you can be fined $50 for failing to file the form on time, but the penalty can be waived if you have reasonable cause. Please see Relief for Reasonable Cause for additional information.

Sign Form 8606 and send it to the IRS at the same time and place you would otherwise file Form 1040, 1040-SR, or 1040-NR. Be sure to include your address on page 1 of the form and your signature and the date on page 2 of the form (IRS).

@taejune1205 

[taejune1205]

If you contributed 2023 traditional ira in March 2024, would sending the 8606 form now consider as late? Is $50 only fee you would be charged? I see on internet that the post tax contribution could be also taxed based income tax. Is this correct?

When you mention, “a statement” does it mean explaining why it was late? 

To summarize, I would have to send 8606 Form, 1040 Form and a statement explaining the reason of lateness. Is this correct understanding?

Thank you

[DanaB27]

Yes, if made a nondeductible contribution traditional IRA for 2023 and you filed your 2023 return without Form 8606 then it would be considered late. 

Since this is about your 2023 Form 8606, you could just amend your 2023 tax return and let TurboTax create Form 8606 and explain the change on your Form 1040-X. 

Please how How do I amend my federal tax return for a prior year?

No, the distribution allocated to the after-tax contribution will be tax-free when withdrawn.

@taejune1205

[dmertz]

If the IRS deems the submission to be subject to the $50 late-filing fee, they will bill for it.