Back door Roth Conversion and Form 8606 IRA basis reduced by Inh IRA RMD

[Luke23]

For tax year 2024, I made a Roth IRA contribution of $8000 on 04/30/24. When doing my 2024 Tax Return, I discovered that my income exceeded the allowable limit, so I did a recharacterization of the Roth contribution to a non-deductible Traditional IRA contribution and then did a backdoor Roth conversion. The recharacterization occurred on 4/03/25, and the amount transferred to the Trad IRA was $8682.83. The backdoor Conversion occurred on 4/14/2025, and the amount transferred to the Roth dropped to $7485.13 due to investment loss, I also received a $2305.00 RMD from a separate Inherited IRA on 12/12/2024.

While doing my 2025 Tax Return, I discovered on my 2024 Form 8606 that the traditional IRA basis was reduced by the $2305 Inh IRA taxable RMD and showed as $5695 ($8000 - $2305 = $5695). Also, on my 2024 Form 1040, the $2305 taxable RMD was listed on line 4a IRA Distributions, but the line 4b Taxable Amount was blank. On the 2025 Form 8606, I corrected the Traditional IRA basis on line 2 by overriding the $5695 carryover amount with $8000 in the TurboTax prompt to enter the 12/31/24 Trad IRA basis. Also on my 2025 IRA Information Worksheet, the $7485.00 Roth Conversion on 4/14/25 is listed as a non-taxable conversion for both 2024 and 2025, so my Conversion basis carryover is overstated by $7485. (Not sure if this matters)

1) Do I need to amend 2024 return to correctly report the inherited IRA RMD as taxable income and prevent it from reducing my IRA basis?

1. Why would TurboTax apply an inherited IRA RMD against my traditional IRA basis on Form 8606?

3) Why is $7485 Roth Conversion listed on the Roth Info Wkst for both 2024 and 2025?

Does it matter if the conversion carryover amount is overstated?

Thank you for the assistance

[ReneV4]

Yes. You should amend your 2024 return using Form 1040-X to correctly report the inherited IRA RMD and restore your Traditional IRA basis.

Since your 2024 Form 1040 Line 4b is blank, it means you did not pay taxes on that $2,305 RMD. Additionally, your Form 8606 used up $2,305 of your $8,000 nondeductible basis to cover that distribution. 

This means that you paid for your RMD using your own post-tax basis. This is a mistake because basis does not transfer between inherited an IRA and your own IRA.

To avoid double taxation, once because you lost the basis for your future Roth conversion and again when the IRS realizes the RMD should have been taxable income, you should amend your 2024 return so that Line 4b shows the $2,305 as taxable. Also, you should correct your Form 8606 so that Line 2 (total basis) remains the full $8,000.

This error likely occurred because the inherited IRA was not correctly identified. If the Form 1099-R for the inherited RMD was not flagged correctly as inherited, or death distribution using Code 4 in Box 7 and if the "I inherited this IRA" box was not checked, TurboTax likely assumed it was a standard distribution from your own IRA. It then looked at your $8,000 nondeductible contribution and applied the pro-rata rule, shielding the RMD with your basis.

The activity appears both in 2024 and 2025 because in 2024, you made the contribution, establishing your basis of $8,000, but you performed the conversion in the 2025 calendar year. Form 8606 tracks that 2024 basis and carries it forward to ensure you don't pay tax on that $7,485 when you file your 2025 return.

Yes. It does matter if the conversion carryover is overstated. If your 2025 Form 8606 shows a conversion of $7,485 and uses $7,485 of basis, you have $515 of leftover basis. The $515 remains in your Traditional IRA as basis for future years. If you report $0 basis, you lose the ability to withdraw that $515 tax-free in the future. If, on the other hand, you tell them you have $8,000 left, you are claiming a basis amount you have already partially used.

[Luke23 · Accepted solution]

Thanks for the reply! I did mark the question “I inherited the IRA” as "no" as I misunderstood the question & thought it meant did I inherit the IRA from the brokerage – No, it came from my deceased Mother. When I switched it to Yes, the $2305 RMD showed up as taxable on line 4b and Form 8606 corrected to include the full $8000 basis on lines 1, 3, and 14. I am in the process of filing an amended 2024 1040 X Federal & state return to pay the additional tax for the RMD 😐

The 2025 IRA Info Wkst still lists the $7485 Conversion (for 2024 done on 4/14/25) as a nontaxable conversion amount for both 2024 & 2025 (?) Maybe it will correct itself?

I have another question about 8606 Traditional IRA basis: For tax year 2021 I performed a backdoor Roth conversion in calendar year 2022 and ended up with a $931 remaining basis on 2022 Form 8606. I forgot to report this on my 2023 Return, but on the 2024 Amended Return I added the $931 in at the prompt to enter the Traditional Basis as of 12/31/23. I did see that if I missed an 8606, I can print out a 2023 Form 8606 to show the carryforward basis and mail it to the IRS with an explanation and hopefully no charge?

Thanks for your help!

[RobertB4444]

All of those seem like the correct way to handle things.  Carry on!