Backdoor Roth Conversion: Calculating Basis

[oddrationale]

Hello!

I have a question about entering the details of my Backdoor Roth conversion correctly. It appears that the software is still treating the distribution from my 1099-R as taxable income.

Here is the situation:

• Background: I am single, under 50, have no other traditional/SEP/SIMPLE IRAs, and made no IRA rollovers, recharacterizations or other distributions.
• Tax Year 2023 
  • This is the first year I performed a backdoor Roth conversion.
  • In March of 2024, I opened a Traditional IRA, contributed the maximum ($6,500). The same day, I converted the full amount from Traditional IRA to my Roth IRA for tax year 2023.
  • In my 2023 tax filings, I filed Form 8606 through a tax professional.
    • I have $6,500 in lines 1, 3, 5, 8, 9, 11, 16, and 17. 
    • I have $0 as the total basis in line 14.
• Tax Year 2024
  • This year I am filing my own taxes with the help of TurboTax.
  • I received a 1099-R for the amount $6,500 in boxes 1 and 2a. Both boxes in 2b are checked.
  • In TurboTax, under Personal -> Personal Income -> Retirement Plans and Social Security -> IRA, 401(k), Pension Plan Withdrawals (1099-R), I've imported my 1099-R form.
  • On the first screen, Great news, we got your 1099-R info! I selected Form 1099-R as the type.
  • I get the screen that says, Good News: You Don't Owe Extra Tax on This Money, but this does not appear to be true as shown later.
  • On the screen, What Did You Do With The Money From INSTITUTION?, I selected "I moved the money to another retirement account" and "I did a combination of rolling over, converting, or cashing out the money". I entered $6,500 for "Amount converted to a Roth IRA account".
  • After a few more follow-up questions, I get the screen Any Nondeductible Contributions to Your IRA? and I select "Yes, I made and tracked nondeductible contributions to my IRA" since I have a Form 8606 from 2023.
  • On the next screen I enter 0 as the Total Basis (to match the Form 8606 from 2023).
  • On the next screen, I enter 0 as the Value as of 12/31/2024, and 0 for outstanding rollovers and recharacterizations.
  • When I review the final 1040 form, it shows line 4a as $6,500 and taxable 4b as $6,500. I expected this to be zero.

Questions:

• Was Form 8606 even filled out correctly for 2023? Reviewing it now, I'm thinking line 4 should have been $6,500 and not have been blank. This should also result in Line 14 being $6,500 as the total basis.
  • Do I need to amend this form? If so, I am correct that these changes would not result in any change in tax liability for 2023? 

Thank you for your help!

[AnnetteB6 · Accepted solution]

Form 8606 from your 2023 return is not correct.  The error comes from stating the the amount in the Traditional IRA was converted to a Roth IRA for tax year 2023.  Conversions are tied to the year when they occur, not for a particular tax year like it was a contribution.  You actually did the conversion in 2024, which is why you got the Form 1099-R for 2024.

When entering the information in your return, if you put in that there is a $6500 basis in the Traditional IRA, instead of zero to match the Form 8606, then the conversion should not be taxable on your 2024 return.  

Instead of amending your return to correct the basis, follow the directions in the TurboTax help article below under the section If your conversion contains contributions made in 2024 for 2023 to file a corrected Form 8606 on its own.  Attach an explanation to the form stating that the conversion did not take place until 2024 and you are correcting the basis in the Traditional IRA.  

How do I enter a backdoor Roth IRA conversion?
 

[barry13]

Wow.  This is the exact problem that I had this year too. 

I also made a mistake on my 2023 Form 8086.  Line 4 was zero when it should have been $8000.  I forgot to enter my contribution for 2023 that was made between 1/1/2024 and 4/15/2024.    

So I adjusted my basis for my traditional IRA in my 2024 return and added an explanation that this was due to an error in 2023 Form 8086.  In the Turbotax Home & Business edition that I'm using, when you see the prompt asking you about the basis for your traditional IRA, there is an "Easy Guide to determine your basis" -- click on this and then make the adjustment.  Once TT sees the adjustment, it will prompt you to "prepare and explanation" for the adjustment.

Once I entered my new basis of $8000 (instead of zero), Line 4b went to zero and my Backdoor Roth conversion was no longer considered "taxable".   Finally, done!!!

Took a long time to find this thread and it was spot on.  Thank you!