Backdoor Roth Conversion - Erroneous Tax Liability

[OaklandWoodTax]

My wife and I each made deductible contributions to Traditional IRAs in late 2019, then again in early 2020.

We entered the non-deductible contributions via TurboTax online as part of our 2019 filing.

Similarly, we've entered the non-deductible 2020 contributions as part of our 2020 filing.

When following the instructions I've found online and in this Online Community, we're seeing $859 unfavorable impact to our federal tax liability after completing the 1099-R entries to record the distributions and conversions.  TurboTax does recognize the cost basis as of Dec 31 2019 resulting from our 2019 non-deductible contributions.  Not sure what's causing the unfavorable tax impact!

[DanaB27]

If the traditional IRA had gained in value then part of the conversion amount would be taxable because only the non-deductible part (basis) will be non-taxable.

Also, please review all the steps to enter a backdoor correctly: 

To enter the nondeductible contribution to the traditional IRA:

1. Login to your TurboTax Account 
2. Click "Federal" from the left side of your screen
3. Click “Deductions &Credits” on the top
4. Scroll down to “Retirement and Investments” and click “Show more”
5. Scroll down to “Traditional and Roth IRA Contributions” and click “Start”
6. Select “traditional IRA”
7. Answer “No” to “Is This a Repayment of a Retirement Distribution?”
8. Enter the amount you contributed
9. Answer “No” to the recharacterized question on the “Did You Change Your Mind?” screen
10. Answer the next questions until you get to “Any Nondeductible Contributions to Your IRA?” and select “Yes”
11. If you had a basis in the Traditional IRA before then enter the amount.
12. On the “Choose Not to Deduct IRA Contributions” screen choose “Yes, make part of my IRA contribution nondeductible” and enter the amount.

To enter the 1099-R distribution/conversion: 

1. Click "Federal" from the left side of your screen
2. Scroll down to “Retirement Plans and Social Security” and click “Show more”
3. Scroll down and click "Start" next to "IRA, 401(k), Pension Plan Withdrawals (1099-R)" 
4. Answer "Yes" to the question "Did You Have Any of These Types of Income?"
5. Click "I'll Type it Myself"
6. Choose "Form 1099-R, Withdrawal of Money from 401(k) Retirement Plans, Pensions, IRAs, etc."
7. Click "Continue" and enter the information from your 1099-R
8. 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”
9. On the "Your 1099-R Entries" screen click "continue"
10. Answer "yes" to "Any nondeductible Contributions to your IRA?" if you had any nondeductible contributions in prior years.
11. Answer the questions about the basis