Backdoor Roth IRA contribution

[amaas]

The app is saying I have a penalty for excess contributions to a ROTH IRA but I contributed to a traditional IRA and then did a Roth conversion.  That doesn't seem correct.

[AnnetteB · Accepted solution]

Based on your question, you may not have entered the information in just the right way to report your Traditional to Roth conversion.  Take a look at the following steps used to report such a conversion within TurboTax.

A back door Roth is a term used to describe a method of funding a Roth IRA when your modified adjusted gross income (MAGI) is too high to allow you to directly contribute to a Roth IRA.  A back door Roth consists of opening a Traditional IRA and making a fully non-deductible contribution to the Traditional IRA.  The Traditional IRA can then be converted to a Roth IRA without any income limitations or restrictions on your MAGI. 

Here are the general steps you need to take to report this type of transaction in TurboTax, either the online or desktop version.  First, take care of the Traditional IRA contribution:

1. Enter “IRA contributions” in the search box located in the upper right corner of the program and initiate the search.

2. Your top search results will be a link to Jump to the section you need.

3. Check the box showing that you contributed to a Traditional IRA.  Remember, that is where you initially put the money.

4. The next screen asks you to verify that you contributed to a Traditional IRA, choose Yes.

5. The next screen asks if the contribution was a repayment of a retirement distribution, choose No.

6. Next, enter the amount that was contributed to the Traditional IRA.

7. The next screen is a little tricky unless you read it carefully.  It is asking if you “recharacterized” the contribution.  This is different from a conversion, so the answer is No.

8. On the next screen (or two), there will be a question about whether you are covered by a retirement plan at work.  Answer according to your situation. 

9. Following that, there will be a question about Excess IRA Contributions.  Answer this according to your situation.

10. Now, we’re at an important step.  The question will be, were there any nondeductible contributions to the IRA.  The answer here is Yes.

11. The next page asks for the basis of the Traditional IRA.  If you have never made nondeductible contributions in the past and kept them in the IRA, your basis is zero.  Otherwise, enter the amount shown as total basis on your most recently filed Form 8606.

That takes care of the first part of the process.  Next, you need to take care of the conversion of the Traditional IRA to the Roth IRA.  When you do this, a Form 1099-R will be issued to report the conversion.  You will simply enter the information from the Form 1099-R into TurboTax using these steps:

1. Enter “1099-R, distribution from an ira” in the search box located in the upper right corner of the program and initiate the search.

2. Your top search results will be a link to Jump to the section you need.

3. Enter the information exactly as it appears on your Form 1099-R.  Pay special attention to Box 2b, Box 7, and the IRA/SEP/SIMPLE check box.  Click Continue.

4. The next screen is a follow-up question asking whether you inherited the IRA.  Answer No.

5. The next screen asks what you did with the money.  Answer I moved the money to another retirement account.

6. Then, choose I converted all of this money to a Roth IRA account to answer the question that appears. 

7. Finally, there will be a final question to determine whether any of the money was moved back to the traditional IRA.  Answer No.

One final note, if the Traditional IRA earned any money before it was converted to the Roth IRA, those earnings will be taxable on your return. 

[pagfree]

Still need to consider conversion rule which will make a portion of the nondeductible taxable re the pro rata rule.

[Spouse1234]

We made too much money to contribute to a Roth IRA the year (2016).  My wife has $0 in a Traditional IRA. I would like to do a backdoor conversion. We have already filed our taxes for 2016. Do I need to report this in TurboTax and file an amendment. Or will TurboTax generate the Form 8606 for me?

[fanfare]

It is too late to do this for 2016.

[Spouse1234]

Why?

[sccphotog]

Thank You TurboTax AnnetteB.

1.  Does the second part of the process get recorded on the 2016 or 2017 tax return if I made the nondeductible TIRA contribution in 2017 for the 2016 tax year and converted it to a Roth the next day?

2.  Is the 1099-R issued by the trustee immediately, at the time of the distribution?

3. If had had zero basis before, will the status of my TIRAs be altered in any way after the backdoor conversion of the nondeductible amount plus interest is completed?

4.   How does the process differ if I'm eligible to make a portion of the TIRA contribution deductible (i.e. $1000) and I want to leave that portion in the TIRA while also doing a $4500 backdoor Roth contribution (nondeductible TIRA contribution and conversion to a Roth)?

[Taxpaul-EA]

Thank you, AnnetteB, EA.  I will be in this manner for 2017.  You are truly a tax expert.

[Taxpaul-EA]

1099-R are required to issued by Feb. 15.  The distribution amt reported is Box 1.

[pewee9196]

Does anyone have the steps for 2017.  These do not work this year.  It is not asking me if it was nondeductible.

[Spouse1234]

There is something wrong with the backdoor contribution this year. For my wife's I made two $5500 backdoor contributions in 2017, one for 2016, one for 2017. So $11,000 in income. It's trying to say I owe a lot in taxes for that, whereas in both cases, it was a nondeductible IRA contribution followed by a Roth conversion the next day. When I delete this, the amount I owe changes by several thousand dollars. So I'm doing something wrong here in TurboTax.

[zachwass20-00]

@Spouse1234 that sounds right. When you do the conversion to Roth, you have to pay the taxes this year.

[Spouse1234]

@zachwass20.00 , not so sure. Before reporting the IRA, I got taxes back. When I listed the IRA, I owed. All I did was contribute to a nondeductible IRA, and convert it to a Roth the next day, so there shouldn't be any additional taxes. Anyhows, I was able to somehow fix it for my 2017 contribution, since the contribution was in the tax year. But for 2016, which I contributed to in early 2017, it wasn't working, unless I said the basis of it on Dec 31, 2016 was $5,500 (which it wasn't, since I didn't contribute until early 2017). But that was the only way to avoid paying taxes on this, which I shouldn't pay, since tha taxes were paid as part of my income tax.

[DCinvestor]

@Spouse1234 make sure you added your contributions under the Deductions / Credits.  This did not appear to autoimport from any of the tax forms for me.  If you don't do this, you may be showing taxes on the contributed / converted amount.

[Spouse1234]

@DCinvestor , Yes, for 2017, I found that when I added that, it took it into account and my taxes owed went down. I'm just not sure how to handle it for the 2016 contribution, for which I did the Traditional IRA nondeductible contribution and Roth conversion in 2017 (within a day).