Backdoor Roth IRA conversion of 2 years' non-deductible traditional IRA contributions

[bozhao2000]

In 08/2015,  I opened a traditional IRA account and made a $5500 non-deductible contribution for 2015 (not qualified for IRA contribution deductions because of high income). At that time, I did not know about backdoor Roth IRA conversion.
In 01/2016, I made a $5500 non-deductible contribution to this traditional IRA account for 2016. After a couple days I converted all of my traditional IRA balance to Roth IRA.
I recently received the 2016 Form 1099-R. It lists box 1 gross distribution $10926, box 2a $10926, box 2b is checked, box 7 is coded 02, IRA/SEP/SIMPLE box is checked.
 
I am preparing my 2016 tax return. I read a few tax articles, but am still not sure how to report this backdoor Roth IRA conversion correctly. Could you please help me? I would greatly appreciate it.

[dmertz · Accepted solution]

Line 14 of the 2015 Form 8606 carries over to line 2 of your 2016 Form 8606 when you transfer in your 2015 TurboTax file.  In 2016 TurboTax, click the Continue button on the Your 1099-R Entries page, make sure that you indicate that you made nondeductible traditional contributions for prior years, then confirm that TurboTax shows your $5,500 basis from prior years.  Also make sure that you've entered your $5,500 nondeductible traditional IRA contribution for 2016 under Deductions & Credits.  TurboTax will sum these amounts on Form 8606 line 9 to be applied against your $10,926 conversion to determine the taxable amount.  The entire conversion will be nontaxable as long as you had no other traditional IRA distributions in 2016 and no other money in traditional IRAs on December 31, 2016.

With the entirety of your balance converted to Roth, you will be left with $74 of unrecoverable traditional IRA basis.  TurboTax will report this on Schedule A line 23, but it's unlikely result in any deduction since it's unlikely to exceed 2% of your AGI.

[bozhao2000]

Thanks a lot. You don't think my 1099-r box 2a taxable amount $10926 is a problem? I thought I need to ask vanguard to change box 2a amount to 0.

[dmertz]

Box 2a equal to box 1 with box 2b Taxable amount not determined is required reporting for any regular distribution from a traditional IRA, including those for a conversion to a Roth IRA, because it's impossible for any IRA custodian, including Vanguard, to determine the taxable amount of the distribution because they have no knowledge of what other traditional IRA accounts you might have.  They also have no way to know how much basis you have in nondeductible traditional IRA contributions; that's between you and the IRS.  The taxable amount is not known until you prepare Form 8606.

The code 2 in box indicates that they know the distribution is not subject to penalty because they know that the entire amount was converted to a Roth IRA (since they performed the transactions), but that's all they know (other than the gross amount).

[bozhao2000]

Thanks a lot. You saved a lot of my time because I thought about calling vanguard tomorrow about 1099-r Form. Now I don't need to any more.

[natenate]

I'm in a very similar situation.  My form 8606 from 2015 does show 5,500 in box 14, so should I enter that amount on the "Let's Find Your IRA Basis" page in the "Total Basis as of December 31, 2015" box?  In my case I made the 2015 non-deductible contribution in Jan of 2016, I didn't even have an IRA on December 31 2015 so it seems strange to enter a value there.

[dmertz]

Yes, this is where you should enter the amount from line 14 of your 2015 Form 8606.  TurboTax's instruction is just badly worded.

[AndreaG]

To report the conversion contribution for 2016, you would complete part 2 of Form 8606. https://www.irs.gov/pub/irs-pdf/f8606.pdf. However, I think there is a problem with your 1099R because they have 10,926 in box 2a as a taxable amount, and you only had nondeductible contributions to your Traditional IRA. Did you file Form 8606 each year that you made contributions to the Traditional IRA to identify these contributions as nondeductible? Also, when the conversion contribution was made to your Roth IRA, that should be reported to you on a Form 5498 in box 3, "roth IRA conversion amount"https://www.irs.gov/pub/irs-prior/f5498--2016.pdf. 

[bozhao2000]

Thanks a lot for your reply. Yes, I filed form 8606 last year identifying $5500 traditional IRA contributions as non-deductible. I have not received Form 5498 for 2016 yet. I should call Vanguard to correct my 1099 R Form and ask about Form 5498, right?

[AndreaG]

Yes. I think that your 1099R is wrong and seeing your Form 5498 is another way to make sure that everyone involved understands that this is a conversion contribution and that these are nondeductible contributions. There isnt a box 7 code that is specifically for a conversion contribution;that would be nice.

[dmertz]

The Form 1099-R is correct.

[koulekovag]

dmertz, thank you for this detailed explanation. I followed the steps but still see " you currently have penalty" due to excess contribution to Traditional IRA.  Can you help me resolve that? 

My situation is similar to this post since in April 2022 I made $7k for 2022 and $7k for 2021 Traditional IRA contribution on Vanguard which i then converted to Roth right away. (Had i known all this headache I would have never made it the prior year contribution, but it was an easy selection on the screen). Since it was close to the tax file date, we didn't receive 1099-R then so this form was not entered, nor form 8606 added. 

Yesterday - 2.5.2023 I received 1099-R Vanguard form for my 2022 contribution of  $14,000 amount. 

I was thinking that i can just send IRS form 8606 for 2021 (with Cost basis Dec 31 2021 of $7k), then list this tax basis in Turbo tax for "prior year, but then i am getting the message  " you have a penalty" for excess contribution. 

Would you say that this approach is not going to work (just submitting standalone 8606 form to IRS for 2021 and listing all $14,000 in 2022 return). Do i have to do an amendment for 2021 where i enter 1099 R  with $7k (kind of splitting the current 1099 R that has the combined 2021/2022 amount into two portions). 

Any help would be greatly appreciated. 

[dmertz]

" i am getting the message  " you have a penalty" for excess contribution."

In 2021 TurboTax or in 2022 TurboTax?

With regard to contributions, in 2022 TurboTax you only enter the $7,000 contribution you contributed for 2022.  The $7,000 contribution for 2021 was required to have been entered into 2021 TurboTax to be reported on 2021 Form 8606.  Nothing else changes with regard to your 2021 tax return.  That would result in $7,000 on line 14 of the 2021 Form 8606 carrying forward to line 2 of your 2022 Form 8606 to be combined with $7,000 on line 1 for a total of $14,000 on line 3.

The 2022 Form 1099-R is reportable on your 2022 tax return only.  TurboTax will likely use Worksheet 1-1 from IRS Pub 590-B to calculation the nontaxable portion of the Roth conversion (which will be zero assuming that you have no money in any traditional IRAs at the end of 2022).  When TurboTax uses Worksheet 1-1, TurboTax will put asterisks on lines 13 and 15 of Form 8606 to indicate that.

[koulekovag]

Thank you so much! I entered 1099R $14k  in 2022 as you advised and then $7k in prior year cost basis. then that message disappeared since i believe before it looked like i overfunded TIRA when all $14k were entered in one year. 

I think now I need to send IRS a form 8606 for 2021, to tell them that i had non deductable $7k contributed to 2021 Traditional IRA then converted to IRS. Hopefully that takes care of all. 

Thank you again for looking into this and sharing your knowledge. I see  how you are helping a lot of people here and just want to tell you that it is very much appreciated. This matter could  be very confusing to people, i stayed till 1am last night for example reading and stressing over it. Thank you again!

[dmertz]

There are two extremely simple rules that, if everyone followed, would make reporting these transactions trivially easy:

1.  IRA contributions must be reported on the tax return for the year for which the contribution is made.

2.  Roth conversions must be reported on the tax return for the year in which the distribution from the traditional account is made.