Backdoor Roth IRA conversion with non-zero balance in the IRA account

[sakethuk2]

I did a traditional IRA conversion to Roth IRA in 2018. However, my Traditional IRA had a non-zero balance left after I did the conversion. Now TurboTax is showing that I have a taxable distribution on my traditional IRA in spite of reporting a conversion to Roth IRA.

History of transactions is as follows:

2017: $5500 (post tax, non-deductible) contributed to traditional IRA

2017: IRA balance grew to $5546.

2017: Converted $5500 to Roth IRA from traditional IRA

2018: Reported the above on 2017 Tax with Turbotax. No tax liability shown by turbo tax

2018: Contributed $5500 to traditional IRA

2018: Converted $5500 to Roth IRA from traditional IRA

2018: Year end balance in traditional IRA was $43

2019: Turbotax showing $46 as IRA distributions - nontaxable and $5454 as IRA distributions - taxable.

Not sure how to correct this.

Please help.

Regards,

Saket

Update: I figured it out. After I completed the earnings section, the turbo tax reported it as above in "Earnings Summary". However, once I addressed the same section under deductions, even when I didn't change any information, the summary corrected itself. I think it's a quirk with the desktop tool.

Thanks for your replies below!

[macuser_22]

Sounds like yiu failed to enter the 2018 IRA contribution in the IRA contributions section and mark is as a non-deductible contribution.

This so-called “back-door Roth” method ONLY works if you have NO OTHER Traditional IRA accounts.  If you do, then the non-deductible part must be spread over ALL accounts and cannot be withdrawn by itself.  Only if you started with NO Traditional, SEP & SIMPLE IRA and ended up with a zero amount in ALL Traditional, SEP & SIMPLE IRA accounts will this Roth conversion not be taxable.

First you must enter your Traditional IRA contributions (if there were 2018 contributions).

IRA contribution
Federal Taxes,
Deductions & Credits,
I’ll choose what I work on (if that screen comes up),,
Retirement & Investments,
Traditional & Roth IRA contribution.

Be SURE to answer the follow up that the are choosing to make this contribution NON-DEDUCTIBLE - if that screen comes up. (DO NOT say that you moved (recharacterized) the money to a Roth) – this is a conversion, not a recharactorazition.

Then enter the 1099-R that shows the distribution.

Federal Taxes,
Wages & Income
I’ll choose what I work on (if that screen comes up),,
Retirement Plans & Social Security,
IRA, 401(k), Pension Plan Withdrawals (1099-R).

Answer the follow-up questions answer the question that you moved the money to another retirement. The screen will open up with choices of where it was moved. Choose you converted it to Roth IRA.

When asked if you have made any non-deductible contributions say " "yes" if you did then enter the non-deductible contributions made for tax years before 2018.     (Usually zero unless you also made a 2017 or earlier non-deductible contribution. If you do have prior year basis then enter the last filed 8606 line 14 value.).

Enter the 2018 year end value of your Traditional IRA a "0" (zero) - if it is in fact zero - this tax free Roth conversion will not work if it is not zero.

[If you had any other Traditional IRA at the end of 2018, then the nondeductible "basis" must be pro-rated over the current distribution and the total IRA value and only a portion of the Roth conversion will be non taxable and part will be taxable, with the remaining non-deductible basis carrying forward for future distributions. You can never only withdrew the nondeductible basis as long as the IRA exists and has a value more than zero.]

The non-deductible amount of your contribution will be subtracted from the taxable amount of the conversion on then 8606 form and enter on line 4a of them 1040 form and a zero taxable amount on line 4b if you did it right.

Also see this TurboTax FAQ:
https://ttlc.intuit.com/questions/4350747-how-do-i-enter-a-backdoor-roth-ira-conversion

[Critter]

There is nothing to correct ... the program is right.  Since you had earnings in addition to the non deductible contributions the conversion had to be prorated.... you could not leave just the earnings behind.  Next time move everything including the earnings to avoid this situation.  

 If you were going to do a backdoor ROTH you should have NOT allowed the account to earn anything ... put the contribution into a cash account just long enough for the ink to dry and move it right away prior to it accumulating any earnings.  

[macuser_22]

@Critter - The OP said: "2019: Turbotax showing $46 as IRA distributions - nontaxable and $5454 as IRA distributions - taxable".

If only $46 was in the account at years end then not all of the $5500 contribution would be tax free but most of it would be.    $5,554 would not be taxable.  It seems that the 2018 $5,500 contribution was never entered as a non-deductible contribution to offset the majority of the tax.