Backdoor Roth IRA conversions being taxed when they shouldn't be

[ineedtaxhelp]

For 2021, I received three 1099-R's.

1. Let's call the first one 1099R-A:
   • $6,000 after-tax traditional IRA contribution made in 2021 for 2020 tax year
   • before conversion, made $50 in capital gains
   • converted all $6,050 to Roth IRA in 2021, thus receiving a 1099-R for 2021
2. The second one we'll call 1099R-B:
   
   • $6,000 after-tax traditional IRA contribution made in 2021 for 2021 tax year
   • converted all $6,000 to Roth IRA in 2021, thus receiving a 1099-R for 2021
3. The third we'll call 1099R-C, but shouldn't be relevant because I'm not seeing it causing an issue in the 1040 tax summary. It was a $4,500 Roth IRA excess contribution removal. I'm mentioning it just in case it's causing an issue.

On my 1040 line 4a is showing $12,050 for IRA distributions, and line 4b is showing that $6,050 is taxable. Why is this happening? All the contributions were after-tax and treated as non-deductible, so none of the backdoor conversions should be taxable, right?

I experimented by deleting 1099R-B ($6,000), and as expected, the taxable amount on line 4b became $50.

[DanaB27]

You will need to enter your basis (nondeductible contribution) from your 2020 Form 8606 line 14 during the interview (steps 8 and 9 when you enter your contribution or steps 6 and 7 when you enter your Form 1099-R). You should have reported the nondeductible, traditional IRA contribution for 2020 on your 2020 tax return. If you didn't do that then please see How do I amend my 2020 return?

To enter the nondeductible contribution to the traditional IRA:

1. Login to your TurboTax Account 
2. Click on "Search" on the top right and type “IRA contributions” 
3. Click on “Jump to IRA contributions"
4. Select “traditional IRA”
5. Answer “No” to “Is This a Repayment of a Retirement Distribution?”
6. Enter the amount you contributed ($6,000)
7. Answer “No” to the recharacterized question on the “Did You Change Your Mind?” screen
8. Answer the next questions until you get to “Any Nondeductible Contributions to Your IRA?” and select “Yes” since you had a nondeductible contribution before this tax year.
9. Enter your $6,000 basis in the Traditional IRA from line 14 of your 2020 Form 8606.
10. On the “Choose Not to Deduct IRA Contributions” screen choose “Yes, make part of my IRA contribution nondeductible” and enter the amount (if you have a retirement plan at work and are over the income limit it will be nondeductible automatically and you only get a warning and then a screen saying $0 is deductible).

To enter the 1099-R distribution/conversion: 

1. Click on "Search" on the top right and type “1099-R”  
2. Click on “Jump to 1099-R”
3. Click "Continue" and enter the information from your 1099-R
4. 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”
5. On the "Your 1099-R Entries" screen click "continue"
6. Answer "yes" to "Any nondeductible Contributions to your IRA?" since you had any nondeductible contributions in prior years.
7. Answer the questions about the basis from line 14 of your 2020 Form 8606 and the value of all traditional, SEP, and SIMPLE IRAs

It seems as if you didn't have earnings on your excess Roth contribution removal therefore it won't impact your taxable income. Only the earnings would be taxable and subject o the 10% early withdrawal penalty if you are under 59 1/2.

[ineedtaxhelp]

Hi DanaB27,

I did all those steps that you mentioned. I even spent an hour on the phone with TurboTax live help, and two experts could not figure out how to fix this. They gave me the same steps you did too.

To clarify, the $4,500 excess removal that gave me 1099R-C was actually for a $3,000 Roth IRA contribution and $1,500 earnings on it.

Two other questions:

For the question "Tell Us the Value of All Your Traditional IRA Accounts", I should put $0, right? Because as of December 31, 2021, I had already converted everything to Roth IRAs, so they were empty. What's confusing is when it says "Include any IRA distributions you made in 2020. The amount you enter must be at least the amount of your distributions." How could the ending balance amount of my traditional IRAs be equal to at least my distributions when there are $0 in the account? Yesterday the TurboTax experts had me try putting $12,000 to fix my issue, and it did nothing.

And for the question "Select any of the following years that you converted a traditional IRA to a Roth IRA." should I select 2020, because the conversion I made was for the 2020 Roth contribution, or should I select None of the above (implying 2021) because the conversion itself was made in 2021?

[DanaB27]

Yes, for the question "Tell Us the Value of All Your Traditional IRA Accounts" you will enter $0. 

You will select "None of the above" for the question "Select any of the following years that you converted a traditional IRA to a Roth IRA." if your 2021 conversion was your only conversion.

To verify, you entered the basis from your 2020 Form 8606 during the interview when TurboTax asks about the prior year's basis ($6,000)?

What is the code in box 7 for Form 1099-R (C) for withdrawal of excess contribution and earnings? The earnings will be taxable.

@ineedtaxhelp