Backdoor Roth IRA - TurboTax is saying I made excess contributions to my Traditional IRA

[kelloggs]

I'm above the income limit for a traditional IRA and use the backdoor method to contribute.

Here is how I contributed towards a Traditional IRA in 2024:

• Contributed $6,500 as part of 2023 contributions on Jan 2nd, 2024
• Contributed $7,186 ($186 is excess since $7000 is the limit) on July 22nd, 2024

Fidelity is saying I've contributed $13,686 into my Traditional IRA. My total cost basis as per Form 8606 in my 2023 return is $500. So TurboTax believes I owe $13,686-($7000-$500) = $6198 in taxable income.

Through the software how do I ensure this taxable income comes to $186 (which is the excess I contributed). Did I mess up in my 2023 Form 8606 (H&R Block filed it for me) which is why this issue is happening? Should the basis have been $6500 so that the excess comes to $186 only.

[Opus 17 · Accepted solution]

If you intended the $6500 contribution--made in January 2024 for the 2023 tax return--to be non-deductible for  a future backdoor Roth conversion, then your 2023 form 8606 should show $6500 as your total basis on line 14.  (Unless you had a prior basis on line 2 was more than zero, in which case the new basis on line 14 should be the old basis plus $6500.)

You need to start by preparing an amended form 8606 for 2023.  HRB should do this for free if they screwed up.  You should also check your 2023 return to see if you took a tax deduction (schedule 1 line 20) or they just entered the wrong total for the contribution (form 8606, line 1 and line 4 should both be $6500). 

To file for 2024, you need the numbers from a corrected 2023 form 8606.  You may be able to make the correction manually, so you don't have to wait for HRB to do the amended return. 

[Opus 17]

When did you perform the conversion?

The $186 excess will be taxable but should also result in a 6% penalty for this year and every year after until it is withdrawn.  

Did you really contribute $186 excess, or is that the amount of earnings included in the conversion?  That's not an excess contribution, because conversions and rollovers are not considered contributions.  It's just a gain in value in the account so it's taxable when you convert.  

[kelloggs]

This is super helpful and is exactly what happened. TY! I've just reached out to HRB for a correction on my 8606.

[kelloggs]

This is also exactly what happened. My $7000 contribution to my Traditional IRA grew to $7186 before I rolled it over into my Roth IRA.

[Opus 17]

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@kelloggs wrote:

This is also exactly what happened. My $7000 contribution to my Traditional IRA grew to $7186 before I rolled it over into my Roth IRA.

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I just want to clarify in case it wasn't clear.  When you did the Roth IRA conversion, you should have converted the entire amount ($7186).  The $186 of growth/gain is taxable, but it is not subject to the additional 10% penalty for early withdrawal.