Backdoor roth IRA with small gain

[koulekovag]

Looking for help, please.

I have contributed $7,500 to Traditional IRA then converted to Roth IRA, since i expected my income to be over the limit ( I was laid off so it wasn't but that's how i did it in March 2023).

There was a small $10 gain between TIRA contribution and Roth IRA conversion ( which somehow i didn't pay attention to and converted the whole $7,510). 

On my 1099 R the gain field is left blank , but for the taxable line it says $7,510, gain included). 

Can you please help me with how to enter this in Turbo tax. Right now, if i leave gain blank I am getting the message of penalties of 6% and more complicated language. 

I called Vanguard, since i read that i can leave the $10 for next year, but they told me that i am not actually over the limit, since my contribution is $7500 and the $10 is the gain, and i need to talk to Turbo tax to lean how to handle that. 

Thank you for reading and any advise is appreciated. 

[dmertz · Accepted solution]

You did a Roth conversion, not a recharacterization.  Make sure that you enter your traditional IRA contribution and indicate that you did not switch the contribution to a Roth IRA.

Converting the entire $7,510 was the correct thing to do.  This is reported by entering into 2023 TurboTax the code-2 or code-7 2023 Form 1099-R that reports the distribution from the traditional IRA and indicating that you converted the entire amount to Roth.

[bitjockey]

I struggle with this every year. My wife and I each have back door Roths. She has a $214 gain that should be showing up on 1040 Row 4b, but it doesn't. In TTAX 2024, it'll ask "What did you do with the money from {finserv company}?

If you read the "rolled over" hyperlink, it says "You do not have a rollover when you transfer funds from a traditional IRA to a Roth IRA. This is called a conversion." I agree with that, but the only way I can get TTAX to do what I know needs to be done is to choose "{Name} rolled over all this money."

Otherwise, TTAX does all sorts of crazy things to my state return and otherwise. This transaction seems straight forward, but why is this so hard to get right with TTAX? AM I doing something wrong? I am not entirely sure I know what you mean by "indicate that you did not switch the contribution to a Roth IRA." On which screen am I indicating that?

[AnnetteB6]

Entering a backdoor Roth IRA conversion is a two-step process.  First, you enter the non-deductible Traditional IRA contribution that was made.  (During this process you might see the question asking if you changed your mind and 'switched' the contribution to a Roth.)  Then, you enter the Form 1099-R reporting the distribution from the Traditional IRA.

If you are only seeing questions about whether the money was rolled over, versus a question about putting the money into a Roth IRA, it could be due to the distribution code in box 7 or not having the IRA/SEP/Simple box checked.  

Take a look at the following TurboTax help article for some step-by-step guidance to enter the backdoor Roth IRA conversion:

How do I enter a backdoor Roth IRA conversion?

@bitjockey 
 

[bitjockey]

Thank you....that is a really detailed, helpful article. Unfortunately, it still doesn't work for me. Here is the scenario. Husband and wife, filing joint. Husband made $8k Back Door Roth (BDR) in 2024, converted at $7,986, no gain so no issues.

Wife did BDR in Jan 2024 (a 2023 contribution but reported in 2024 1099-R) and Nov 2024 (a 2024 contribution reported on the same 2024 1099-R. That total is $14,714 ($6,500 for 2023 plus $8,000 for 2024; wife turned 50 in 2024), so I assume 1040 Line 4b should show a gain of $214. But it does not.

It also completely messes up my New York State return; somehow it thinks I have $88,414 in itemized deductions (I do not; I never itemize, not even close). I haven't even started to try and figure out how to fix that mess.

I about ready to delete my whole return and start over. It's painful b/c the 1099 import process from Betterment doesn't work (the screen says it imported all the data, but it just gets stuck in that endless login-import-success loop....so I have to manually enter everything.

[DanaB27]

To clarify, was the value of all of her traditional/SEP/SIMPLE IRAs $0 on December 31, 2024?  If not and she had pre-tax funds in her IRA then pro-rata rule applies. This means that with each distribution/ conversion you will have a taxable and nontaxable part. You can see the remaining basis on line 14 of Form 8606, this basis can be carried forward.

You entered her $6,500 basis from the 2023 Form 8606 line 14 when TurboTax asks about her prior nondeductible contributions? 

To enter the Form 1099-R conversion in TurboTax Desktop: 

1. Click "Federal Taxes" on the top and select "Wages & Income"
2. Click "I'll choose what to work on"
3. Scroll down and click "Start" next to "IRA, 401(k), Pension Plan (1099-R)" 
4. Answer "Yes" to the question "Did You Have Any of These Types of Income?"
5. Click "I'll Type it Myself"
6. Choose "Form 1099-R, Withdrawal of Money from 401(k) Retirement Plans, Pensions, IRAs, etc."
7. Click "Continue" and enter the information from your 1099-R
8. Answer questions until you get to “What Did You Do With The Money” and choose “I moved it to another retirement account”
9. Then choose “I did a combination of rolling over, converting, or cashing out money.” and enter the amount next to "Amount converted to a Roth IRA account"
10. On the "Your 1099-R Entries" screen click "continue"
11. Answer "yes" to "Any nondeductible Contribution to your IRA?" if you had any nondeductible contributions in prior years.
12. Answer the questions about the basis from line 14 of your 2023 Form 8606 (should be $6,500) and the value of all traditional, SEP, and SIMPLE IRAs

Yes, you can delete and restart your State return and see if that will fix the state issue. Please see How do I delete my state return in TurboTax Desktop for Windows?

@bitjockey