Backdoor roth still instructions still dont work, WTF?

[JoannaB2]

Yes.  You may follow the steps below;

• In Turbo Tax Home Screen, click Tax Tools, then Tools.
• Type in the search bar 1099-R.
• Click Add another 1099R, click continue.
• Click "Change how i enter my form" then continue
• In "How do you want to add your 1099-R?", click type it in myself.
• Answer the interviews, then click continue.
• Enter the 1099-R provider's info, then continue.
• On the question, "Do any of the situation apply to you?", select "I took money due to the impact of Covid-19". if it was.
• Answer Yes "Did you rollover the gross amount to another retirement account?

A backdoor Roth IRA is a legal way to get around the income limits that normally restrict high earners from contributing to Roth. You're allowed to contribute the lesser of your earned income or $6,000 in a traditional IRA, which can then be converted to a backdoor Roth IRA. If you're 50 or older, you can also make an additional catch-up contribution of $1,000 each year.

[eturge011]

This is precisely what I did and it didn't work.  When I preview the 1040, it shows that $5200 of this money is taxable.  None of it should be.

[DanaB27]

Please review the instructions below for a backdoor Roth. If you made the nondeductible contribution in prior years then please pay special attention to steps 7 and 8 when entering the conversion part.

Please be aware, that any earnings will be taxable. Also, if you had deductible amounts in the traditional IRA then each distribution will have an amount allocated to the taxable part.

If you made the nondeductible contributions for 2020 then please enter the traditional IRA contribution like this:

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
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” if you had a nondeductible contributions before this tax year.
9. If you had a basis in the Traditional IRA before then enter the amount.
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 and you only get a screen saying $0 is deductible)

To enter the 1099-R distribution/conversion: 

1. Login to your TurboTax Account 
2. Click on "Search" on the top right and type “1099-R”
3. Click on “Jump to 1099-R”
4. Click "Continue" and enter the information from your 1099-R
5. 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”
6. On the "Your 1099-R Entries" screen click "continue"
7. Answer "yes" to "Any nondeductible Contributions to your IRA?" if you had any nondeductible contributions in prior years.
8. Answer the questions about the basis and value

If this does not help the please provide more details about your contribution and conversion.

[macuser_22]

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@eturge011 wrote:

This is precisely what I did and it didn't work.  When I preview the 1040, it shows that $5200 of this money is taxable.  None of it should be.

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The "Backdoor Roth" does not exist in tax law. It is a procedure used by some to take advantage of a quirk in tax law that allows making a non-deductible contribution to a Traditional IRA when one cannot contribute to a Roth IRA, and the immediately converting the Traditional IRA to a Roth IRA, thereby getting the money into the Roth via "backdoor" tax free.

That "procedure" can only work of all these requirements are met:
1) No Traditional IRA account whatsoever can exist (that includes any SEP or SIMPLE IRA accounts) at the start. If existing IRA's contain any before-tax money or earnings then it will be partly taxable.
2) The Tradition IRA contributions must be reported on a 8606 form as non-deductible.
3) The conversion to a ROTH must be shortly after the contribution to avoid taxable gains.
4) The entire Traditional IRA value must be zero that the end of the year of conversion.

Otherwise the conversion will be partly or mostly taxable.

[eturge011]

I appreciate you taking the time to respond to my question, but you're simply wrong about points (1) and (4).  I encourage anyone else encountering this issue to review the IRS's guidance on the "pro rata rule" and how the IRS calculates an IRA's post-tax basis on form 8606. 

[macuser_22]

For it to be a "backdoor Roth" all 4 must be true otherwise the taxable amount will not be zero.

To be a true backdoor Roth then there can not be any before tax money in the IRA at the start of end otherwise it is just an ordinarily Traditional IRA with non-deductible basis to Roth conversion.

You can NEVER withdraw ONLY the nondeductible part - it must be prorated over the entire value of ALL Traditional IRA accounts which include SEP and SIMPLE IRA's. (For tax purposes you only have ONE Traditional IRA which can be split between as many different accounts as you want, but for tax purposes they are all added together).

For example using rough figures: if you had $60K of nondeductible contributions in an IRA with a total value of $600K (10:1 ratio), then when you take a $60K distribution from any IRA account $6,000 would be nontaxable and $54,000 would be taxable (same 10:1 ratio) , with the remaining $54K of basis staying in the IRA for future distributions. As long as there is any money in the IRA, there will be some basis.

TurboTax will ask for your non-deductible "basis" and then the *Total Value* of *all* Traditional IRA, SEP and SIMPLE accounts as of Dec 31, of the tax year. That is so the prorating of the basis can be properly proportioned between the current years distribution and the remaining IRA value. That is done on the 8606 form.