Backdoor Roth- Suggestion on Dividend accrued in Traditional IRA for 2024 conversion

[taxman_us]

Greetings,

Happy Holidays. I did back door Roth contribution (non-working spouse) through Fidelity in Nov 2024. Deposited funds held in Trad IRA before available to transfer to Roth IRA. Based on order history, I converted Full available (7000.85: CONV TO ROTH IRA) on 11/25/2024. A few days later, I noticed there was dividend amount received for the time the funds were in Traditional IRA. I did not file any form for that dividend in 2024 filing or transfer that amount (now total $21) to Roth. 

1. Reported 7000.85 in 2024 filing on 1040 form as IRA distribution (4a) - based on form received from Fidelity. Any additional filing I missed?

2. How to address dividend amount in Traditional IRA (now its 2025 filing time).

Thanks in advance.

[Bsch4477]

You don’t have to do anything as far as tax reporting is concerned. You can leave the small amount in your traditional IRA or withdraw it. 

[taxman_us]

Thank you. I searched online (prior to posting here) and a few forum discussions suggesting filing 8606 with interest amount. What I accrued was dividend and don't I need to pay tax on that? Thanks in advance.

[Bsch4477]

If you want to convert that $21 you can and it won’t be taxed. If you withdraw it for simplicity you will pay tax on it but the amount is trivial. 

[dmertz · Accepted solution]

Form 8606 was required to be included in your 2024 tax return whether or not your traditional IRA received the dividend distribution.  If the 2024 Form 8606 was not present or was incorrect, you must amend your 2024 tax return to make the correction.

Because you had a nonzero balance in traditional IRAs at the end of 2024, your $7,000.85 conversion was partly taxable, and resulted in a small amount of your basis in nondeductible traditional IRA contributions remaining in your traditional IRAs.

As an example, I'll assume that the dividend resulted in a 2024 year-end balance in your traditional IRAs of $20 and I'll use the rounding that TurboTax would use on Form 8606.  The nontaxable amount of your 2024 Roth  conversion would then be $7,001 * 7,000 / (7,001 + 20) = $6,980 and the taxable portion would then be $21.  $20 of your basis in nondeductible traditional IRA contributions would remain in your traditional IRAs, shown on Form 8606 line 14, to be applied to future distributions.  Line 14 carries forward to line 2 of the next Form 8606 that you are required to file.

With such a small amount in your traditional IRAs, it would make sense to simply convert your entire traditional IRA balance to Roth so that you end up with a $0 year-end balance in traditional IRAs.

[taxman_us]

Thank you. I've checked all the forms I saved but did not see 8606. I used TurboTax desktop software and entered information based on1099-R. On the tax form (Married filing jointly) entered '0' for Traditional and Roth IRA contribution for both. Could that be the reason?

 Can I file amendment (corrected1040 with 8606) while filing 2025 taxes /Turbotax or from 2024 taxes? 

[dmertz]

"On the tax form (Married filing jointly) entered '0' for Traditional and Roth IRA contribution for both."

That seems to be the problem.  It appears that you failed to enter the traditional IRA contribution that you made.

To correct this you need to amend your 2024 tax return to include a correct Form 8606 and to add the small amount of taxable income.  (Because the tax tables are stepwise, the small increase in taxable income may or may not increase your 2024 tax liability.)

For your 2025 tax return you'll either want to begin by importing the amended tax file or simply correct the amount of basis carried in from line 14 of the 2024 Form 8606.

To avoid such problems in the future, remember that a so-called backdoor Roth is actually two separate, largely independent transactions, a traditional IRA contribution and a Roth conversion.  These two transactions only intersect on Form 8606 where the pro rata calculation of nontaxable taxable and taxable amounts is performed.

[taxman_us]

Thank you for your insights. Although I did not save the file yet, attempted from 2024 return with amend option:

1. Federal Taxes > Deductions&credits > Retirement and Investments> Traditional and Roth IRA contributions (current $0): Traditional IRA: $7k

Transferred amount to Roth IRA: 7000.85
Switched or recharacterized: no, Prior years: none
IRA deduction: $0

Now Traditional and Roth IRA contributions show 7000.

-------------------------------------

Now I checked and 8606 form generated, however, when I proceeded further, I do not see option to enter $21 interest. 8606 form show Line1 and Line3 entry (total 7000- as nothing from previous years). How to add the small amount of taxable income that is sitting in Trad IRA?

[dmertz]

"Now Traditional and Roth IRA contributions show 7000."

There was no ordinary Roth IRA contribution.  The only contribution that should be present under Deductions and Credits is the $7,000 traditional IRA contribution.

The $7,000.85 moved to the Roth IRA as a Roth conversion is entered via the Form 1099-R entry.

On the page that lists the Forms 1099-R that you entered, click the Continue button and proceed until TurboTax asks you to enter the 2024 year-end value of your traditional IRAs.  Assuming that you have no other traditional IRAs, that value will likely be less than $21 if the present value in the traditional IRA is $21.

[taxman_us]

Sorry..was out. Thank you and will check. No other Trad/Roth IRAs. I was also reading online that I can mail out a standalone 8606 form (as there are no distributions). That's an option as well? If yes, how to report on $21.

[dmertz]

It seems that correctly preparing Form 8606 will change your AGI slightly, so Form 1040-X will be required to accompany Form 8606.

[taxman_us]

Thank you. I filled out the 2024- 8606 form to check: 

Line1: $7000.00 (My initial contribution to Trad IRA)

Line2: $0.00 (no previous year contributions, 2024 was the first year)

Line3- $7,000: Conversion 'Yes'

Line4- $0.00

Line5: $7000.00

Line6 & 7: $0.00

Line 8: $7000.85 (From 1099-R)

Line9: $7000.85

Line10: 1.000

Line11: $7000.85

Line12- $0.00

Line13: $7000.85

Line14: -0.85

Line 15 a-c: $0.00

-------

Lines:16 - 17: $7000.85

Line 18: $0.00

Does this look correct and still need 1040-X? Where to report about $21 interest sitting in Traditional IRA.

Document to be signed by spouse?

Happy to contact 1-1 if you prefer.

[dmertz]

Line 6 of Form 1099-R should not be zero since the dividend and any attributable gain or loss were present in the traditional IRA on December 31, 2024.  Be sur to enter this amount when TurboTax asks for your year-end balance in traditional IRAs.  The taxable amount of the conversion of about the same amount as the year-end balance and that will add to your AGI.  See my previous post for the calculation.

[taxman_us]

Thank you. With your input and online search, guess I got what went wrong.

1. For IRA question: What did you do with money from xyz: I need to select 'did a combination of rollover, converting or cashing' (Instead I did 'rolled over' to another traditional IRA or qualified retirement Account).

2.Missed Traditional IRA entry.

With these corrections, TT generated 1040-X with $22 interest and 8606 that matches the form I manually did with taxable amount $22. Status as of now,

1.1040-ES payment voucher: ignore.

2. Federal 1040-X: I owe $5. (I owe and paid $2200 while filing Taxes)

3. This changed State filing/tax information as well and I owe $1 to State (I got refund $400+while filing).

4. Reason for 1040-X: I converted all of it to Roth IRA (I think I need to elaborate this).

--------------------------

1.For Federal: 1040-X wit signature + 8606 is sufficient (along with check) with a cover letter or any additional forms to attach? I noticed schedule 8812 -child tax credit form Lain13 went up by $5 (not sure why).

2. For State: I think I have an option to submit electronically, but If I do by mail just 4 pages of CT state (CT-1040X) without 1040V voucher with cover letter is fine?

[dmertz]

Form 1040-X must be filed because your AGI and tax liability changed.  The Form 8606 by itself is insufficient to indicate the change in tax liability.