Contribution to IRA

[Bog2021]

This month I contributed 6,000$ to a Traditional IRA for year 2020 and a week later a transferred this amount to a Roth IRA (backdoor) open with the same trustee. Due to my MAGI, this contribution is non deductible and I also don't qualify to contribute directly to Roth IRA.

Turbo Tax is asking me: How much of the 6,000$ you contributed to a traditional IRA for 2020 did you switch or recharacterize to a Roth IRA?

I guess the correct answer is 0$ and this action is considered a conversion, I assume that my financial institution will send me an 1099R form next year for this action.

Last question: if this is first time when I contribute to an IRA, the amount did have any gains and I already paid taxes for it, I assume that next year I will not owe any additional taxes.

Thank you.

[macuser_22 · Accepted solution]

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@Bog2021 wrote:

This month I contributed 6,000$ to a Traditional IRA for year 2020 and a week later a transferred this amount to a Roth IRA (backdoor) open with the same trustee. Due to my MAGI, this contribution is non deductible and I also don't qualify to contribute directly to Roth IRA.

Turbo Tax is asking me: How much of the 6,000$ you contributed to a traditional IRA for 2020 did you switch or recharacterize to a Roth IRA?

I guess the correct answer is 0$ and this action is considered a conversion, I assume that my financial institution will send me an 1099R form next year for this action.

Last question: if this is first time when I contribute to an IRA, the amount did have any gains and I already paid taxes for it, I assume that next year I will not owe any additional taxes.

Thank you.

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It is a contribution NOT a recharacterization.  Any gains between the time of contribution and conversions will be taxable.

Here is the entire procedure.

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 taxable.

First you must enter your Traditional IRA contributions (if there were 2020 contributions).

IRA contribution
Federal Taxes,
Deductions & Credits,
I’ll choose what I work on (if that screen comes up),,
Retirement & Investments,
Traditional & Roth IRA contribution.

Be SURE to answer the follow up that the are choosing to make this contribution NON-DEDUCTIBLE - if that screen comes up. (DO NOT say that you moved (recharacterized) the money to a Roth) – this is a conversion, not a recharactorazition.

Then enter the 1099-R that shows the distribution.

Federal Taxes,
Wages & Income
I’ll choose what I work on (if that screen comes up),,
Retirement Plans & Social Security,
IRA, 401(k), Pension Plan Withdrawals (1099-R).

Answer the follow-up questions answer the question that you moved the money to another retirement. The screen will open up with choices of where it was moved. Choose you converted it to Roth IRA.

When asked if you have made any non-deductible contributions say " "yes" if you did then enter the non-deductible contributions made for tax years before 2020.     (Usually zero unless you also made a 2019 or earlier non-deductible contribution. If you do have prior year basis then enter the last filed 8606 line 14 value.).

Enter the 2020 year end value of your Traditional IRA a "0" (zero) - if it is in fact zero - this tax free Roth conversion will not work if it is not zero.

[If you had any other Traditional IRA at the end of 2020, then the nondeductible "basis" must be pro-rated over the current distribution and the total IRA value and only a portion of the Roth conversion will be non taxable and part will be taxable, with the remaining non-deductible basis carrying forward for future distributions. You can never only withdrew the nondeductible basis as long as the IRA exists and has a value more than zero.]

The non-deductible amount of your contribution will be subtracted from the taxable amount of the conversion on then 8606 form and enter on line 4a of them 1040 form and a zero taxable amount on line 4b if you did it right.

Also see this TurboTax FAQ:
https://ttlc.intuit.com/questions/4350747-how-do-i-enter-a-backdoor-roth-ira-conversion

[Bog2021]

Thank you for your quick response. 

I didn't receive a 1099R form since I made the contribution in 2021 for year 2020 and the conversion took place shortly after the initial contribution. Should I expect to receive an 1099R form next year for this action?

[macuser_22]

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@Bog2021 wrote:

Thank you for your quick response. 

I didn't receive a 1099R form since I made the contribution in 2021 for year 2020 and the conversion took place shortly after the initial contribution. Should I expect to receive an 1099R form next year for this action?

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Yes, 1099-R next year but the 2020 contribution must be entered on your 2020 tax return to generate the 2020 8606 that you must have next year to enter the box 14 basis.

[Bog2021]

Got it. 

Last scenario: This is first time when I create an Traditional IRA. I contributed 6,000$ shortly after converted entire amount (gain was 0.01$) to Roth IRA for year 2020 and reported this action on my 2020 taxes The end result is that my Traditional IRA has a balance of 0$ and my Roth of 6,000.01$.

My question is: May I contribute another 6,000$ for 2021 year and convert again the entire amount to my Roth IRA? The end result is that my Traditional IRA will have a balance of 0$ and my Roth will have 12,000.01$. If the contribution to Traditional IRA is also nondeductible, it is fair to expect that next year I will not owe any additional taxes for these conversions?

Thank you. 

[macuser_22]

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@Bog2021 wrote:

Got it. 

Last scenario: This is first time when I create an Traditional IRA. I contributed 6,000$ shortly after converted entire amount (gain was 0.01$) to Roth IRA for year 2020 and reported this action on my 2020 taxes The end result is that my Traditional IRA has a balance of 0$ and my Roth of 6,000.01$.

My question is: May I contribute another 6,000$ for 2021 year and convert again the entire amount to my Roth IRA? The end result is that my Traditional IRA will have a balance of 0$ and my Roth will have 12,000.01$. If the contribution to Traditional IRA is also nondeductible, it is fair to expect that next year I will not owe any additional taxes for these conversions?

Thank you. 

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Yes you can.  2020 and 2021 contributions are separate.

[Bog2021]

Thank you very much and have a great weekend.