Conversion to Roth - Pro-Rata but not really situation

[PianoMan12]

I have a corner-case situation for which I can't find an answer on what the rule is and of course how to handle in Turbo Tax a situation where I made separate conversions from a Trad-IRA to a Roth once with taxed money and another with pre-tax money but never co-mingled.  

Details:

Early January 2020 I did a $6000 backdoor Roth contribution by first making a non-deductible contribution to a Traditional IRA (that had a zero balance) and then converting that entire 6K to a Roth a few days later (putting the Trad-IRA back to a zero balance). That would be a simple back-door contribution situation with no taxes. However in August, I rolled a conventional 401K into the same Traditional IRA and subsequently converted $50K (which is only a portion of the new balance) to the Roth. My 1099-R shows a distribution of 56K (all of which is marked as taxable in box 2a in the form).

Based on the lack of co-mingling of any of the pre/post tax funds at any time, I would assume that the 50K is 100% taxable while the 6K should sail through with no taxes.  Am I right?  If I'm correct, how do I handle it in Turbo Tax to have the 50K taxed and the 6K not be taxed instead of having it apply the pro-rate formula?

[macuser_22]

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@PianoMan12 wrote:

Based on the lack of co-mingling of any of the pre/post tax funds at any time, I would assume that the 50K is 100% taxable while the 6K should sail through with no taxes.  Am I right?  If I'm correct, how do I handle it in Turbo Tax to have the 50K taxed and the 6K not be taxed instead of having it apply the pro-rate formula?

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Unfortunately you are incorrect.   For Tax purposed you only have ONE Traditional IRA that is the aggregate total of any Traditional, SEP or SIMPLE IRA account that might exist.

Non-deductible "basis" in ANY such IRA account applies to the combined total of all accounts.

That is why a "backdoor Roth will not work if you have ANY Traditional IRA value at years end.

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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.

[PianoMan12]

Thanks for the reply.  So if I replay back your response, it sounds like timing of contributions during the year doesn't matter at all, and all that matters is the balance at the end of the year.  If the Traditional IRA is zero all year and you do something to load it with pre-tax money (e.g. rollover) on 12/31 creating a positive balance, then you've effectively pushed yourself into having do a pro-rata calculation even if your attempt at a back door happened while the balance was zero earlier in the year. 

[macuser_22]

Correct and that is why backdoor Roth's do not work for some people that have other Traditional IRA accounts or make a large rollover form a 401(k) into a IRA at years end thinking that it will not affect the earlier non-deductible  conversion.

Actual backdoor Roth's will only work if all there conditions are net otherwise some or most will be taxable.

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.