Converted after-tax IRA to Roth before rollover—should be tax‑free. TurboTax ignores the dates and wrongly taxes my distribution. Need support!

[angeljfv]

At the beginning of the year, I made a $7,000 after‑tax contribution to my IRA and then converted that amount to a Roth IRA. Later in the year, I received a rollover from qualified retirement accounts into my IRA. According to IRS rules, the pro‑rata rule is applied based on the IRA balance at the time of conversion. Since my conversion occurred when my IRA held only after‑tax dollars, it should be tax‑free. However, TurboTax isn’t accounting for the specific dates of my transactions and is treating the conversion as taxable. I need a way to override or manually adjust the dates in TurboTax to correctly reflect that my conversion is non‑taxable.

[fanfare]

"the pro‑rata rule is applied based on the IRA balance at the time of conversion"

There is no such rule.

the pro‑rata rule is applied based on the IRA balance at the end of the year. See Form 8606.

@angeljfv 

[angeljfv]

You're right. I trusted too hard on o3-Mini, that suggested that timing matters. o1 coincides with you, also by reading the form 8606 I coincide too. Thanks.

Extract from o1:

Taxes do apply if your IRA balance contains pre-tax money at year end. Because of the pro-rata rule, the percentage of after-tax vs. pre-tax in your IRA at year-end determines how much of the earlier conversion is taxable income.
For a typical “backdoor Roth” strategy to stay tax-free, you generally need to ensure you have zero pre-tax balances in all your traditional IRAs as of December 31 of that same year. Rolling a large 401(k) into your IRA mid-year can defeat the tax-free part of the backdoor Roth.

If your goal is to preserve the tax-free aspect of the backdoor Roth, many people try to:

Convert first, then keep the IRA empty of pre-tax dollars through Dec. 31.
Or use a qualified plan (like a 401(k) that accepts IRA roll-ins) to keep pre-tax amounts outside of any IRAs at year-end.
Once the pre-tax money sits in your IRA on December 31, it “contaminates” (or, more precisely, it factors into the pro-rata calculation for) that entire tax year’s conversions.

[dmertz]

[Edit:  I see that you already realized this.  I failed scroll down before replying.]

"According to IRS rules, the pro‑rata rule is applied based on the IRA balance at the time of conversion."

False.  The dates and order of the transactions are irrelevant to the tax treatment.  The balance that is required to be used in determining the taxable amount is the year-end balance, not the balance at any other time during the year.  It would seem that you have entered everything correctly, allowing TurboTax to do the correct pro-rata calculation on Form 8606.

[fanfare]

your AI is hallucinating. Ouch.