Converting a traditional ira to roth ira (backdoor roth) is causing a tax liability. How do I correct this?

[macuser_22 · Accepted solution]

This so-called “back-door Roth” method ONLY works if you have NO OTHER Traditional IRA accounts.  If you do, then the non-deductible part must be spread over ALL accounts and cannot be withdrawn by itself.  Only if you started with NO Traditional, SEP & SIMPLE IRA and ended up with a zero amount in ALL Traditional, SEP & SIMPLE IRA accounts will this Roth conversion not be taxable.

First you must enter your Traditional IRA contributions (if there were 2017 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 2017.     (Usually zero unless you also made a 2016 or earlier non-deductible contribution).

Enter the 2017 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 2016, 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 15a of them 1040 form and a zero taxable amount on line 15b  if you did it right.

Also see this website that has some screenshots of the procedure
http://thefinancebuff.com/how-to-report-backdoor-roth-in-turbotax.html

[kc_kc]

Thanks for great tips and link

[tylkaw]

FYI TurboTax 2018 is not performing backdoor Roth properly.  I have the exact same data entered in the 2017 version which does pick it up properly.  We will have to wit for Intuit to fix.  It is creating a tax liability.  For those interested in my situation,  I do the backdoor Roth for my wife because we keep zero money in a traditional IRA.  We successfully filed a backdoor Roth with our 2017 return using TurboTax and as I previously stated I keep a 2018 return file using the 2017 TurboTax program which is successfully eliminating the tax liability.

[tylkaw]

Macuser 22 is wrong.  You can do a backdoor Roth with money in a traditional IRA & TurboTax needs to perform the proper calculation.  One must simply fill out a an 8606 form to prorate the amount money you must pay tax on.  it becomes a % game based on using all the money in all your traditional IRA's.

[macuser_22]

@tylkaw - There is a bug in the 2018 version when doing any Roth conversion.

See this FAQ and sign up to get an email when it is fixed.
<a rel="nofollow" target="_blank" href="https://ttlc.intuit.com/questions/4510136-on-form-8606-a-traditional-ira-converted-to-roth-ira-net-a...>

What I posted a year ago is not wrong.   It says exactally what you are saying.

I said:
"[If you had any other Traditional IRA at the end of 2016, 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.]

[aremedios777]

I'm using the backdoor IRA method (whereby I contribute to a traditional IRA with after-tax money, then later convert to Roth).
 When calculating the basis for the conversion, do I need to include my tax-deferred IRAs?  If so, this results in my after-tax contribution money being taxed a second time during the conversion.  Is this correct?

[macuser_22]

@aremedios777 - See the first paragraph in my answer.

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.

[aremedios777]

@macuser_22:  Thanks for the response.  

So, regarding my question about double-taxation, if I contribute $6,000 of after-tax money to a traditional IRA, but have a separate tax-deferred IRA account valued at $600K, then the non-taxable portion of my distribution during conversion is $60, and the taxable portion would be $5,940.

Since that means most of my original contribution is being taxed during conversion, isn't that double-taxation?

If so, is there any way around this?

[macuser_22]

No. It is not double taxation.   Your after-tax contribution went into the IRA and became basis.
Your distribution consisted pf both before tax money and after-tax money in the ratio as explained.   You pay tax on the before tax amount of the distributions - the part of after-tax basis is not taxed.

Every distribution in the future will be the same - both taxable and non-taxable.

No.  That it the fallacy of so called "Backdoor Roth".  IRA basis is always prorated over the total value of the IRA.  The total basis can only be applied if all IRA's are distributed and closed so the total year end value is zero.

[aremedios777]

@macuser_22:  Ok, thanks again for your explanations.  This clarifies a lot.  I need to amend my 2015 and 2016 returns.

One other item I'm struggling with is that my CPA tells me that lines 6 and 8 on Form 8606 need to be filled in.  However, I've been following the step-by-step instructions in the financebuff article you shared in the original post and can't seem to get those lines populated using TurboTax.  TurboTax doesn't even let me manually enter any amounts on those lines in form view.

What am I not doing correctly?

[macuser_22]

Line 8 is the amount converted and comes from the "what you did with the money" question and line 6 is the total year end value that comes after the the "enter the non-deductible basis" question.

[aremedios777]

This is for 2015 and 2016.  My CPA needs to amend 2017 for me to get me the basis for 2018's Form 8606,

[macuser_22]

What did you do in 2015 and 2016?
Contributions? Distributions?

[aremedios777]

Same backdoor IRA method of contribution, then conversion to Roth.  I didn't realize my tax-sheltered IRA needed to be included in the basis calculation.