Deductible Contributions for Backdoor Roth IRA

[joonyung]

My understanding is that if you do a backdoor Roth IRA, you need to make your Traditional IRA contributions non-deductible. However, if you choose to take the deduction, the conversion is taxed which basically offsets the deduction creating a "wash". However, when I choose to take the deduction, TurboTax is not offsetting the conversion. It's actually bumping my refund up meaning it's just giving me the deduction. Why is this the case?

[dmertz]

If you do the Roth conversion in the same year for which you make the traditional IRA contribution and you have no other money in traditional IRAs, it doesn't matter whether the IRA deduction or not.  If deductible, the Roth conversion is taxable, offsetting the deduction.  If nondeductible the Roth conversion is nontaxable.

Only if the IRA contribution is made for some year before the year in which the Roth conversion tax place will there be any difference if you make the contribution deductible.  For example, if you make a deductible contribution for 2023 and do the Roth conversion in 2024, you effectively move taxable income from 2023 to 2024.  (Of course you don't want to make a deductible contribution if you don't have enough taxable income to offset, but in most cases if your taxable income was already low you would probably be eligible to contribute directly to the Roth IRA.)

[joonyung]

Right, but this is exactly why I'm confused. My spouse and I did clean backdoor Roth IRAs (i.e., contribution and conversion in the same year, conversion done ASAP so there was no growth in the traditional IRA contribution, no cost basis, etc). The only difference is my spouse doesn't have a retirement plan which is why TurboTax is asking if we want to make her portion of the contribution deductible or not. Regardless of what option I choose, the refund should stay the same because of your explanation. Why is it that when I choose to keep the deduction, our refund amount is going up (which I assume means it's not taxing the conversion and, therefore, offsetting the deduction)?

[dmertz]

If the Roth conversions were made in 2023 and making here traditional IRA contribution lowers your tax liability, it seems to imply that your spouse has other money in traditional IRAs that affect the pro rata calculation of the nontaxable amount of here Roth conversion.

(Note that if your AGI is low enough that your spouse's entire traditional IRA contribution is eligible to be deducted, you both could have made contributions directly to the Roth IRAs, but that not an option after having contributed to the traditional IRAs and converted.)