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Returning Member
posted Feb 11, 2024 12:14:09 PM

Got taxed on entire Roth conversion for (deductible) trad contribution I later had to undo?

Hello, and apologies in advance for the complicated explanation!

 

In 2022, I didn't work, so I had no earned income, only investment income. I contributed $6,000 (of post-tax money) to a traditional IRA in Jan 2022. A few days later, I converted the whole thing (still worth $6,000) to a Roth IRA.

 

I realized in early 2023 that I should not have contributed to an IRA in 2022 because I didn't have any earned income that year. To correct this, I withdrew the entire excess contribution ($5,055, value had decreased) from the Roth IRA. I did this in 2023, but before the 2022 contribution deadline.

 

Because I withdrew the excess 2022 contribution in early 2023, I am getting ready to amend my 2022 return using the 2023 1099-R.

 

However, I have been examining the 2022 return I filed with TurboTax. It looks like I was taxed on the entire $6,000 involved in the original Roth conversion:

  • Form 1040 Box 4a (IRA distributions) and 4b (Taxable amount) both contain $6,000
  • Form 8606 Part 1 is all blank. Part 2 Line 16 (conversion amount) is $6,000, and Line 17 (basis) is $0, so Line 18 (Taxable amount) is $6,000.
  • IRA Information Worksheet line 59 (2022 conversion contributions taxable at conversion) is $6,000
  • Schedule 1 Line 20 (IRA deduction) is blank

I get that converting a non-deductible trad IRA to Roth makes the whole amount taxable, but I think the original contribution was deductible (made with post-tax money, no employer retirement plan in 2022), but it looks like I didn't get the deduction.

 

Relevant things I entered in TurboTax:

  • Total value of my traditional IRAs on Dec 31, 2022: $0 (because I had already converted to Roth by then);
  • Excess Contribution Withdrawn Before Due Date of Your Return: $6,000

I am wondering if I should have put $0 for excess contributions withdrawn, because they were withdrawn from the converted Roth IRA, not from the original Traditional IRA?

 

It seems wrong that I both didn't get the deduction for the $6,000 original contribution and paid tax on the $6,000 when I converted it to Roth. Obviously, it's more complicated, because I later undid the excess contributions, but it still feels like my taxable was $6,000 too high?

 

Hope some of that made sense. Thanks for any advice!

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1 Replies
Expert Alumni
Feb 14, 2024 11:26:01 AM

That Roth conversion is a tricky business.  You are absolutely correct that you shouldn't have been taxed on it.  So now you have a little more work to do when you amend the return.

 

First, you need to delete the 2022 entries for your IRA deposit, withdrawal and conversion.

 

Second, follow these steps in order to enter the conversion properly.

 

Third, enter the fact that you withdrew the excess contributions.

 

@spacemoose