How to handle broker fees when converting from traditional IRA to Roth

[Steven79]

I contributed $14K to two traditional iras.  Then I converted the net of $13,392 to the Roth nd received a 1099-Q.  The difference is broker fees that I paid in the traditional ira.  The difference is showing up as taxable on my tax return and as the basis for my cumulative traditional non-deductible iras.  This cannot be correct.  How does turbotax account for the difference between my gross contribution and the next distributed?

[fanfare]

you paid a fee so that could not get converted to a Roth IRA.

The fee was taken (distributed) from your IRA so it is taxable.

If you are under age 59 1/2 it is an early withdrawal.

[DanaB27 · Accepted solution]

I'm assuming you received a 1099-R for the Roth conversion which you will enter in the retirement section and here you will indicate that it was a conversion.

TurboTax will correctly calculate your basis if you enter the distribution shown on Form 1099-R, your nondeductible contributions, any prior basis, and the value of your traditional IRA on Dec 31. If you converted the full amount then your value in your traditional IRA on Dec 31 should be $0.

The $14,000 contribution is one for you and one for your spouse? Or was one part a contribution for 2020 made in 2021? Please see IRA Contribution Limits.

First, you will enter your nondeductible traditional IRA contribution:

1. Open your return
2. Click “Deductions &Credits” on the top
3. Click "I'll choose what to work on"
4. Scroll down to “Traditional and Roth IRA Contributions” and click “Start”
5. Select “traditional IRA”
6. Answer “No” to “Is This a Repayment of a Retirement Distribution?”
7. Enter the amount you contributed
8. Answer “No” to the recharacterized question on the “Did You Change Your Mind?” screen
9. Answer the next questions until you get to “Any Nondeductible Contributions to Your IRA?” and select “Yes” if you had nondeductible contributions before this tax year
10. If you had a basis in the Traditional IRA before then enter the amount.
11. On the “Choose Not to Deduct IRA Contributions” screen choose “Yes, make part of my IRA contribution nondeductible” and enter the amount.

To enter the 1099-R distribution/conversion: 

1. Click "Federal Taxes" on the top and select "Wages & Income"
2. Click "I'll choose what to work on"
3. Scroll down and click "Start" next to "IRA, 401(k), Pension Plan (1099-R)" 
4. Answer "Yes" to the question "Did You Have Any of These Types of Income?"
5. Click "I'll Type it Myself"
6. Choose "Form 1099-R, Withdrawal of Money from 401(k) Retirement Plans, Pensions, IRAs, etc."
7. Click "Continue" and enter the information from your 1099-R
8. Answer questions until you get to “What Did You Do With The Money” and choose “I moved it to another retirement account”
9. Then choose “I did a combination of rolling over, converting, or cashing out money.” and enter the amount next to "Amount converted to a Roth IRA account"
10. On the "Your 1099-R Entries" screen click "continue"
11. Answer "yes" to "Any nondeductible Contribution to your IRA?"
12. Answer the questions about the basis and value

[Steven79]

The issue is (1) this was a non-tax deductible contribution, so that $666 dollars paid to the broker should not be taxable income to me.  AND My basis in traditional iras is overstated at $666.  The $666 was paid to the broker, my basis should be $0.

[Steven79]

The contribution was for 2020 and 2021.  I did receive a 1099_R and entered it as reported.

I show the traditional IRA basis at the end of 2021 as $0 FMV.  But the 8606 shows that I have a basis of $666.

[DanaB27]

The 1099-R states $13,392 as distribution but doesn't include the broker fee? If yes, you might want to contact your financial institute since paying the fee from your IRA should be considered part of the distribution.

Please note your basis on December 31, 2020, should be $7,000 from the 2020 contribution. And yes, the value on December 31, 2021, will be $0 if you took all the funds out of the traditional IRA.