I converted $2310 from my non-deductible IRA to Roth in 2021, why is part of it taxable?

[jenniferlixu]

In 2021 I converted $2310 from my traditional IRA to Roth IRA. I only have one IRA account and I've been making non-deductible contribution to this account since 2013. I received 1099-R this year with Distribution Code 2. I entered it into TurboTax Deluxe Desktop. It tells me only $519 is non-taxable. I don't understand why. Thanks!

[DanaB27]

You should have filed Form 8606 each time you made a nondeductible traditional IRA contribution and will have to enter your basis from your last file Form 8606 line 14 during the interview (step 8).

To enter the 1099-R conversion: 

1. Click on "Search" on the top right and type “1099-R”  
2. Click on “Jump to 1099-R”
3. Click "Continue" and enter the information from your 1099-R 
4. Answer questions until you get to “What Did You Do With The Money” and choose “I moved it to another retirement account”
5. 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"
6. On the "Your 1099-R Entries" screen click "continue"
7. Answer "yes" to "Any nondeductible Contribution to your IRA?" if you had any nondeductible contributions in prior years.
8. Answer the questions about the basis from line 14 of your 2020 Form 8606 and the value of all traditional, SEP, and SIMPLE IRAs

[jenniferlixu]

Thank you. I did follow those steps. I actually went back and looked at my previous years contribution and added them all up, which ended up as $47000. I entered that as the basis, at the end it showed me only $519 out of $2310 was non-taxable. I don't understand. I already paid taxes on the $2310. Now that I converted it to Roth, I have to pay taxes on $1791 of them. Shouldn't all $2310 be non-taxable because I already paid taxes on it and was not able to deduct any of it?

[DanaB27 · Accepted solution]

If you have earnings or pre-tax funds in the traditional IRA and the value on December 31, 2021, isn't $0 then the pro-rata rule applies. This means that with each distribution/ conversion you will have a taxable and nontaxable part.  You can see the calculations either on Form 8606 lines 6-12 or on the Taxable IRA Distribution Worksheet.

You can see the remaining basis on line 14 of Form 8606, this basis can be carried forward. Therefore each distribution/conversion in the future will have a taxable and nontaxable part until the basis is all used.

@jenniferlixu

[jenniferlixu]

Thank you so much!

[jenniferlixu]

Hi, one more question. What should I enter in Line 2 for total basis in traditional IRAs? In 2012, I rolled over $13000 + $21000 pre-tax fund from my previous 401K into this IRA account, then I have been doing non-deductible contribution from 2013 to 2021. My total after tax non-deductible contribution is $47000. My total pre-tax contribution is $34000. Should I enter $81000 as the total basis or $47000 as the total basis? Thank you!

[DanaB27]

You will enter a basis of $ 47,000 (after-tax contributions).

@jenniferlixu

[jenniferlixu]

Thank you again! You've been most helpful!