Its important to know if you performed a recharacterization or a conversion. If you performed a recharacterization, then you could be taxed if you made too much money to directly contribute to a Roth.
Most customers who have their banks "change" their traditional contributions are doing conversions. The distinction makes all the difference on your taxes, and in Turbo Tax.
Entering
a "back-door Roth conversion" of a traditional IRA contribution into a Roth requires 2 parts, and
it will not be properly reported if both parts aren’t reflected in the program.
Step
1- You report the Traditional IRA contribution (under Deductions and Credits-IRA Contributions) and make sure you keep
it nondeductible. This establishes basis on Form 8606, which you’ll need to
avoid showing tax on Step 2. Never report a backdoor Roth as a Roth
contribution, because it is “technically” not a Roth contribution. If your income is too high to contribute to a Roth, reporting the contribution as a Roth contribution will show a penalty. Reporting it as recharacterized is reporting it as a Roth contribution for all intents and purposes.
Step
2- Report the distribution from the Traditional IRA, which will be reported to
you on Form 1099-R. You may not have this form yet, but you will get it if you
did the conversion in 2016. After inputting the 1099-R, you will be asked if you converted the money to a Roth.
After you've established basis on Form 8606 (done with Step 1), it would offset the distribution on the 1099-R (Step 2).
To report the nondeductible Traditional IRA contribution:
- click Start or Update next to Traditional and Roth IRA contributions within Deductions and Credits
-
if Roth had been checked previously, leave the checkmark and click continue until you can remove the dollar amount, then return to the first screen
- Make sure you now check Traditional IRA contribution, and say Yes to the Traditional question
- Put in the contribution amount
- Make sure you do not indicate a recharacterization if it was a conversion - the former may be a taxable event, subject to a penalty
- On the Choose Not to Deduct Contributions screen, say Yes and make the full amount nondeductible
You would not receive a penalty for making a nondeductible traditional IRA contribution, unless you don't have enough earned income.
Note:
Those who don’t convert right away may have some taxable income from the
appreciation of the contribution. Those who have more than "shell" IRA accounts (aka more than $0 in Traditional IRAs at the end of the year) may also experience a tax impact. Both would be reflected after entering the 1099-R (aka the distribution).
See SuperUser HalAl's response for an example of a taxable event caused by this.
Click on attachment to see a sampling of the relevant screens.
