Do all nondeductible (after-tax) contributions to a traditional IRA count as "Other Contributions Previously Taxed by MA" when doing a backdoor Roth IRA Conversion?

[dogmatagram]

I opened a traditional IRA in 2017, made nondeductible (after-tax) contributions to it using money from an MA employer, made contributions of the same type to it again in 2018, then did a "Backdoor Roth IRA" conversion in 2018.

When filing MA state tax, TurboTax lists "Your total IRA/Keogh plan distributions" as the total of all money that was converted from Traditional -> Roth.

I'm trying to figure out what to type in the "Other Contributions Previously Taxed by Massachusetts" and "Total Distributions Received in Previous Years" boxes. 

1) "Other Contributions Previously Taxed": Should I be entering my 2017 traditional IRA nondeductible contribution amount in this box, or my all contributions (including 2018), which would make the taxable amount equal to the earnings that were converted, completely excluding the after-tax contributions? The sticking point here is that I want to verify that my after-tax contributions for 2018 should count as "previously taxed" in the same year, since they were done with after-tax funds.

2) "Total Distributions Received in Previous Years": Since the first time any money left the traditional IRA was in 2018 (for the conversion), I think this would be 0 for this year, but would the amount I converted this year count as a "distribution received" to be typed into this box a year from now, or should it not actually be counted as a distribution since it was actually a conversion?

[williasp · Accepted solution]

Let me qualify my response by saying I'm no expert.  Also, I typically find the questions encountered on the state return rather baffling and TT provides little or no explanation.  That being said, I can tell you what I just did since it's the only thing that made sense to me.

My son makes an after-tax, non-deductible contribution to his t-IRA every year, then subsequently converts the funds in the t-IRA to Roth (i.e., Backdoor Roth).  In such a case, only the gains accumulated in the t-IRA should be taxable for both Fed and State purposes.  This amounts to about $2 in his case.

I noticed his MA tax liability was a bit high when I got to this section, so I assumed MA was counting his t-IRA distribution as taxable.  I believe the section re "Other Contributions Previously Taxed by MA" is supposed to account for the discrepancy and takes into account non-deductible t-IRA contributions.  You are correct that these contributions have, in fact, already been taxed in MA as part of your W2 income. 

So I plugged in my son's t-IRA contribution made in 2018 into that box and, voila, his MA tax liability declined.  I assume it would be OK to add in your 2017 non-deductible after-tax contribution as well.

I'm not sure what to do with the box "Total Distributions Received in Previous Years."  I left it blank.  My son obviously receives a distribution every year since he does a Backdoor Roth every year.  It doesn't seem like it would make sense to add up all the distributions received in all prior years.  That could eventually be a big number (say after 10 years) and I'm not sure what purpose it would serve.  I would be interested to know how others treat this section.

By the way, on the Fed side, I learned that when you do a Backdoor Roth and you get to the section where you report the IRA contribution, there is one tricky question I always miss and that results in TT not treating the Roth conversion correctly and higher tax liability.  That section asks you to identify any IRA's you "own or contributed to" in 2018.  You need to check both t-IRA and Roth IRA.  I was only checking t-IRA since that was the only IRA getting a contribution.  However, if you also check Roth IRA, then TurboTax will subtract the Roth conversion from the t-IRA distribution.

[dogmatagram]

Thanks for the detailed answer!

I came to the same conclusion as you about "Other Contributions Previously Taxed by MA", and I assume I got the IRAs I "own or contributed to" question correct since the TT-generated form 8606 appears to correctly account for the conversion and computes the taxable amount to only be the pre-conversion earnings/gains from the t-IRA.

I still don't know whether Roth conversions should count towards "Total Distributions Received in Previous Years" and I left it blank as well, but may revisit researching it for 2019 taxes.

[williasp]

I went back and looked at the MA instructions for Sched X & Y so I could try to get a feel for the full context.  I think I now get it.  That section seems to apply to an IRA or Keogh plan in which you have made non-deductible contributions over a period of years.  Let's say you have $50K in the plan and your non-deductible contributions totaled $25K.  That $25K has already been taxed.  Let's say you've previously withdrawn $15K and this year you withdraw $5K.  Since you can withdraw a total of $25K of your non-deductible contributions and only previously withdrew $15K, then the $5K withdrawn this year is non-taxable.  So in that context, it makes sense to keep track of all the non-deductible contributions made and all the funds withdrawn.
It doesn't make a lot of sense in the Backdoor Roth situation where every year you make a non-deductible contribution (i.e., funds already taxed in MA), then convert those funds to Roth.  I will continue to leave the "Total Distributions Previously Received" blank and hope this doesn't trigger an audit.  If it does, it seems like it should be easily explainable.

[dogmatagram]

Thanks for the additional insight!

[Anonymous]

Hi there - On the question, select the kind of IRS(s) you own or will contribute to.... I think you actually just want to click on Traditional IRA.  with the backdoor strategy, you are Contributing to a Traditional IRA, then converting to a Roth.  I could be wrong, but from everything I have read, you only want to check the Traditional IRA box on this question.  Would be curious to hear what others say.

[fanfare]

A conversion to roth is not a contribution to a roth.
conversely to convert a Traditional IRA some funds must first be contributed.

The contribution could be in this tax year or previous years.