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jdfkin
Level 2

In 2021 made a $6000 contribution to an IRA, held it for a day and converted it to a Roth IRA. Rev'd a 1099 with a distribution code 2. Is the $6000 taxable income?

Box 2 on the 1099-R (not distribution code 2) says the $6K is taxable. The money I put in the IRA was not pretax money
8 Replies
DanaB27
Expert Alumni

In 2021 made a $6000 contribution to an IRA, held it for a day and converted it to a Roth IRA. Rev'd a 1099 with a distribution code 2. Is the $6000 taxable income?

No, if you didn't have any pre-tax balance in any traditional/SEP/SIMPLE IRA then it should not be taxable. Please use the following instructions to enter a "Backdoor IRA" to ensure it is calculated correctly in TurboTax.

 

 

To enter the nondeductible contribution to the traditional IRA:

  1. Login to your TurboTax Account 
  2. Click on "Search" on the top right and type “IRA contributions”
  3. Click on “Jump to IRA contributions"
  4. Select “traditional IRA
  5. Answer “No” to “Is This a Repayment of a Retirement Distribution?
  6. Enter the amount you contributed
  7. Answer “No” to the recharacterized question on the “Did You Change Your Mind?” screen
  8. Answer the next questions until you get to “Any Nondeductible Contributions to Your IRA?” and select “Yes” if you had a nondeductible contributions before this tax year.
  9. If you had a basis in the Traditional IRA before then enter the amount.
  10. On the “Choose Not to Deduct IRA Contributions” screen choose “Yes, make part of my IRA contribution nondeductible” and enter the amount (if you have a retirement plan at work and are over the income limit it will be nondeductible automatically and you only get a warning and then a screen saying $0 is deductible).

 

 

To enter the 1099-R distribution/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 “Tell us if you moved the money through a rollover or conversion” and choose “I converted some or all of it to a Roth IRA
  5. On the "Your 1099-R Entries" screen click "continue"
  6. Answer "yes" to "Any nondeductible Contributions to your IRA?" if you had any nondeductible contributions in prior years.
  7. Answer the questions about the basis from line 14 of your 2020 Form 8606 and the value of all traditional, SEP, and SIMPLE IRAs
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Opus 17
Level 15

In 2021 made a $6000 contribution to an IRA, held it for a day and converted it to a Roth IRA. Rev'd a 1099 with a distribution code 2. Is the $6000 taxable income?

Did you have any other IRA balances at any time in 2021?  Either in the same account or other accounts?  A backdoor IRA does not work if you have any deductible balance in any IRA (all your IRA balances are aggregated for this purpose).  If you had any deductible IRA balance, then the Roth conversion will be partly taxable.

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*
jdfkin
Level 2

In 2021 made a $6000 contribution to an IRA, held it for a day and converted it to a Roth IRA. Rev'd a 1099 with a distribution code 2. Is the $6000 taxable income?

The $6000 funds contributed to the IRA were non deductible due to high income. The $6000 contributions made were after tax dollars. The funds were then converted to a Roth (backdoor Roth process) so a 1099-R was generated for that distribution with a distribution code 2 (early distribution with exception). Line one on the 1099-R was $6000 for gross distribution and line 2 was $6000 taxable amount. Taxable amount not determined box was checked. Seems like I could file form 8606  and have the distribution become non taxable since I was using after tax dollars for the contribution and the fact they were non deductible. Do you agree or is there something else I need to know to make the determination about whether the distribution s taxable or not? All of the transactions occurred in calendar year 2021. 

jdfkin
Level 2

In 2021 made a $6000 contribution to an IRA, held it for a day and converted it to a Roth IRA. Rev'd a 1099 with a distribution code 2. Is the $6000 taxable income?

I posted this reply a few minutes ago:

The $6000 funds contributed to the IRA were non deductible due to high income. The $6000 contributions made were after tax dollars. The funds were then converted to a Roth (backdoor Roth process) so a 1099-R was generated for that distribution with a distribution code 2 (early distribution with exception). Line one on the 1099-R was $6000 for gross distribution and line 2 was $6000 taxable amount. Taxable amount not determined box was checked. Seems like I could file form 8606  and have the distribution become non taxable since I was using after tax dollars for the contribution and the fact they were non deductible. Do you agree or is there something else I need to know to make the determination about whether the distribution s taxable or not? All of the transactions occurred in calendar year 2021. 

Also, there is a 401K that I have maxed out at work. Does that make a difference and is anything reportable if I fill out the 8606 on that 401K?

RaifH
Expert Alumni

In 2021 made a $6000 contribution to an IRA, held it for a day and converted it to a Roth IRA. Rev'd a 1099 with a distribution code 2. Is the $6000 taxable income?

No, this is not a taxable distribution to convert your IRA into a Roth. The fact that you maxed out your 401(k) at work does not change this. 

 

If the only money in the traditional IRA was the $6,000 you contributed the day before, then the entire amount should be nontaxable. You don't have to worry that the form has a taxable amount in Box 2, report it in TurboTax exactly as it is reported to you. Once everything is reported correctly, you will not pay tax on the conversion since the IRA was funded with post-tax dollars. 

 

If you follow @DanaB27 's instructions above, you should see an IRA distribution of $6,000 on line 4a with a taxable amount of 0 on line 4b of Form 1040. To preview your 1040:

  1. Open or continue your return.
  2. Select Tax Tools in the left menu (if you don't see this, select the menu icon in the upper-left corner).
  3. With the Tax Tools menu open, you can then view your 1040 form: Select Tools. Next, select View Tax Summary in the pop-up, then Preview my 1040 in the left menu
  4. Scroll down until you see Form 1040 Line 4a IRA Distributions and 4b Taxable amount.
Opus 17
Level 15

In 2021 made a $6000 contribution to an IRA, held it for a day and converted it to a Roth IRA. Rev'd a 1099 with a distribution code 2. Is the $6000 taxable income?


@jdfkin wrote:

I posted this reply a few minutes ago:

The $6000 funds contributed to the IRA were non deductible due to high income. The $6000 contributions made were after tax dollars. The funds were then converted to a Roth (backdoor Roth process) so a 1099-R was generated for that distribution with a distribution code 2 (early distribution with exception). Line one on the 1099-R was $6000 for gross distribution and line 2 was $6000 taxable amount. Taxable amount not determined box was checked. Seems like I could file form 8606  and have the distribution become non taxable since I was using after tax dollars for the contribution and the fact they were non deductible. Do you agree or is there something else I need to know to make the determination about whether the distribution s taxable or not? All of the transactions occurred in calendar year 2021. 

Also, there is a 401K that I have maxed out at work. Does that make a difference and is anything reportable if I fill out the 8606 on that 401K?


You didn't answer my question.  Did you or do you have any other IRA funds that were deductible?  Even from previous years.

 

If you had no other non-deductible IRA funds, then what you did is not taxable as long as you enter it in the program correctly.  Your 401(k) contributions don't have any effect on the process.

 

But if you do have deductible IRA funds, even from a previous year and even in a different account, then you can't do a tax-free conversion.  You can't only convert the $6000 from 2021.  You have to combine all your IRA balances when calculating the tax effect of the conversion.  To give a basic example: Suppose your previous deductible IRAs total $50,000.  Then you made a $6000 non-deductible contribution.  You now have combined IRA balance of $56,000 of which 10.7% is non-deductible.  If you do a $6000 Roth conversion, only 10.7% will be non-taxable, and the other 89.3% will be taxable.  And you will end up with the $50,000 balance in your traditional IRA being partly non-deductible.

 

So it really is critical to know if you have any other pre-tax (deductible) IRAs, even from prior years. 

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*
jdfkin
Level 2

In 2021 made a $6000 contribution to an IRA, held it for a day and converted it to a Roth IRA. Rev'd a 1099 with a distribution code 2. Is the $6000 taxable income?

Thank you for the reply. I have not made any deductible contributions to any IRA account. They have all been non deductible. 

Opus 17
Level 15

In 2021 made a $6000 contribution to an IRA, held it for a day and converted it to a Roth IRA. Rev'd a 1099 with a distribution code 2. Is the $6000 taxable income?


@jdfkin wrote:

Thank you for the reply. I have not made any deductible contributions to any IRA account. They have all been non deductible. 


Then the "backdoor" conversion should be non-taxable.  Make sure you are following the employee experts' answers.  You may need to delete your 1099-R entries and start over. 

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*
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