IRA Basis

[redbull2395]

Hello,

I have a question regarding IRA basis. During the tax year of 2022, I contributed $6,000 initially to a Rorth IRA. I realized I would be over the income limit, recharacterized the contributions to a traditional IRA, and then proceeded to perform a backdoor Roth. Before the recharacterization, the $6,000 had lost money and the amount recharacterized was $5,231.48. The amount converted back to the Roth was $5,272.30. The basis reported on 8606 is $769. For tax year of 2023, I contributed $6,500 to traditional IRA (after the end of the tax year) and converted it to a Roth IRA. When preparing my taxes and entering my basis, I enter the $769 which is on the return that was prepared by TurboTax. TurboTax is now saying this doesn't match the basis from 2022 ($0) and that I need to prepare an explanation. I did not have any basis before 2022. Any help regarding a solution would be appreciated.

Thanks.

[dmertz]

The amount of contribution recharacterized was $6,000, not $5,231.48.  $5,231.48 was the amount transferred to accomplish the recharacterization of $6,000.  You seem to have done something wrong was done with your reporting after that.  If the $5,272.30 Roth conversion was done in 2022, your basis that carries forward from 2022, shown on line 14 of your 2022 Form 8606, should have been $728.  If the $5,272.30 Roth conversion was instead done in 2023, all $6,000 should have been present on line 14 of your 2022 Form 8660 because there was no Roth conversion done in 2022.  Either way, it seems that you need to amend your 2022 Form 8606.

[redbull2395]

Thanks for the quick response. Is amending the 8606 able to be accomplished using TurboTax or will I need to complete it by hand? Even if I do amend the 8606, I don't believe it will solve my other issue though. For some reason, TurboTax is not carrying forward the basis from 2022 and is saying my basis is $0. Is there any way to rectify this issue or should I just submit an explanation along with my return saying the basis I am reporting is correct and was present on my 2022 return (after I correct it).

[redbull2395]

It appears when generating form 8606, TurboTax took the amount from the 1099R which tracked the recharacterization, not the 1099R for the Roth conversion, which accounts for the error. If there a way to manually fix form 8606 through TurboTax? I have downloaded the desktop version in an attempt to amend the return, but haven't had any luck so far. Thanks again.

[dmertz]

In what year did you do the $5,272.30 Roth conversion?

[redbull2395]

The conversion was done in 2022 leaving the balance of the traditional IRA 0 as of Dec 31st.

[dmertz]

In that case your basis carrying forward from 2022 should have been $728 on line 14 of the 2022 Form 8606.

Have you tried entering $728 into 2023 as your basis to see if that will cause TurboTax to not ask for an explanation for a change in basis?

[dmertz]

Another thought:  I think that TurboTax has a bug (which I reported years ago and was never corrected) that results in TurboTax losing your carryover basis under some circumstances.  Perhaps something about your 2022 tax return results in this being one of those cases.  Since you have the download version of TurboTax, examine your 2022 tax return closely to see if the Form 8606 and the basis information on the IRA Information Worksheet makes sense.

[redbull2395]

I attempted using that amount and it still says it is not correct. It seems to suggest my basis from 2022 is 0. Here is my 8606. It looks like the issue is that TurboTax took the amount from the 1099R that I uploaded for the initial recharacterization, not the amount that was actually converted as the value had increased slightly.  

[redbull2395]

If I have no plans on ever maintaining a balance in my traditional IRA (I always plan on backdooring it into a Roth - I did this for tax year 2023 but did make the contribution after the 1st of the year), would there be any harm in just saying I have no basis going forward? At this time, I do not have any plans to carry a balance in my traditional IRA. As such, would tracking basis be necessary? I am relatively new to this and am still trying to get acclimated to all the ins and outs. Thanks for all the help.

[dmertz]

The 2022 Form 8606 seems to show that you reported a $5,231 conversion rather than a $5,272 conversion.

[Disregard the following sentence, I misread the Form 8606]  The Form 8606 also shows that you made the $6,000 traditional IRA contribution for 2022 in 2023 (the result of recharacterizing a $6,000 Roth IRA contribution made in 2023), so how could you have converted the $5,272 in 2022?  Do you have a 2022 Form 1099-R showing a $5,231 distribution from a traditional IRA, presumably with code 2?

[redbull2395]

Where does it show the contribution happened in 2023? Line 4 is left blank and I don't see any other place indicating it occurred in 2023. I received 2 1099Rs, one for my Roth IRA and one for my traditional IRA. I will attach them below. Going back and looking at my transaction history, it actually appears the recharacterization amount was 5,272.30 and the conversion amount was 5,231.48. I believe I must've misunderstood what exactly the 1099R amounts referred to. If the conversion was in fact 5231.48, then it appears the basis on the 8606 is actually correct and the issue remains that TurboTax, for some reason, is not carrying this forward. I apologize for the oversight.

Roth

Traditional

[dmertz]

I misread the 2022 Form 8606 that you posted.  I think I saw the $6,000 on line 5 and thought it was on line 4.  The form does indicate that the $6,000 contribution was made in 2022, so ignore what I said about it appearing that the contribution was made in 2023.

In your original post you said, "... the amount recharacterized was $5,231.48. The amount converted back to the Roth was $5,272.30."  However, your Forms 1099-R show that the amount recharacterized was $5,272.30 and the amount converted was $5,231.48.  Given the correct information, your 2022 Form 8606 is correct, so no need to amend that.  $769 is the correct basis that carries forward.

Check line 3 of your 2022 IRA Information Worksheet.  If it shows zero, this is likely where the problem lies.  Before the Tax Cuts and Jobs Act of 2017 suspended miscellaneous deductions subject to the 2%-of-AGI floor through 2025, one could take a deduction for unrecoverable basis.  TurboTax would automatically include this deduction on Schedule A and zero the basis when the year-end value in traditional IRAs was zero (although in my opinion this deduction should be optional).  With the suspension of this deduction, TurboTax no longer puts the deduction on Schedule A but I think it still zeros the basis that carries forward.

I would enter $769 into 2023 TurboTax as your basis from 2022, enter as your explanation that there is no actual adjustment to your basis and that 2022 TurboTax mistakenly zeroed your basis carryforward despite $769 being present on 2022 Form 8606 line 14.

(If you enter at least $1 as your year-end value in traditional IRAs, I think that TurboTax won't zero your basis.)

[redbull2395]

Sounds great, I will do that! Thank you so much for the help!