Is TurboTax double taxing traditional IRA to Roth IRA conversion?

[coolbean]

In the last couple years, I contributed after tax money to my traditional IRA and converted Roth IRA. Each year my traditional IRA starts with $0 and I contribute $6000 and then convert around $6001 to Roth IRA, leaving the traditional IRA empty again. I never withdrew anything. I recently realized Turbotax reported double tax on that fund. (I owe $360 for the IRA contribution even tho it was already after tax). Did I do anything wrong or is this an error in Turbotax? If so, how do I correct the tax return for the last couple of years?

[dmertz]

Entered correctly, TurboTax handles this scenario correctly.  $360 sounds like a 6% excess contribution penalty.  It seems likely that you entered a Roth IRA contribution that you did not actually make.  You made a nondeductible traditional IRA contribution (reported on Form 8606 Part I), not a Roth contribution, then did a Roth conversion (reported on Form 8606 Part II via entry of the Form 1099-R that reported the Roth conversion).  Nothing of this is to be entered as a Roth IRA contribution.

Perhaps the first year that you did this you made a $6,000 Roth IRA contribution, realized that you were ineligible to make a Roth IRA contribution, recharacterized the contribution to be a traditional IRA contribution instead and then did a Roth conversion.  If so, you could have told TurboTax about the Roth IRA contribution but failed to indicate that it was recharacterized, leaving you with reporting a $6,000 excess Roth IRA contribution that is subject to a $360 penalty on Form 5329 Part IV each year until corrected.  You'll need to find out where you went wrong and amend the corresponding tax returns.

[coolbean]

Thanks for your reply, that's interesting. I believe the 6% penalty comes from me trying to correct the error in form 8606 from year 2021 when Turbotax mistakenly said my total basis for traditional IRA is $0 when it should have been $6000 since I contributed $6000 to IRA in 2020. It's too late to amend the 2021 return so what should I do now? Do I say this year's basis is $6000 or $12000?

[dmertz]

The deadline for amending your 2021 tax return is April 15, 2025.

"Each year my traditional IRA starts with $0."  If your 2020 year-end value was zero, your basis carried into 2021 was $0.  Perhaps in 2021 TurboTax you failed to enter your 2021 nondeductible traditional IRA contribution.

[fanfare]

Form 8606 is an important part of the "Backdoor Roth " process.

also, do not make a direct Roth contribution or tell TurboTax you made a contribution.

That defeats the whole plan.

[fanfare]

Use Form 1040-X to submit a revised Form 5329 showing no penalty tax.

If Form 8606 was missing or wrong, correct that form also.

The "amount you owe" will go down, accordingly.

[coolbean]

Thanks! I always contributed to Roth IRA via traditional IRA. Just to confirm, it is ok to convert all of $6001 in traditional IRA to Roth IRA, right? The $1 earning there will not cause me to be double taxed?

[dmertz]

With $6,000 in basis and no other money in traditional IRAs, converting $6,001 will result in all $6,000 of your basis being applied.  That means that only the investment gain of $1 will be taxable, calculated on Form 8606.