@Sarmor wrote:
Hi,
Ty for clearing this up
Here are some remaining questions:
1) When you say the earnings are only taxed after they are finally distributed, do you mean when they are converted from traditional back to Roth and I get a a 1099R form (on tax 2021 form) or do you mean when I finally withdraw the money (like after age 59.5)? If you mean the latter, isn’t it true earnings are never taxed for Roth? Did you mean if ai withdrew from Traditional IRA earnings would be taxed? In this case I am basically putting money back in Roth so earnings will never be taxed unless withdraw early, right?
2) Also, as far as reporting the back door conversion of this amount from Traditional back to Roth, I can’t do this until next year’s Tax form 2021, right? Is this bc I won’t get the 1099-R for this distribution until 2022? It seems conversions have to be reported on tax form year they were done in and not for what year they were done for.
Thx
1) Yes, a Roth conversion is a distribution. If you convert the Traditional IRA to a Roth then the earning will be taxable. (A true Backdoor Roth only works if the year end value of all Traditional IRA account is zero and there are no earnings.) See below.
2) Correct any conversion in 2021 must be reported on a 2021 tax return.
Perhaps you should review the "Backdoor Roth" procedure.
The "Backdoor Roth" does not exist in tax law. It is a procedure used by some to take advantage of a quirk in tax law that allows making a non-deductible contribution to a Traditional IRA when one cannot contribute to a Roth IRA, and the immediately converting the Traditional IRA to a Roth IRA, thereby getting the money into the Roth via "backdoor" tax free.
That "procedure" can only work of all these requirements are met:
1) No Traditional IRA account whatsoever can exist (that includes any SEP or SIMPLE IRA accounts) at the start. If existing IRA's contain any before-tax money or earnings then it will be partly taxable.
2) The Tradition IRA contributions must be reported on a 8606 form as non-deductible.
3) The conversion to a ROTH must be shortly after the contribution to avoid taxable gains.
4) The entire Traditional IRA value must be zero that the end of the year of conversion.
Otherwise the conversion will be partly taxable.
First you must enter your Traditional IRA contributions (if there were 2020 contributions).
IRA contribution
Federal Taxes,
Deductions & Credits,
I’ll choose what I work on (if that screen comes up),,
Retirement & Investments,
Traditional & Roth IRA contribution.
Be SURE to answer the follow up that the are choosing to make this contribution NON-DEDUCTIBLE - if that screen comes up. (DO NOT say that you moved (recharacterized) the money to a Roth) – this is a conversion, not a recharactorazition.
Then enter the 1099-R that shows the distribution.
Federal Taxes,
Wages & Income
I’ll choose what I work on (if that screen comes up),,
Retirement Plans & Social Security,
IRA, 401(k), Pension Plan Withdrawals (1099-R).
Answer the follow-up questions answer the question that you moved the money to another retirement. The screen will open up with choices of where it was moved. Choose you converted it to Roth IRA.
When asked if you have made any non-deductible contributions say " "yes" if you did then enter the non-deductible contributions made for tax years before 2020. (Usually zero unless you also made a 2019 or earlier non-deductible contribution. If you do have prior year basis then enter the last filed 8606 line 14 value.).
Enter the 2020 year end value of your Traditional IRA a "0" (zero) - if it is in fact zero - this tax free Roth conversion will not work if it is not zero.
[If you had any other Traditional IRA at the end of 2020, then the nondeductible "basis" must be pro-rated over the current distribution and the total IRA value and only a portion of the Roth conversion will be non taxable and part will be taxable, with the remaining non-deductible basis carrying forward for future distributions. You can never only withdrew the nondeductible basis as long as the IRA exists and has a value more than zero.]
The non-deductible amount of your contribution will be subtracted from the taxable amount of the conversion on then 8606 form and enter on line 4a of them 1040 form and a zero taxable amount on line 4b if you did it right.
Also see this TurboTax FAQ:
https://ttlc.intuit.com/questions/4350747-how-do-i-enter-a-backdoor-roth-ira-conversion
**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**
