Backdoor ROTH and getting penalty for contributing to a ROTH because over income limit.

[jssomerset]

My income is too high for a ROTH.  In 2023 I contributed $6500 to a traditional IRA and immediately transferred it to a ROTH.  I followed all the instructions on TurboTax for a ROTH conversion. 

Now I’m being told that I made too much for a ROTH and will have a $390 penalty for every year I don’t take out the $6500.

[DanaB27]

Please make sure that you don't enter the conversion as a Roth IRA contribution in the IRA contribution sections. A conversion is entered in the retirement section.

Please review the steps on how to enter the nondeductible tradition IRA contribution and conversion here: How do I enter a backdoor Roth IRA conversion?

[Opus 17]

A Conversion is not a Contribution.  Only report the conversion via the 1099-R.  

[sesayse92]

So there is no need to enter anything in deductions & credits section as long as I have an 1099-R?

[AnnetteB6]

Correct.  You do not enter anything pertaining to making a Roth IRA contribution.  

However, if the Traditional IRA non-deductible contribution was made during 2024, you do need to be sure to enter it in the deductions and credits section for IRA contributions.

@sesayse92 

[sesayse92]

So I made the traditional IRA non-deductible contribution in 2024. 

I entered that into the Traditional IRA section and followed the steps. 

However, it is saying that I have a penalty. Even though I submitted a 1099-R in the Wages & Income section. 

[DanaB27]

To confirm you only entered the Traditional IRA contribution and you did not say during the IRA contribution interview that you switched/transferred the contribution to Roth IRA (recharacterization)? 

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 (do not enter anything on the "Tell us how much you Transferred" screen)
8. Answer the next questions until you get to “Any Nondeductible Contributions to Your IRA?” and select “Yes” if you had a nondeductible contribution before this tax year.
9. Enter your basis in the Traditional IRA from your 2023 Form 8606 line 14 (if you had a basis in the prior year)
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 Form 1099-R 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" screen and choose “I converted some or all of it to a Roth IRA”
5. On the "Here's your 1099-R info" 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 2023 Form 8606 and the value of all traditional, SEP, and SIMPLE IRAs

@sesayse92 

[Opus 17]

Those are two completely different things.

A 1099-R lists withdrawals (distributions).  A 1099-R has nothing to do with contributions.

You must list your contributions separately, if you made any.  They are two separate transactions with different rules.  

[Opus 17]

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@sesayse92 wrote:

So I made the traditional IRA non-deductible contribution in 2024. 

I entered that into the Traditional IRA section and followed the steps. 

However, it is saying that I have a penalty. Even though I submitted a 1099-R in the Wages & Income section. 

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A 1099-R only lists withdrawals.    Contributions are separate, different, and covered by different rules.

Did you have income earned from working?  You can only contribute to any kind of IRA if you have compensation from working (generally, wages in box 1 of a W-2, or self-employment income.)