Backdoor Roth IRA Prorata Rule in TurboTax

[penname]

Please advise. 

This year my husband and I decided to contribute money to a backdoor roth. We both opened traditional IRAs and converted the 6k contributions each to a roth. Shortly thereafter I discovered that my husband has a traditional IRA from years ago that he had forgotten about with 2700. He is now trying to roll over the old IRA money into his work 457. 

How do I report the old IRA money in turbotax? I realize that because of this we now have to pay a penalty (prorata rule), does turbotax automatically do this? I did not see options to report this. 

Thank you for the help!

[macuser_22]

After entering any 2018 or earlier "basis" (2019 basis comes from entering any 2019 non-deductible contribution into the IRA contribution interview) then the interview will ask for the total 2019 year end value of ALL existing Traditional, SEP or SIMPLE IRA accounts that existed.    The pro-rating is done on a 8606 form lines 6-15 or the "Taxable IRA Distributions Worksheet" if needed.

Enter a 1099-R here:

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).

OR Use the "Tools" menu (if online version left side) and then "Search Topics" for "1099-R" which will take you to the same place.

Be sure to choose which spouse the 1099-R is for if this is a joint tax return.
Be sure to pick the correct 1099-R type: Standard 1099-R, CSA-1099-R, CSF-1099-R, RRB-1099-R.

[NOTE: When you get to the "Your 1099-R Entries" screen where you can add another 1099-R, use "continue" to keep going as there are additional interview questions after that screen in most cases. You can always return as shown above.]

You will be asked of you had and tracked non-deductible contributions - say yes. The enter the amount from the last filed 8606 form line 14 if it did not transfer. Then enter the total value of any Traditional, SEP and SIMPLE IRA accounts that existed on December 31, 2019.

That will produce a new 8606 form with the taxable amount calculated on lines 6-15 and the remaining carry-forward basis on line 14.

NOTE: If there is an * next to line 15 then 6-15 will be blank and the calculations will be on the "Taxable IRA Distributions worksheet instead.

[dmertz]

The pro-rata rule is not a penalty, it simply means that you pay tax on some portion of the pre-tax IRA balance now instead of later.

Presumably the Roth conversion done in 2019.  If so, it's too late to do anything about a portion of the Roth conversion being taxable.  However, if the Roth conversion was instead done in 2020, rolling over the remaining IRA money to a qualified retirement plan before the end of 2020 will result in the Roth conversion being nontaxable on your 2020 tax return.

Your Roth conversion is unaffected by your husband's year-end balance in traditional IRAs.  It's only affected by your own year-end balance in traditional IRAs.

[penname]

thank you @dmertz! that account with 2700 is still standing in a traditional IRA. We did not roll it over yet. So when do we pay the pro rata tax? and is it on the total amount of his and my retirement funds (IRAs). can I deduct it from my federal refund on turbotax?

Our backdoor roths were 2019 with contributions in 2020 during the allowable period.

Thank you so much for the help!

[dmertz]

Your 2019 tax returns will report only the traditional IRA contributions, with the nondeductible amount reported on a separate Form 8606 for each of you.  The amount that results on line 14 of each Form 8606 (presumably the full amount of each of your traditional IRA contributions made for 2020) will carry forward to line 2 of each of your 2020 Forms 8606.

The rollover from the traditional IRA to the 457(b) and the Roth conversion, both occurring in 2020, will be reported on your 2020 tax return.  With neither of you having a year end balance in traditional IRAs at the end of 2020, the entire amount of your basis in nondeductible traditional IRA contributions from 2019 (and perhaps 2020 if you make 2020 nondeductible traditional IRA contributions before the end of 2020) will be applied on 2020 Forms 8606 to be used in calculating the nontaxable amount.  As long as each individual's basis in nondeductible traditional IRA contributions is greater then or equal to the amount each converts, each Roth conversion will be entirely nontaxable.  If more is converted because there have been investment gains, the gains converted will be taxable.