Converting non-deductible IRA contribution to Roth IRA

[locorecto]

I opened a traditional IRA Account in 2019 and made a $3000 after-tax contribution.  In reality I wanted to get a Roth IRA because I already had a employer sponsor 401k but I wasn't well informed. I make over the income limit to qualify for deductible contributions to a traditional IRA. I filed my 2019 taxes and Turbo Tax created a 8086 for non-deductible IRA contribution. I haven't made any others contributions to that account.

I want to transfer/convert those funds to a Roth IRA account now.

What is the best way to do this?

How do I report this on the 2020 tax return?

[macuser_22 · Accepted solution]

You simply have the IRA custodian convert the IRA to a Roth.  The will issue a 2020 1099-R that you report this way next year on your 2020 tax return.

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, 2020.

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.

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".

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.
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.

[dbrier2]

If you have a loss in the traditional Ira can that reduce your taxable amount if some of the contribution was before taxes ? ie; contribution $5000. only $1000 (non-deductible) after taxes, account is only now worth $4000 due to an investment loss.

[macuser_22]

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@dbrier2 wrote:

If you have a loss in the traditional Ira can that reduce your taxable amount if some of the contribution was before taxes ? ie; contribution $5000. only $1000 (non-deductible) after taxes, account is only now worth $4000 due to an investment loss.

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A loss just means that you have less money to convert so there is less to tax if taxable.

[NJ_Devils]

@macuser_22 This is a 2 year old post, but wanted to ask why you think there can be no traditional IRA at the start of the year to benefit from backdoor ROTH? You can just close it before the end of the year and there will be no proration on Form 8606, if I am correct?