For box 7 on 1099 R form, if I put code 2 it makes conversion to Roth IRA taxable. What code should I put so that Roth IRA conversion is not taxable?

[KatrinaB48]

What type of retirement account did you transfer the funds from? 

[Anstoss]

From my traditional IRA to my Roth IRA

 Basically backdoor conversion 

[hbl3973]

Anstoss,

Any distribution from a traditional IRA to a Roth IRA is taxable.  The code 2 says that you won't be dinged with a 10% additional penalty beyond the regular income tax you would pay if you were under 59 1/2 years old at the time.  IRS publication 590-B (https://www.irs.gov/pub/irs-pdf/p590b.pdf) discusses the exceptions to such an early distribution on pages 22-24.

It is possible you thought that you were not making a taxable transaction when you did the conversion.  In that case, it is unfortunate, but, as noted in IRS publication 590-A (https://www.irs.gov/pub/irs-pdf/p590a.pdf:(

"No recharacterizations of conversions made in 2018
or later. A conversion of a traditional IRA to a Roth IRA,
and a rollover from any other eligible retirement plan to a
Roth IRA, made after December 31, 2017, cannot be recharacterized as having been made to a traditional IRA."

You are stuck paying the tax, but not the penalty.  If that extra tax proves to be more than you can afford right now, you should pay as much as you can with the tax return and either pay the balance within 120 days after April 15 or set up a payment plan at https://www.irs.gov/payments/online-payment-agreement-application or with paper form 9465.  You should also handle your state tax return, if any, similarly.

[AnnetteB6]

If you are trying to report a 'backdoor' Roth IRA conversion, then you should have a Form 1099-R that was issued by the financial institution when you distributed the funds from the Traditional IRA and put them into the Roth IRA.  You should not be entering the information on a Form 1099-R on your own.  If the conversion took place in 2020, then you will get a 2020 Form 1099-R to report on the 2020 tax return.  

For more detailed guidance for entering the backdoor Roth IRA conversion, please see the following TurboTax article:

How do I enter a backdoor Roth IRA conversion?

@Anstoss

[hbl3973]

AnnetteB6, thanks for the info and link.  As the code 2 surely would not have been mentioned unless it appeared on a tax form, it seems clear to me that the original poster was entering the information from a 1099-R form and got concerned that the refund shrunk or the tax due jumped.

[macuser_22]

@Anstoss 

It is probably taxable because you failed to enter the other half of a "backdoor Roth".   There are two parts:

1) enter the non-deductible contribution  in the IRA contribution section and mark it non-deductible  (assuming that this was a new 2019 contribution - if prior to 2019 then you should have a 8606 form form the prior years contribution in box 14).

2) Enter the 1099-R for the convulsion and indicate in the interview that you tracked the non-deductible basis.  The non-deductible contributions should offset the taxable amount.

This so-called “back-door Roth” method ONLY works if you have NO OTHER Traditional IRA accounts.  If you do, then the non-deductible part must be spread over ALL accounts and cannot be withdrawn by itself.  Only if you started with NO Traditional, SEP & SIMPLE IRA and ended up with a zero amount in ALL Traditional, SEP & SIMPLE IRA accounts will this Roth conversion not be taxable.

First you must enter your Traditional IRA contributions (if there were 2019 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 2019.     (Usually zero unless you also made a 2018 or earlier non-deductible contribution. If you do have prior year basis then enter the last filed 8606 line 14 value.).

Enter the 2019 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 2019, 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

[Anstoss]

Thanks everyone for your feedback. Yes it is after tax contributions to traditional IRA and then backdoor conversion to Roth. 

If I put 7 [which is about conversion to Roth], turbotax will show no tax on the conversion.  Could this work or I have to do the two parts as post above?

Thanks

[macuser_22]

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@Anstoss wrote:

Thanks everyone for your feedback. Yes it is after tax contributions to traditional IRA and then backdoor conversion to Roth. 

If I put 7 [which is about conversion to Roth], turbotax will show no tax on the conversion.  Could this work or I have to do the two parts as post above?

Thanks

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You have to do the 2 parts.    You cannot change the code.  (Code 7 has nothing to do with a Roth conversion and in your case is not different than code 2).

[Anstoss]

Thanks. what if I made non-deductible contribution to traditional IRA in late 2018, and did backdoor conversion to Roth early Jan 2019. Where/how should I do the first part to show the money is not subject to tax?

[fanfare]

The only way for it to work is to meet the conditions and follow the steps.

File 2018 Form 8606 to show your election to make your  2018 IRA contribution non-deductible.

That should have happened a year ago.

[macuser_22]

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@Anstoss wrote:

Thanks. what if I made non-deductible contribution to traditional IRA in late 2018, and did backdoor conversion to Roth early Jan 2019. Where/how should I do the first part to show the money is not subject to tax?

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When you entered the 2018 non-deductible contribution on you 2018 tax return there should have been a 8606 form generated.

As I said in the answer in the box above, you use the box 2018 8606 box 14 value to answer the interview question about prior year non-deductible contributions.

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 2019. (Usually zero unless you also made a 2018 or earlier non-deductible contribution. If you do have prior year basis then enter the last filed 8606 line 14 value.).