Need Help with Step Two Backdoor ROTH IRA Conversion

[dlp32]

I converted $100,000 from my IRA Retirement Account to a newly opened ROTH IRA on 12/28/2020. This is my only ROTH IRA and I have made no other conversions.  This money was 80% of my 2020 RMD from my IRA so, of course, I received a 1099-R for my IRA showing a Gross Distribution in Box 1 of $125,000. I have already entered this 1099-R into my TurboTax CD/Download. 

I am now trying to follow the instructions for a Back Door Roth IRA Conversion and I completed Step One of the Two-Step Process as outlined by TurboTax. I have Started Step Two and am at #3 where it asks how I want to enter my 1099-R and I have to select Type it in yourself because I have nothing to import but I also do not have a 1099R. It says to follow the instructions but since I do not have a 1099-R for my ROTH, how can I fill in all the Boxes on the 1099-R screen that pops up? All I have is a ROTH IRA ACCOUNT STATEMENT - 2020 ANNUAL STATEMENT from my broker that clearly says CONVERSION on it and $100,000. I also have a tax information statement that reads IRA ACCOUNT FAIR MARKET VALUE FOR THE TAX YEAR 2020 for $100,000. I am stumped at how to fill in the 1099R screen. What do I type in all those Boxes? 

Thank you for your help. It was nice of the IRS to give us until May 17th to file but I need to finish by April 15th in order to know how much to send in for my Federal and State 1st Quarterly Estimates. :-C

$

[dmertz]

Nothing about this involves a distribution or Form 1099-R from a Roth IRA.

You do have a Form 1099-R that includes the distribution that was converted to Roth.  It has $125,000 in box 1.

Delete and reenter this 1099-R.  Indicate that none of this Form 1099-R was RMD (because RMDs were waived for 2020), indicate that you moved the money to another retirement account, indicate that you did a combination of rolling over, converting or cashing out, then indicate the amount that you converted to Roth.

To reach the page that asks for your year-end value in traditional IRAs, click the Continue button on the page the lists the 1099-Rs that you've entered.

For your estimated taxes, if you have the cash available to do so, you can always overestimate your Q1 payment and adjust your Q2 payment to bring your total for Q1 and Q2 to only the amount necessary to satisfy the safe harbor.  It just means that you pay a little bit 2 months early.

[MtnTABS]

Thank you for your help! (All of the following happened in 2020.) If I understand correctly, you are telling me to delete my 2020 IRA1099-R that I entered into TT, start fresh and enter it again. Box 1 is $125,000.00. $100,000 of that converted into my new ROTH IRA on 12/28/2020. The other $25,000 went into my personal checking account. Doesn’t that mean that the $25,000 was a partial RMD for 2020? You said to “indicate that you did a combination of rolling over, converting or cashing out...” so I assume there is a box to check that indicates i.e. “part of Box 1 is a RMD”? I am going to follow your steps and see what happens. 

Before reading your suggestion to send in the 1st quarter estimates, at 3:30 a.m. April 15th (today) I wrote out and mailed checks for both Federal and State 2021 1st Quarter Estimates. 2021 will be the first time I will have only myself as a deduction since my spouse passed away 02/24/2020.  Trying to figure out the estimates without a completed 2020 return was a big fat guess so I just added a couple thousand dollars to the amounts I paid quarterly in 2020 and will adjust the 2nd Quarter Estimates as needed. My spouse did all our taxes so last year I had to figure out how to turn on his computer (!), find all our previous yearly TT return files, buy a TT CD at Staples and educate myself on everything. I thought my head would explode especially since all his passwords are hidden somewhere in his computer. With all that I am still having much more trouble with the 2020 returns than I did with the 2019 returns. I so appreciate help from you and anyone else.

[dmertz]

Because RMDs were waived for 2020, none of the amount distributed in 2020 was a required distribution (the 'R' in RMD) even though the original intent might have been for it to be an RMD.  It's just a distribution.

[MtnTABS]

I have been reading TT about Form 8606. I inherited this IRA from my husband on 02/24/2020. With this traditional IRA conversion to a ROTH IRA plus the $25,000 distribution I received does this mean I have to print out Form 8606 and manually enter the information? Will I not be able to eFile through TurboTax? Thanks 🙏🏽 again for all the explanations. 

[dmertz]

What is the code in box 7 [not box 4 as I had originally typed] of the form 1099-R?

[MtnTABS]

Box 4 on the 1099-R is FEDERAL INCOME TAX WITHHELD with $0.00 inserted. Box 7 Distribution Code has 7 inserted. The IRA/SEP/SIMPLE box is checked. 

Friday night I deleted my 2020 traditional IRA 1099-R from my TurboTax software and started from scratch. I once again followed the Two Step Back Door Traditional IRA Conversion to ROTH IRA and both steps worked perfectly, the $100,000 conversion shows on an 8606, the $25,000 distribution is as it should be, I made sure not to mark anything as an RMD and the $2,700 charitable donations I made directly from my traditional IRA are there. 

When looking at my Forms list I see a red ❗️exclamation point next to Form 8606. There is nothing filled out in 8606: Part One.  My $100,000 ROTH IRA conversion shows in 8606: Part Two. Is there something I need to manually enter to get the 8606 accepted when I eFile? 

Your help has gotten me through a difficult step.....3 days of attempts and lots of reading. 🤓 Hopefully I can do something to my 8606 to make that ❗️disappear. 🙏🏽

[dmertz]

Sorry, I did mean box 7.

Code 7 means that you chose to treat the traditional IRA as your own.  As such, it's no longer an inherited IRA.  Tell TurboTax it's not inherited and you should be able to work though everything.

Any basis that your husband had in nondeductible traditional IRA contribution is now part of your basis as well.  If your husband had basis, after clicking the Continue button on the page that lists the 1099-Rs that you've entered, indicate that you made and tracked nondeductible contributions, click the EasyGuide button on the Let's Find Your IRA Basis page and indicate that you inherited a traditional IRA before 2020 from a spouse who died even though you inherited it in 2020.  TurboTax will then allow you to enter the basis that you inherited from your husband.

[MtnTABS]

Thank you for your continued help. I researched our joint federal tax returns (TurboTax Deluxe) back to 2014 following the 8606 trail to see what my husband’s basis was: 

By 2014, Line 14 on the 8606 was 11.

By 2015, Line 14 on the 8606 was 1.

By 2016, Line 14 on the 8606 was 0.

Our federal returns for 2017, 2018, and 2019 had no Form 8606s filed because there was no “basis” left thus all IRS distributions from 2017 forward are fully taxable, right?? Therefore in 2020,  the $100,000 I converted from my traditional IRA (formerly my husband’s) to a ROTH IRA  plus the $25,000 distribution I took totals $125,000 that is taxable because it originates from deductible contributions (no basis). Am I correct in all this? 😬 

2nd Question: My 2020 Back Door Traditional IRA Conversion to a ROTH IRA generated a 2020 Form 8606. Part II is filled in: 

Line 16 $100,000

Line 17  $0

Line 18. $100,000

There are 3 questions on the 8606 to answer to see if I need to fill out Part 1 and I am confused. I have no Basis; I haven’t made nondeductible contributions in 2020; I did take a $25,000 distribution in 2020 and I did convert $100,000 from a traditional IRA to a ROTH IRA. So am I to assume I need to fill out Part 1? I googled the heck out of the Internet all weekend plus read the 8606 publication and I am still stumped. In TurboTax I would switch from “Step-by-Step”  to “Forms” and I would be manually filling in Part 1 if necessary (I assume?).

Hopefully I haven’t completely confused you. 😮

[dmertz]

1) Yes, it appears that your husband had no basis in nondeductible traditional IRA contributions remaining.

2) This is just an ordinary Roth conversion.  With no basis in nondeductible traditional IRA contributions there is no need for Form 8606 Part I.  The $100,000 Roth conversion is entirely taxable as shown on Form 8606 Part II.  The other $25,000 distributed is also taxable for a total of $125,000 on Form 1040 line 4b.

You should be using forms mode only to review the forms, not to make any entries.

[MtnTABS]

Thanks SO much. I still don’t know why there is a ❗️8606-T (Not Done) on my FORMS list or why Part I, Line 1 is blank but highlighted in bright pink. Last night I twice went through the Step-by-Step for IRA contributions to insure that I checked NO after both our names but that ❗️still appears so I will ignore it. 

💃👏👏👏

[MtnTABS]

Last week you helped me through the steps to correctly enter my 1099-R. Sorry but I am back again with a new problem with the same1099-R 2020 $125,000 distribution that I took from my IRA. The $100,000 shows up on Part II of the 8606 Lines 16 and 18 as a ROTH Conversion as we discussed BUT the other $25,000 is not included on 1040 Line 4b. You said Part I of the 8606 didn’t need to be filled in but could this be my problem? The ❗️Form 8606-T (Not Done) is still showing under FORMS IN MY RETURN. I was very careful when entering this 1099-R to say it was not an RMD. When it asks “What Did You Do with the Money.....” I checked the box that says “I moved the money to another retirement acct. “ because if I don’t check this box, the rest of the questions on that screen disappear including “Tell us how much of the $125,000 you moved to an IRA, 401k or other retirement account”. This is where it asks “Amount converted to a Roth IRA account” and I filled in $100,000. Underneath that it says, NOTE: We’ll assume that everything that wasn’t rolled over or converted was cashed out or wound up somewhere other than a retirement account. ....So I click on Continue and answer “No, I didn’t put this money in an HSA.” On the next screen I answer No, this was not a ...2020 Disaster Distribution. That’s it and I am back to the 1099-R Entry screen. 

Underneath all my 1099R entries I hit CONTINUE to answer the follow up questions. I answer NO to the disaster distribution question. Next I answer NO I did not make and track nondeductible contributions to my IRA. Next screen I filled in the total values of all my traditional IRAs. (This does not include the converted Roth IRA.) The next screen I answer “I was not required to take an RMD for 2020.” On the next screen I answer the same question for my deceased spouse (no RMD required). And that is the end. 

So the big question is, why is my 1040 only showing $100,000 of my $125,000 distribution as taxable when ALL of it is taxable? Both Box 1 and Box 2a on the 1099-R say it is all taxable. Why is the $25,000 not showing up in 1040 Line 4b?  Are you sure Part I of my 8606 doesn’t need to be filled in? That ❗️indicates something is not right I think. And if it should be filled in, how do I do it through Step-by-Step? I’ve reviewed all my FORMS and this is the only thing stopping me from filing as far as I can determine. Once again, thanks for your help. 🙏🏽🙏🏽🙏🏽

[dmertz]

You needed to indicate that you did a combination of rolling over, converting and cashing out.  By doing it the way that you did, TurboTax seems to have assumed that the $25,000 is not taxable because it was rolled over to another qualified retirement account.

Edit the 1099-R to indicate that you did a combination.  if that doesn't produce the correct result, I suggest deleting and reentering this 1099-R, indicating that you did a combination.

[MtnTABS]

I did indicate that it was a combination conversion and cash. I’ve entered and re-entered this 1099R carefully, answered the CONTINUE questions at the end of all the 1099-R entries AND TT will not tax that cash. Someone else insisted I had to divide the 1099-R into separate entries, identical except the amounts in Boxes 1 and 2a and it STILL doesn’t tax that $25,000distribution. I specifically watched the Federal Refund amount at the top of the screen and when I entered the $25,000 1099R, the refund fell from $15,000+ to $9,000+ BUT as soon as I checked  the IRA/SEP/SIMPLE box, the refund shot back up to $15,000+. If I leave the box empty, TT asks me about it in the very next question. 

I still think it is because my 8606-T Part I is not filled in but what do I know?  I’ve been at this 32 days now. Any other  ideas? Thanks for responding.

[dmertz]

If marking the IRA/SEP/SIMPLE box results in a change in your refund, the only reason is that somehow TurboTax believes that you have basis in nondeductible traditional IRA contributions and is preparing Form 8606 on which the taxable amount is being calculated as $0.  Examine the IRA Information Worksheet.  Otherwise, click the Continue button on the page that lists the 1099-Rs that you've entered and proceed to the page that asks for your basis in nondeductible traditional IRA contributions to see what's there.

However,  if that was was the case, it seems that the taxable amount of the Roth conversion if entered by itself would be incorrect as well.