Non deductible IRA backdoor converted to Roth, shall I answer Yes or No to "Recharacterization"?

[JerseyBird68]

Hi!

Here is my problem:

I converted a few of my losing stocks in my non-deductible IRA to Roth IRA (through backdoor) this year, the first time. It is a partial conversion, I still have holdings in my IRA account. 

When comes to the screen to ask if I have a recharacterization, whether I answer Yes or No, they all dont look right.

First, I answer No recharacterization, then follow the steps, enter the number in my 1099R form, and the total value of my IRA accounts at 12/31/21, then it tells me to pay $10,000 more tax!    - But that's not right.

Because I specifically converted the stocked I have lost money on,  so I should have no gains on these stocks, so technically, this conversion should be tax free (because the base contribution is after tax, and I had no earnings on these stocks; although my overall IRA account had gains, but the gained part is not converted).

Then I tried to answer Yes. Follow the steps, then in the end, it says I am not eligible to  contribute to Roth, I have to withdraw my "contributions" to Roth IRA.  - I think it treats my distribution from the IRA to Roth IRA as a contribution, instead of a conversion.

I am so confused! Is a backdoor nondeductible IRA to a Roth a "Recharacterization" or not?

If not, where do I enter the specific stocks conversion values?

Please help!  Thanks!

JerseyBird68

[DanaB27]

No, you did not make a recharacterization you made a conversion which is entered in the retirement section. Also, do not enter this as a Roth contribution.

Please be aware, that generally, a conversion is 100% taxable unless you had a basis (after-tax) funds in the traditional IRA. If you had pre-tax and after-tax funds in the traditional IRA then the pro-rata rule applies and each distribution/conversion will have a taxable and nontaxable part.

You stated you had after-tax funds in the traditional IRA? Did you enter your basis form Form 8606 line 14 when TurboTax asked (steps 6 and 7)? 

To enter the 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” and choose “I converted some or all of it to a Roth IRA”
5. On the "Review 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 last filed Form 8606 and the value of all traditional, SEP, and SIMPLE IRAs

Or did you make nondeductible contributions to the traditional IRA in 2021?

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
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. If you had a basis in the Traditional IRA before then enter the amount.
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).

[JerseyBird68]

Sorry, I just got time to key in the numbers today.

Thank you so much for your replay!!

Yes or no.

I did follow your instructions and finished all the steps.  It did not ask me to pay extra tax in the end (that's the yes part).  However, I am not sure if it's all correct.

My entire IRA is funded using after tax money (Non deductible IRA).  So there is no tax on the base conversion; but isn't that you are supposed to pay tax on the capital gains part for the converted amount?

However I went though all the interview steps,  there is no place to enter the detailed stocks transactions info, so how can IRS determine if I had gain or lose for the stocks I converted ?

I looked at Form 8606, Line 8 -  "Net amt converted to Roth IRA", the number is 0  - this value is auto-populated by the program.  I am confused!  I did convert $xxx amt to Roth IRA, why the program puts 0 there? what am I supposed to do?

So I problem is half resolved, lol

Really appreciate your help!

HerseyBird68

[JerseyBird68]

oh, I have been filing Form 8606 for over 10 years.  Line 14 is filled automatically. 

[DanaB27]

Yes, if you had gains in your traditional IRA before conversion then these would be taxable. TurboTax can tell this because the amount converted shown on Form 1099-R would be more than the basis (nondeductible contribution).

It might be that TurboTax used the Taxable IRA Distribution Worksheet to calculate the nontaxable amount. Then lines 6-12 are be empty and a * is next to line 13. You should have an entry on line 6 on the Taxable IRA Distribution Worksheet for the amount converted. If not, then please verify your entries in the retirement section. Make sure you selected that you converted the funds in the follow-up questions.

@JerseyBird68

[JerseyBird68]

Well, Line 6 is not 0, of course. 

But Line 7 is 0,  (in the mini worksheet, Distribution $X, Rolled over $X, therefore, Line 7: $X- $X = 0)

I think the key point is,

my total basis over the last 10+ year, let's say, it's $100k, and I only converted $50k, therefore, it is comparing to your total basis, not the particular lot that you converted, therefore your this conversion has no gains ($50k - $100K is less than 0, so no gain).  Maybe that's how IRA calculates that, I read the Form 8606 Instructions, I don't think I entered any thing wrong.

Thanks for your input!

[JerseyBird68]

@DanaB27  SOS!

In a final review of Form 8606, I realized the software did not record my Roth conversion! Part II is blank!

Follow your instruction, after step 3, my next screen (using Home and Business edition) is

"Good News: you don't owe Extra Tax on this money".

Keep answering questions, I get to

"What Did you do with the Money"

1. Moved the money to another retirement acct

2. Did something else (cashed out, etc.)

Choose 1, then the bottom of the page:

1. Rolled over all the money

2. did a combination of rolling over, converting, or cashing out

I chose 1, then got:

You won't have to pay tax on your $ rollover.

*******************

Basically, I don't see the screen in your Step 4

4. Answer questions until you get to “Tell us if you moved the money through a rollover or conversion” and choose “I converted some or all of it to a Roth IRA”

1. Answer questions until you get to “Tell us if you moved the money through a rollover or conversion” and choose “I converted some or all of it to a Roth IRA”

So I have no where to enter the conversion!!

Please help!  Thanks!

[DanaB27 · Accepted solution]

Yes, part II of Form 8606 should be filled in. You will have to select "2. did a combination of rolling over, converting, or cashing out" then you can enter the conversion amount.

Please review these instructions for TurboTax Download/Desktop:

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 “What Did You Do With The Money” and choose “I moved it to another retirement account”
5. Then choose “I did a combination of rolling over, converting, or cashing out money.” and enter the amount next to "Amount converted to a Roth IRA account"
6. On the "Your 1099-R Entries" screen click "continue"
7. Answer "yes" to "Any nondeductible Contribution to your IRA?" if you had any nondeductible contributions in prior years.
8. Answer the questions about the basis from line 14 of your 2020 Form 8606 and the value of all traditional, SEP, and SIMPLE IRAs

@JerseyBird68

[JerseyBird68]

yes, I realized that, it's not "rollover", I should have selected 2.

Thanks for your reply!