Pro-rata rule, why does a non-deductible IRA contribution between Jan 1 and April 15 not affect the taxable amount?

[user1770912]

Say I have some balance in my traditional IRA on 12/31/19, and also make a Roth conversion in 2019. This is subject to the pro-rata rule.

My understanding of the form 8606 instructions is that only the balance on 12/31/19 is used when calculating the taxable amount of my Roth conversion.

So, even if I made a non-deductible contribution for 2019 before April 15, 2020, that amount would not be used in the calculation.

However, it seems when I add this contribution in TurboTax, the tax due stays the same regardless of the amount I put in the "amount contributed between Jan 1 and Apr 15, 2020" field.

If I include the contributions made in 2020 for 2019 I get the same value as Turbotax, but if I follow the form instructions I'm getting a different number. Anyone have an idea which is correct ?

[dmertz · Accepted solution]

Because you made both distributions and nondeductible contributions for 2019, TurboTax is using Worksheet 1-1 of IRS Pub 590-B to determine the taxable amount of the distribution.  This worksheet treats you contribution after year-end as having occurred during the year.

Worksheet 1-1 is to be used when your IRA contributions "may not be fully deductible."  TurboTax probably uses this worksheet  more liberally than intended.  It seems to me that if it's clear that your IRA contribution is nondeductible regardless of the addition to AGI from the IRA distribution, TurboTax should not be using this worksheet, but it does frequently use it anyway.  Use of this worksheet is indicated by an asterisk on Form 8606 lines 13 and 15 and blank lines 6 though 12.

[user1770912]

590-B is regarding distributions from IRAs; I thought that a Roth conversion was not considered a distribution?

It sounds like I should not be using Worksheet 1-1, rather, I should complete lines 6-12 of Form 8606. Meaning TurboTax is incorrectly calculating my tax due. Is this right? If so, is there a way to get the software to stop using the worksheet?

Thanks!

[dmertz]

A Roth conversion is a distribution from the traditional IRA and a rollover to a Roth IRA, with the taxable amount being the same as if the distribution was not rolled over but not subject to any early-distribution penalty.

Other than using overrides which prevent e-filing and void TurboTax's accuracy guarantee, there is no way to get TurboTax to not use the worksheet when it thinks it should.