Rollover IRA tax

[muss007]

I opened a backdoor Roth IRA account last year (Dec 2019) with the Vanguard and forgot to realize that I also had a rollover IRA with the Fidelity.  I recently found out that this is not allowed.  I am in the process of converting the rollover IRA into my current 401K plan.  I hope this should resolve the problem.  However, I was told that I have to pay tax on the rollover IRA last year.  How can file this?  What form and calculation method should I use.  Thanks.

M.

[macuser_22]

For tax purposes you only have one Traditional IRA, but you can have as many IRA accounts that yiu want, but your IRA is the aggregate total amount of all Traditional, SEP and SIMPLE IRA accounts that exist.

A "Backdoor Roth" only works if you start with a zero amount in your Traditional IRA and end up at the end of the year with a zero amount, otherwise any non-deductible basis must be prorated between the current years distribution and the Dec 31 year end total values of all IRA accounts.

That is entered and calculated this way:

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, 2019.

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.

Entire "Backdoor Roth"  method:

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.

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

[dmertz]

"I opened a backdoor Roth IRA account last year (Dec 2019)"

I assume that this means that you did the Roth conversion in 2019, not in 2020.  Since you also had another traditional IRA at the end of 2019 (the rollover IRA), the value of that IRA was required to be included in the calculation of the nontaxable and taxable amounts of your 2019 Roth IRA conversion.  As such, it's likely that a large part of that conversion was taxable and a large portion of your nondeductible traditional IRA contribution made for 2019 remains with your traditional IRAs.  Since your 2019 Form 8606 apparently shows the entire amount converted as nontaxable, you must amend your 2019 tax return to make the correction.  You can do this by amending your 2019 tax return in TurboTax, clicking the Continue button on the Your 1099-R Entries page, and, when asked, enter the December 31, 2019 value of your rollover IRA.  TurboTax will prepare the corrected Form 8606 and Form 1040X which you must file, and pay the balance due.  (If your 2019 tax return did not include Form 8606 because you failed to report the contribution and Roth conversion, you must also make those entries when amending.)

You are not permitted to roll any basis in nondeductible traditional IRA contributions into a 401(k).  Since your traditional IRAs presently do have some amount of this basis, you are not permitted to roll your entire rollover IRA into the 401(k).  You are only permitted to roll over to the 401(k) the amount that is in excess of your basis in nondeductible traditional IRA contributions, determined as if all of the transactions occur on December 31, 2020.  For this reason, you'll probably want to convert an amount equal to your total basis in nondeductible traditional IRA contributions before rolling the remainder (which will all be pre-tax money) over to your 401(k) before the end of 2020.  You can do this after making your nondeductible traditional IRA contribution for 2020, as long as you make the contribution for 2020 before the end of 2020.