Roth IRA Excess Contribution to Traditional IRA to Backdoor Roth IRA

[cfharp]

I have a "new to me" tax situation for 2023 that I could use some assistance with how to enter in TurboTax. The short version is that last year (for 2022 tax year) we fell into the phase out income range for Roth IRA contributions. We removed all excess (with some losses), and backdoored some back into a Roth IRA, and some into a taxable investment account. In addition to that, I also have an old Traditional IRA (deductible) from a former employer. Now I'm trying to figure out how to enter all of this for our 2023 tax return.

The detailed version...

2021 (and prior):

• Our combined income was always lower. My employer offered a SIMPLE IRA which I contributed to.
• Both my wife and I would max out our Roth IRA's.
• SIMPLE IRA balance as of 12/31/2021: $59,249.

2022:

• My employer was acquired. I had a couple months of contributing to the SIMPLE IRA, and then I started contributing to a Roth 401k instead.
• In August 2022, my SIMPLE IRA was converted to a Traditional IRA (at the same custodian where I have my Roth IRA).
• My wife and I continued to max out our Roth IRA's.
• Traditional IRA (former SIMPLE IRA) balance as of 12/31/2022: $50,502.

2023:

• At the start of the tax season (for the 2022 return), I soon realized our income had placed us into the phase out income range for being able to contribute to IRA's.
• I spoke to my custodian and filed a return of excess + losses, and had that moved into a taxable investment. I left what I could in my Roth IRA, and did nothing else. My Roth IRA excess + losses was $4,340.
• My wife spoke to her custodian and filed a return of excess + losses, had that moved to a new Traditional IRA (nondeductible), and then converted (backdoor) back into her Roth IRA. Her Roth IRA excess + losses was $4,324. Her conversion amount was $4,518.
• For the rest of 2023, I paused contributions to my Roth IRA, while my wife's financial advisor suggested she continue to make contributions.
• At the end of the year, I contributed $500 to my Roth IRA, she contributed the max $6,500 to her Roth IRA.
• Traditional IRA (former SIMPLE IRA) balance as of 12/31/2023: $61,041.

2024:

• Much like last year, we are still in the phase out range for contributing to Roth IRA's.
• My wife is currently filing a return of excess + gains (while 2022 saw losses, I imagine for 2023 we'll see gains on excess). Her Roth IRA excess amount is $5,030.
• For tax filing purposes, I know I need to enter details for the backdoor conversion that occurred, but I'm not sure how/where to do that to ensure it's properly handling the mix of deductible and nondeductible Traditional IRA's (I know about the pro rata formula, which is what I want to make sure is accounted for). 
• We each received a 1099-R for our Roth IRA's. They both have distribution codes J and P. They both have 2a taxable amount of $0. When I enter these forms, nothing changes with our tax return refund amount.
• My wife also has a 1099-R on her new Traditional IRA with distribution code 2. This one does have a 2a taxable amount ($4,518, same as 1 gross distribution), and all 3 check boxes are checked (2b taxable amount not determined, total distribution, IRA/SEP/SIMPLE IRA). When I added this as-is, it dropped our refund significantly (reduced by $1,011, though I can't determine how it's coming up with this number). I feel like I'm missing something here.
• Additionally, I have read that I should enter a fake 1099-R form on the 2023 tax return to avoid needing to file an amended 2023 tax return next year. From what I understand, this is to account for the Roth IRA return of excess gains that are occurring this year when correcting the 2023 Roth IRA contributions, but are counted as 2023 gains. How would I go about doing this?

For anyone else who has been in this situation before, is there anything else I'm missing? Any other details you need from me? I would appreciate any assistance you can offer. Thank you!

[DanaB27 · Accepted solution]

The 2023 Form 1099-R with codes P and J belong on the 2022 tax return but only earnings (listed in box 2a) are taxable. You had a loss and therefore you do not have any taxable income to report on your 2022 return and you do not need to amend your 2022 return.  

You will get a 2024 Form 1099-R  in 2025 with codes P and J for the withdrawal of the 2023 excess contributions and earnings. This 1099-R will have to be included on your 2023 tax return and you have two options:  

• You can wait until you receive the 2024 Form 1099-R in 2025 and amend your 2023 return or
• You can report it now in your 2023 return and ignore the 1099-R when it comes unless there is Box 4 Federal Tax withholding and/or Box 14 State withholding. Then you must enter the 2024 Form 1099-R into the 2024 tax return since the withholdings are reported in the year that the tax was withheld. The 2024 code P will not do anything to the 2024 tax return income but the withholdings will be applied to 2024.

To create a Form 1099-R in your 2023 return please follow the steps below:

1. Login to your TurboTax Account 
2. Click on the "Search" on the top right and type “1099-R” 
3. Click on “Jump to 1099-R”
4. Answer "Yes" to "Did you get a 1099-R in 2023?"
5. Select "I'll type it in myself"
6. Box 1 enter total distribution (contribution plus earning)
7. Box 2a enter the earnings
8. Box 7 enter J and P
9. Click "Continue"
10. On the "Which year on Form 1099-R" screen say that this is a 2024 Form 1099-R.
11. Click "Continue" after all 1099-R are entered and answer all the questions.
12. Continue until "Did you use your IRA to pay for any of these expenses?" screen and enter the amount of earnings under "Corrective distributions made before the due date of the return".

Please be aware, code P will say in the drop-down menu "Return of contribution taxable in 2022" but you can ignore that since the follow-up question will tell TurboTax that it will be taxable in 2023.

Also note, if you are in the phaseout range then reporting the taxable earnings from the excess will increase your MAGI again and can create a new excess. Therefore, it might be beneficial to remove a little extra to avoid this issue.

Please see How do I enter a backdoor Roth IRA conversion? for detailed instruction. TurboTax will automatically handle the Pro-rata calculation. You can see the calculations on Form 8606. If you have a star next to line 13 then you can see the calculations on the Taxable IRA Distribution Worksheet.

[cfharp]

Thank you for all the detail @DanaB27 !

Though this got me thinking and wondering if I messed up my tax return last year for 2022. Looking at just my wife's IRA:

• 1/1/2022 - 12/31/2022: Contributed $6,000 to Roth IRA
• 3/17/2023: Removed $4,324 excess + losses from Roth IRA ($4,510 excess - $186 losses = $4,324)
• 3/31/2023: Contributed $4,510 to Traditional IRA (nondeductible)
• 4/14/2023: Converted $4,518 from Traditional IRA to Roth IRA ($4,510 contribution + $8 gains = $4,518)
• 1/1/2023 - 12/31/2023: Contributed $6,500 to Roth IRA

As far as I understand, the conversion from 4/14/2023 should be included on the tax return for the calendar year it occurred (i.e. 2023, not 2022). The excess return from 3/17/2023 generated a 1099-R form this year to amend the 2022 tax return, but since there were losses there is really nothing to amend. Where or when was I supposed to include the nondeductible Traditional IRA contribution from 3/31/2023 on a tax return? My return from 2022 doesn't have Form 8606, so I'm guessing it wasn't included there, but should it have been? I'm wondering if I entered the wrong data somewhere and just assumed it was OK since it was supposed to be nondeductible and not impacting the tax return. If it should have been on the 2022 return, can I amend that now?

[DanaB27]

Yes, the nondeductible traditional IRA contribution from 3/31/2023 for 2022 has to be reported the 2022 Form 8606. You should have a basis of $4,510 on lines 1, 3, and 14. The basis from line 14 has to be entered on your 2023 tax return when TurboTax asks if you tracked nondeductible contributions in prior years.

"If this form isn't included in your 2022 return, you'll need to fill out a 2022 Form 8606 to record your nondeductible basis for conversion, and mail this form to your designated IRS office. Don’t amend your 2022 return to record your basis. (Note: If you're required to file Form 8606 to report a nondeductible contribution to a traditional IRA, but don’t do so, you’ll be subject to a $50 penalty. This penalty can be waived if you can show reasonable cause.)" (FAQ)

Please verify. that you didn't deduct the traditional IRA contribution on your 2022 tax return (Schedule 1 line 20). If you did then you will have to amend your 2022 tax return.

[cfharp]

Thank you again @DanaB27 ! This has been very helpful and very detailed. I believe I have everything sorted out now and ready to go.