Why does the TurboTax calculator adjust from a potential refund of over $2000 to us owing about $650 when I enter my IRA yearend balances?

[randallcherry69e]

My wife turned 70 1/2 in 2017. She deferred her 2017 RMDs until 2018 before April 1st. This year, we included her RMDs for both years in our reported income, entered the basis of nondeductible contributions for her IRA accounts, and entered the yearend IRA balances where asked for. When entering the yearend balances, the calculator reduced the potential refund as discussed in the original question. Why. What happens in that calculation and why would yearend balances affect the refund if full RMDs were taken during the year?

[dmertz]

Until you enter the year-end basis, TurboTax assumes a year-end value of zero when preparing your wife's Form 8606 Part I to calculate the taxable amount of her IRA distributions.  Because the taxable amount of an IRA distribution and the amount of basis that remains in the traditional IRAs depends on the ratio of basis to overall balance plus distributions, using a value of zero on line 6 of Form 8606 results in an incorrect, low taxable amount being calculated.  Once the year-end value is entered, TurboTax recalculates to obtain the correct, higher taxable amount of the distributions.

TurboTax's refund/balance due display is useless until your tax return is complete.  Intermediate results are essentially meaningless.

[toolman1995]

I have a traditional IRA. The value amount is $100,000. but in previous years I did not defer 4000. This year I entered the 4000. basis and it gave me a return of 1500. but when it ask me to enter my total IRA value as of 12-31-19 I entered 96000. It takes away some of my refund. Am I doing this right or should I enter 0 as I have no more basis to report in the future?

[email address removed]

[dmertz]

toolman1995, have you taken any traditional IRA distributions since making the $4,000 nondeductible traditional IRA contribution?

Given what you have said, I'm guessing that you are are anticipating taking a $4,000 distribution from your traditional IRAs before the end of 2019.  It's correct that TurboTax reduces the calculated refund when you enter your year end balance in traditional IRAs.  You are not permitted to take a distribution of only the basis in nondeductible traditional IRA contributions; your distribution is a proportionate mix of basis and pre-tax money, with the nontaxable portion of a $4,000 distribution calculated on Form 8606 Part I as follows:

$4,000 * $4,000 / ($96,000 + $4,000) = $160

The remaining $3,840 of the distribution is taxable and $3,840 of you basis in nondeductible traditional IRA contributions remains in your traditional IRAs to be applied to future distributions.  You can see that if you mistakenly omit the $96,000 year-end balance you get the incorrect result that 100% of the distribution is nontaxable.

[toolman1995]

I am not trying to be a pain I just need help understanding this. To answer your question, no, this is my first distribution that I have ever taken. Maybe I'm wrong but I don't think I should have to pay any tax on the $4000.00 as I didn't defer this amount in previous years which means I already paid tax on that money. So do I have to enter the remainder of my IRA on line 6 of the 8606 form or do I enter 0.

[dmertz]

The $4,000 of basis in nondeductible traditional IRA contributions is not permitted to be distributed separately from the rest of your traditional IRAs.  Instead, the law requires that the $4,000 be distributed gradually in proportion to the overall value of your traditional IRAs.  The last of the $4,000 won't be (and is not permitted to be) distributed until that last amounts have been distributed from your traditional IRAs.

Yes, you are required by law to enter your year-end value in traditional IRAs on line 6 of Form 8606.

[RichMM]

This is very helpful.  TT almost made me make an expensive mistake.  I converted 100% of one of my traditional IRAs, which had taxed and pre-tax money.  After answering TT's questions about how much was already taxed, TT asked what the total amount is in all of my IRAs (non-ROTH).  I have another much larger IRA with another company, so I answered with that amount, and in response TT reduced my tax refund by over $1000.  That made no sense to me until I read the answer above.  Now I understand that TT was assuming only a pro-rated fraction of the taxed funds were converted.  However, since at the first company the entire IRA was converted, 100% of the taxed funds were converted.  Thus, the TT question is misleading.

[dmertz]

RichMM, I assume that your much larger IRA is indeed a traditional IRA, not some other type of retirement account.

"I have another much larger IRA with another company, so I answered with that amount, and in response TT reduced my tax refund by over $1000."

Yes, that other IRA must be included in the year-end balance that you enter into TurboTax.

"Now I understand that TT was assuming only a pro-rated fraction of the taxed funds were converted."

That's not an assumption, that's the result required by law.

"However, since at the first company the entire IRA was converted, 100% of the taxed funds were converted."

That is false.  Only a pro-rated portion of your total balance in traditional IRAs was converted.

"Thus, the TT question is misleading."

The question seems quite clear that you must include the sum of the year-end balances of all of your traditional IRA accounts.

The portion of your basis in nondeductible traditional IRA contributions that was not included in this Roth conversion remains in your traditional IRAs to be distributed proportionately until you have no more money in traditional IRAs.

[RichMM]

Thanks for your reply, dmertz.  

I was trying to figure this out and I would like to call a tax expert at TT like I did last year, but I don't see any way to do that this year.  I don't understand this new "community" system, but I appreciate your help.

The larger IRA is actually a pair of IRAs that are "roll-over IRAs" that were originally 401 and a 403 retirement accounts.  After I retired, Vanguard advised me to roll them each into IRAs, in preparation for incrementally converting them into Roth IRAs.

So, I was trying to figure out if these are among the "Traditional, Simple," etc., IRAs that needed to be included in the answer to that question.

Help?  Thanks!

(It would be nice if TT had one of its tutorial links on this page to explain what it is doing with this question and explained these points.)

[dmertz]

Yes, a "rollover" IRA is a traditional IRA that much be included in the year end balance that you enter into TurboTax.  Including this large IRA as you are required to do will make your Roth conversion mostly taxable. with a large portion of your remaining basis in traditional IRA contributions to be distributed proportionately with each future distribution from your traditional IRAs, including distributions from your large IRA.