Why am I getting taxed on a backdoor roth ira conversion

[mckennate1]

conversion is from a non-deductible traditional IRA...can't figure out how to enter it in turbo tax

[macuser_22]

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" tax free.

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. If existing IRA's contain any before-tax money or earnings then it will be partly taxable.
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 2020 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 2020.     (Usually zero unless you also made a 2019 or earlier non-deductible contribution. If you do have prior year basis then enter the last filed 8606 line 14 value.).

Enter the 2020 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 2020, 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-conversionThe "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" tax free.

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. If existing IRA's contain any before-tax money or earnings then it will be partly taxable.
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 2020 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 2020.     (Usually zero unless you also made a 2019 or earlier non-deductible contribution. If you do have prior year basis then enter the last filed 8606 line 14 value.).

Enter the 2020 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 2020, 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

[PeteHTX]

I think there may be a bug in how TT is calculating the tax on the conversion to Roth IRA for a spouse.  TT is not handling a second 1099-R and the conversion to Roth IRA correctly.

  I have been using the Roth IRA conversion for several years and I have come to know the process and worksheets and forms.  This year first I imported our 1099-R forms from our financial institution.  I completed the step-by-step prompts, and said that all of our 1099-R distributions ($7000 each) were converted to a Roth IRA account.  On the 1040 form, only $7000 was listed in the non-taxable column and a large portion of the other $7000 was listed in the taxable column.  I repeated the import several times, being careful to note when TT was designating the 1099-R as mine vs my wife's.  Same result on the 1040.  Then I deleted the imported 1099-R forms, and entered them manually for each of us.  Same result on the 1040. 

  I hope this helps you, @mckennate1 

  Then I went to Forms view, to form 8606-S (spouse) and noticed her $7000 was not entered in line 1.  I backtracked to the IRA Contribution Worksheet, and noticed that Line 1 under the Spouse column was blank.  I entered $7000 in Line 1 under spouse, and TT populated the rest of the worksheet appropriately.  Then I went to the 1040, and saw that all of the $14,000 was listed under the non-taxable column, and $0 in the taxable.  (I did the manual calculations on forms 8606 using cost basis to verify that our taxable amounts are indeed $0.)

[macuser_22]

---

@PeteHTX wrote:

  Then I went to Forms view, to form 8606-S (spouse) and noticed her $7000 was not entered in line 1.  I backtracked to the IRA Contribution Worksheet, and noticed that Line 1 under the Spouse column was blank.  I entered $7000 in Line 1 under spouse, and TT populated the rest of the worksheet appropriately.  Then I went to the 1040, and saw that all of the $14,000 was listed under the non-taxable column, and $0 in the taxable.  (I did the manual calculations on forms 8606 using cost basis to verify that our taxable amounts are indeed $0.)

---

That sounds like a user error for not properly entering the non-deductible contribution for the spouse.    I have go through this situation probably a hundred times answering questions and have found no bugs in this area.

[PeteHTX]

I assumed that it was my user error somehow.  I tried really hard to find it and couldn't.  It may still be a user error.  Regardless, I thought it was worth posting the workaround that worked for me.  

[thebouwmans]

I have the exact same issue.  Whatever I input, it ends up in the taxable part.

[DanaB27]

Please review the instructions below to enter a backdoor Roth.

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 contributions 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 screen saying $0 is deductible).

To enter the 1099-R distribution/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 "Your 1099-R Entries" 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 and value

Please be aware, any earnings that you had in the traditional IRA before converting will be taxable. 

@thebouwmans

[mixuala]

I have a problem with this for 2020. I suppose the issue is that my spouse forgot to complete the conversion from TradIRA=>RothIRA in the same tax year, and left a basis in her Trad-IRA. She also earned about $180 in dividends in the TradIRA, which should be taxable when the total amount is finally converted to the RothIRA. 

However,  what I'm seeing is that TT treats the ENTIRE RothIRA conversion in 2020 as taxable, even though "Form8606-S" shows the taxable amount as $0 and the "IRA Contrib Wks" shows theIRA contribution as NON-deductible.

Ultimately, the problem seems to be that "IRA Info Wks - Part V, line 35/36: Conversion Contributions not/taxable" are empty. These values are correctly filled in my TT2021 return––when all the TradIRA=>RothIRA conversions were correctly completed and the YE TradIRA value is $0.

Is my problem that TT cannot correctly complete a Backdoor Roth contribution if the YE TradIRA balance is > $0?  Is there a way to manually override the TT calculations?

[DanaB27]

Yes, you are correct when you had earnings because you delayed the conversion then part of your conversion will not be taxable. Also, if your traditional IRA was not empty (had pre-tax funds) before starting the backdoor procedure then each distribution/conversion will be partly taxable. You cannot convert only the nontaxable part if you have both pre-tax and after-tax funds in the traditional IRA.

To clarify, you made the nondeductible contribution in 2020 and converted the amount in 2021?

If yes, then you will enter the nondeductible contribution on your 2020 tax return with the steps below. This will give you a basis (nondeductible contribution) on line 14 of Form 8606. This basis you will enter in your 2021 tax return.

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 contributions 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 screen saying $0 is deductible).

On your 2021 tax return you will enter the 1099-R for the 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 "Your 1099-R Entries" 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 2020 Form 8606 and  the value of all traditional, SEP, and SIMPLE IRAs

@mixuala

[mixuala]

[SOLVED] I actually had a combination of problems. Most importantly, somehow the 1099R was imported and reused from the prior TT year incorrectly, and the distribution was marked "Inherited". That fixed a lot of problems.

However, to correct for the problem of unmatched years in a Backdoor Roth conversion, I had to do the following:

1. re-enter correct data for Form 8606 from the FIRST Tax year where there was an TradIRA EOY balance.

• F8606 Part II Line 18 will show the correct taxable amount for the partial Roth conversion
• This will flow to the correct "IRA Info Worksheet Part I-TradIRA Line 3, Basis carryover" for the next Tax Year.

2. copy the "IRA Info Worksheet Part I-TradIRA Line 3, Basis carryover" to Line 1 of the SAME worksheet for the next Tax year, and repeat.

• be careful to complete Form 8606 for each Tax year to get the correct Basis carryover for the next year
• when you reach the FINAL year when the TradIRA is now $0, all the TradIRA earnings (if any) show up as taxable

It wasn't easy to find or fix, but the errors were self inflicted.  Kudos to TT for getting this use case correct.

[jeyumaor]

I seem to be having a similar issue and have not been able to figure it out. My spouse has done a "back door" roth ira conversion and the distribution is showing as taxable. In all the instructions the step to explicitly choose not to deduct the ira contribution seems to be emphasized, however, this step is skipped automatically if your magi is too high. I'm not sure what to do to get this to work.

[fanfare]

Did you start this adventure with a ZERO balance in all your Traditional IRAs?

If NO, then if your prior years basis is not at least that balance, the backdoor Roth contribution is not available to you.

@jeyumaor 

[Hal_Al]

This year's contribution cannot be converted in isolation from any existing traditional (including rollover) IRA(s). It's best explained by example. Let's say you have a $95,000 balance in all your existing traditional IRAs and that balance consist of $45,000 in deductible contributions, $10,000 in previous non-deductible contributions and $40,000 in earnings (interest, dividends & capital gains). This year you make a $5000 non-deductible contribution and convert $5000 to a Roth. Only 15% of the $5000 conversion ($750) will be tax free. Your basis, in all your IRAs, is $15,000 (the previous $10,000 of non-deductible contributions plus this year's $5000 contribution). TurboTax will divide that $15,000 basis by the $100,000 balance ($95K+5K) to arrive at the 15% tax free ratio. This is the way the IRS requires it to be done. The calculations will be shown on form 8606.

See: http://www.bankrate.com/finance/retirement/drawback-one-type-roth-conversion.aspx

http://thefinancebuff.com/how-to-report-backdoor-roth-in-turbotax.html

https://ttlc.intuit.com/community/entering-importing/help/how-do-i-enter-a-backdoor-roth-ira-convers... 

https://ttlc.intuit.com/community/retirement/discussion/back-door-roth-ira/01/2552058#M168628

[jay003]

I have an issue where I contributed $12,000 to the backdoor roth ira.  Since it was for 2 different years it meets the limit of $6,000 per year and should not result in me paying any additional taxes.  However, I do not have any idea on how to enter this so that it doesn't increase my taxes (as it should not).  I would appreciate it if someone shares the step by step instruction to do this. 

Thanks in advance

p.s. I am  using the desktop version to do my taxes

[Hal_Al]

The first $6000 should have been entered on your 2021 tax return and a form 8606 generated.

See DanaB27's reply, above, for step by step instructions.