Spousal Traditional IRA should not be taxed on the conversion (edited)

[saunder1]

I have contributed to my traditional IRA as a spousal contribution and my husband to his own traditional IRA.

We converted both to Roth.

Turbotax is showing my conversion as taxable but not my husband's. Given my husband's income should cover both contributions, we should not be taxed on the conversion (except the small amount in interest before conversion). However the whole 8000K is showing as taxable on the 1040 form.

Can someone help please?

There appears to be no way to manually update the worksheets to fix the issue.

Thank you

[saunder1]

I am assuming this problem is due to the spousal IRA this year, as this is the first year I have one.

In past years I have made the same contributions but had my own income, and it worked great.

[dmertz]

There appears to be nothing that needs fixing.  Apparently your husband is covered by a workplace retirement plan, you are not, and you MAGI for the purpose of deducting a traditional IRA contribution is above the threshold where your husband is ineligible to deduct the contribution but below the threshold where your own contribution remains deductible.  This means that your husband has basis in nondeductible traditional IRA contributions that reduces the taxable amount of his Roth conversion but your traditional IRA contribution is being deducted on Schedule 1, giving you no basis to apply to your Roth conversion.  If you had no funds in traditional IRAs at year end, you could tell TurboTax to make your contribution nondeductible, but the taxable result would be the same.  You wouldn't get the deduction for the traditional IRA contribution, but your Roth conversion wouldn't be taxable, so your AGI would remain the same.

One thing to consider, though.  If your MAGI is low enough for your traditional IRA contribution to be able to be deducted, your MAGI for the purpose of making a Roth IRA contribution should also be low enough to be eligible to contribute directly to a Roth IRA, although contributing directly to the Roth IRA it might not make any difference.

[saunder1]

Sorry, I need to change my title as it is not the contribution to which I am referring - it is the conversion.

This is line 4b on 1040.

Perhaps this is not related to a spousal IRA but I can't come up with another difference between the 2.

I am assuming my conversion, not my husband's, is the problem because that's the only difference. Given we both contributed the same amount, this assumption could be wrong.

We converted both traditional IRAs to Roths. For some reason, one of the conversions is being taxed on the full conversion, including basis. As I understand, there are no limits in this case. I should only be taxed on the interest made in the account, not the basis.

(So far as the workplace account, I think it means that I have a 401k which I do, so I selected that I do. But I will say originally I did not because I thought it meant an account I was still contributing to, which I am not.)

Thanks for the timely response but I still need an answer. I'm missing something.

[saunder1]

Now I have a different issue. I reviewed my answers to the TT questions and now I have a different issue. I should open another ticket.

[DaveF1006]

It depends. The software treats each spouse’s IRA profile completely independently, and it sounds like a single "Yes/No" click in the interview has caused the software to "lose" your husband's basis while "creating" a new one for you.

Here is why your husband's Form 8606 is behaving differently and how to fix it.

1. Fix the Contribution (Line 1)

1. Go to Deductions & Credits > Retirement and Investments > Traditional and Roth IRA Contributions.
2. Navigate to your Husband’s entry.
3. If you have an amount entered for a 2025 Traditional IRA Contribution, and that contribution was actually made in 2024 for the 2024 tax year, delete it here. (Line 1 should only have an amount if he physically put money into the account for the 2025 tax year).

2. Step 2: Fix the Basis (Line 2)

1. Continue through the IRA interview until you see the screen: "Any Nondeductible Contributions to your IRA?" (This refers to years prior to 2025).
2. Select Yes for your husband.
3. On the next screen, enter $8,000 as the total basis as of December 31, 2024. This will force the $8,000 onto Line 2.

3. Step 3: The 1099-R (The Conversion)

1. Go to Wages & Income > IRA, 401(k), Pension Plan Withdrawals (1099-R).
2. Ensure his 1099-R is entered correctly. When asked what he did with the money, ensure "I converted some or all of it to a Roth IRA" is selected.
3.  It will ask for the "Value of all Traditional IRAs on Dec 31, 2025." * For your husband, enter that "residual interest" amount (e.g., $5.00).

This triggers the Pro-Rata Rule, which will make that small amount of interest taxable, just like yours.