Taxes on Backdoor Roth IRA that was converted from a previously recharacterized Traditional IRA

[cjlee126]

I'm wondering how to file my taxes on my backdoor Roth IRA/form 8606 when it comes time for 2019 taxes in the following situation:

2016: I over contributed to my Roth IRA

2017: I recharacterized the additional amount, ~1.6K as a Traditional IRA. I invested the IRA in various holdings and have made a couple hundred off of it. 

2019: I deposited an additional $4.4K, and converted the entire traditional IRA to a Roth IRA

When it comes time to file taxes, on what basis am I taxed on? Am I taxed on only the earnings I made on the traditional IRA in 2019, the earnings I've made since 2017, or the entire recharacterized portion? How would I fill in form 8606? 

[macuser_22]

It depends on how you reported the recharacterization on your 2016 tax return.    You would have had the choice to either take a deduction for the new Traditional IRA contribution if you were eligible for a deduction, OR file it as a non-deductible contribution on a 2016 8606 form as a basis in the IRA.

TurboTax will fill out the 8606 using the information that you enter in the interview.

You report a backdoor Roth this way (note that the dates are for a 2018 tax year tax return - adjust the years for a 2019 tax return):

This so-called “back-door Roth” method ONLY works if you have NO OTHER Traditional IRA accounts.  If you do, then the non-deductible part must be spread over ALL accounts and cannot be withdrawn by itself.  Only if you started with NO Traditional, SEP & SIMPLE IRA and ended up with a zero amount in ALL Traditional, SEP & SIMPLE IRA accounts will this Roth conversion not be taxable.

First you must enter your Traditional IRA contributions (if there were 2018 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 2018.     (Usually zero unless you also made a 2017 or earlier non-deductible contribution. If you do have prior year basis then enter the last filed 8606 line 14 value.).

Enter the 2018 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 2018, 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

[cjlee126]

Checking my return, it looks like I filed a Form 8606 in my 2016 tax return. If so, does that mean I would have to follow these instructions? Thanks for your help @macuser_22 !

"If you had any other Traditional IRA at the end of 2018, 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."

[macuser_22]

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@cjlee126 wrote:

Checking my return, it looks like I filed a Form 8606 in my 2016 tax return. If so, does that mean I would have to follow these instructions? Thanks for your help @macuser_22 !

Yes, as in the instructions, then it asks for prior year non-deductible contributions you enter the 2016 box 14 amount so that it will be applied to offset some or all the tax depending on the year end value earnings that are taxable.

(If you used TurboTax in 2016 to file the 8606 and transferred the prior years data file each year,  then the 8606 box 14 might already be there and auto-populate on the form.)

[cjlee126]

Thank you so much for your help @macuser_22 !