The 1099-r for my IRA and my wife's IRA , both show a entry of "2" in box 7 Turbo Tax is taxing my IRA simple to IRA Roth conversion

[skornblau]

My wife and I both moved  post tax $ into a simple IRA and thendid a conversion to make it a Roth IRA. The 1099-r  for both my wife and  my IRA , both show a entry of "2" in box 7 (distribution code), even though this was a conversion, as shown on form 5498 from the institution holding the IRAs. It should be code N but the company refuses to change it. If I enter a code of 2 my taxes go up ~$4000 compared to the correct box 7 code of N. When I call the institution they say use form 8606.  But why I try to do that in TurboTax it says fill out a paper form, and the extra $4000 still appears in my taxes. How do i resolve this?

[macuser_22]

Code 2 is correct.  A *conversion* is NOT a recharacterization (code N).   A recharacterization means that a new *contribution* is applies to a different type of IRA.

A before tax IRA converted to a after-tax Roth ORA *will* be taxable.

What makes you think you can convert a SIMPLE IRA to a Roth IRA without paying the tax?

[skornblau]

AFTER tax $ were put into the IRA and then converted directly to the ROTH IRA, with no earnings. So why would I again have to pay tax on $ that were already taxed? In every other year there has been no tax on this back door conversion and in prior years the bank put the "N" code in. I'm not sure why they changed it this year and frankly  neither are they . When I ask they just say that is how we are doing it this year and fill out form 8606.

[macuser_22]

Those are two different things.  A characterization means that  your contribution to one type of IRA never occurred and is treated as a contribution to the other type of IRA instead.   That is meaningless with what you are trying to do which is called a "Backdoor Roth".

Code 2 is correct but you must first enter the non-deductible contribution so it goes on the 8606 form to offset the tax on the conversation.  See my answer below on how to enter the "backdoor Roth" and the pitfalls.

[macuser_22 · Accepted solution]

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  If you do, then the non-deductible part must be spread over ALL accounts and cannot be withdrawn by itself.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 2016, 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