Traditional IRA rollover and backdoor Roth conversion

[JMuldoon]

I did a rollover from my employer 401K to a traditional IRA and a backdoor Roth conversion in 2021.  My responses to TT step-by-step questions don't capture either of these transactions. It may be that I'm not answering questions about "contributions" correctly, but the TT screen notes seem to imply that rollovers and backdoor Roth conversions are not contributions.  I have 1099-R forms for both transactions. Any help with entering these transactions correctly in TT would be greatly appreciated.   Thanks.

[DanaB27]

To confirm, you did a rollover from your 401k to your traditional IRA and then a conversion from this traditional IRA to your Roth IRA. Therefore, you have two Form 1099-R, correct?

Yes, do not enter these transactions as IRA contributions under Deductions & Credits. You will only enter your 1099-Rs and then answer all follow-up questions carefully.

1. Click on "Search" on the top right and type “1099-R”
2. Click on “Jump to 1099-R”
3. Enter your Form 1099-R for the 401k rollover
4. On the "Did you move this money from a 401(k) to a Roth 401(k)?" screen answer "No"
5. On the "Did you move the money to a Roth IRA?" screen answer "No"
6. Continue through the questions until you can add your 2nd Form 1099-R for the conversion to Roth
7. 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”
8. On the "Your 1099-R Entries" screen click "continue"
9. Answer "yes" to "Any nondeductible Contributions to your IRA?" if you had any nondeductible contributions in prior years.
10. Answer the questions about the basis from line 14 of your 2020 Form 8606 and the value of all traditional, SEP, and SIMPLE IRAs

Please be aware, if you only had pre-tax funds in the traditional IRA then this conversion will be taxable.

A backdoor Roth only works correctly if all traditional, SEP, and SIMPLE IRAs are empty before starting backdoor Roth. Then you can make nondeductible IRA contributions and it is best to convert the contribution right away to avoid earnings that would be taxable in a conversion.

[JMuldoon]

OK, I followed those steps and it did lead me to TT interview questions about rollovers and Roth conversions, so I think that solved the problem.  One last question...after I do this and I check the 1040 form, I see the sum of the 2 1099-R's listed on Line 5a Pensions and Annuities and the Line 5b Taxable Amount is 0.0.  Is that what I should expect to see?

[DanaB27]

It depends. To verify, you had a conversion from a traditional IRA to Roth IRA? If yes, then you would have the amount show up in line 4, please make sure that you check the IRA/SEP/SIMPLE box on your 1099-R.

If I misunderstood and both transactions came from your 401k then yes it would show in line 5 but it will have a taxable part for the conversion in 5b if it was converted from pre-tax funds. 

.

[Hal_Al]

Q. I see the sum of the 2 1099-R's listed on Line 5a Pensions and Annuities and the Line 5b Taxable Amount is 0.0.  Is that what I should expect to see?

A.  Yes.  The transfer from the 401k to the TIRA is a tax free rollover.  The word rollover should appear on the dotted line to the left of 5b. 

The taxable part of the Roth conversion should show on line 4b. If you have nothing on line 4, make sure that you check the IRA/SEP/SIMPLE box on your 1099-R, as @DanaB27  advised. 

You also say "I see the sum of the 2 1099-R's listed on Line 5a".  That's not right. Only the amount from the 401k rollover should be there (again, it's probably the IRA  box not being checked on the 2nd 1099-R)

[JMuldoon]

OK, I think I'll go back and re-do these transactions in TT.

Follow-on Question: for the backdoor Roth IRA conversion, I've basically taken the after-tax contributions that I made to my 401K, excluding any appreciation, and moved that into a Roth IRA.   I am not expecting this  conversion to generate any taxable income.  If I enter this correctly in TT, should I expect TT to generate an 8606 Form, or would that form not be required for this type of transaction?  Thanks!

[Hal_Al]

Q.  If I enter this correctly in TT, should I expect TT to generate an 8606 Form?

A.  Yes.

Q. For the backdoor Roth IRA conversion, I've basically taken the after-tax contributions that I made to my 401K, excluding any appreciation, and moved that into a Roth IRA.   I am not expecting this  conversion to generate any taxable income. Is that correct?

A. No.  You are not allowed to move (convert) only after tax money to a Roth.

General description (not specific to your case but the effect and result are the same)

This year's contribution or rollover cannot be converted in isolation from all existing traditional 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.