Traditional IRA to backdoor Roth IRA conversion reported as taxable income

[vjtom1]

My spouse contributed $6500 into her Traditional IRA (all post-tax) at the end of December, 2023 and did a backdoor Roth IRA conversion of the entirety of what was in the Traditional IRA a few days later in very early January, 2024. She later contributed $7000 into her Traditional IRA for 2024 contributions. She converted all of that in 2024. On her 2024 1099-R, the total distribution is listed as $13,504.52. In Box 7, the distribution code is 2 and the IRA/SEP/SIMPLE is checked. TurboTax is showing that $6505 of the distributions is taxable. I believe this came from $13,504.52 - $7000 for the 2024 IRA contribution/conversion. However, I should only be taxed on ~$5 (if rounding up) since $13,000 is the amount of the converted post-tax IRA contribution. How can I account for this?

[DanaB27]

You should have reported her nondeductible contribution on your 2023 return and TurboTax should have created a 2023 Form 8606 with a basis on line 14 ($6,500).  This basis will be entered in your 2024 tax return.

To enter the nondeductible contribution to the traditional IRA for 2024  (you should have entered these steps on your 2023 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 contribution before this tax year.
9. Enter your basis in the Traditional IRA from your 2023 Form 8606 line 14 (if you had a basis in the prior year)
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 warning and then a screen saying $0 is deductible).

To enter the Form 1099-R 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 "Review your 1099-R info" 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 2023 Form 8606 and the value of all traditional, SEP, and SIMPLE IRAs

Please see How do I enter a backdoor Roth IRA conversion? for instructions in TurboTax Desktop.

[plantrob]

I had a similar issue, that only arose this year (exact same situation was processed without a hitch in previous years). A simple backdoor Roth conversion, executed in early 2024 - not involving anything from 2023. My 1099-R from Fidelily had a code 2 in box 7, and had the same number in box 2a (taxable amount) as in box 1, with box 2b (taxable amount not determined) checked. Elsewhere in Turbotax, I had established that I had made a non-deductible contribution in the same amount. With this status of the form, there was no way that Turbotax was offsetting the contributions, and showed the full amount of the conversion on 1040 line 4b (as well as on 4a). The 8606 form showed this, but stopped after line 3. Through much trial and error, I found that the only way to fix this was to manually change the box 2a amount to zero (Turbotax would not accept a blank entry). Doing this caused the rest of form 8606 to be populated, and the correct amount to be shown on line 4b. But having to misreport what is actually shown on the 1099R seemed a bit iffy to me. The 1099R was provided in exactly equivalent form for 2023, and Turbotax processed the Roth conversion just fine that time.

[DanaB27]

To verify, was your IRA/SEP/SIMPLE box checked on your Form 1099-R entry? And after you followed the backdoor Roth instructions and entered your Form 1099-R only lines 1-3 of Form 8606 were filled out? Nothing in part II of Form 8606 to indicate the conversion?

@plantrob 

[vjtom1]

The issue wound up being a glitch in the software this year. I manually entered line 14 from her 2023 Form 8606. I received an error code that this number didn't match what was in the form last year and was asked to provide a reason why I was inputting a different number. I just indicated that that amount was indeed what is in Line 14 of the 2023 Form 8606. That cleared up the issue.

Just as an FYI for others - I sent a message to Turbo Tax about the Line 14 in the 2023 Form 8606 amount that is automatically put in by TurboTax not being accurate. I received a reply that they were aware of the issue and are working on a fix.