Turbotax thinks a previous year IRA contribution is a penalty

[cameronl21]

In Feb 2023 I contributed $12,500 to a traditional IRA. ($6,000 for 2022 and $6,500 for 2023).

I did backdoor Roth IRA for the entire amount. I have form 8606 from last year (2023) for the (2022) $6,000 contribution. My total basis in 8606 line 14 is $6,000

This year I get my 1099-R and it says I contributed $12,500 in 2023. Makes sense. But when I click through the deduction portion and add my $6,500 contribution (on it's way to report via backdoor), it's saying that because the total basis from last year (2023) is $6,000, and I made an excess contribution and therefore will owe a 6% penalty.

There is no money in the traditional IRA anymore, it's in the Roth IRA.

What do I need to do differently so the penalty does not show up? Surely there is a way to tell which contribution was for which year?

[dmertz · Accepted solution]

Forms 1099-R report distributions not contributions.

Your basis carried in from 2022 has nothing to do with how TurboTax treats your 2023 traditional IRA contribution.  Make sure that you do not tell TurboTax that you "switched" (recharacterized) your traditional IRA contribution.  You did a Roth conversion (which is what the Form 1099-R is reporting), not a recharacterization.

[cameronl21]

Correct, I did click that I did not switch or recharacterize. Should I tell turbotax that I made TWO traditional IRA contributions last year? Will that clear up the $6,000 basis/penalty issue?

[DianeW777]

Please use the following instructions to enter a "Backdoor IRA" to ensure it is calculated correctly in TurboTax:

To enter the nondeductible contribution to the traditional IRA:
 

1. Open your return
2. Click “Deductions &Credits” on the top
3. Click "I'll choose what to work on"
4. Scroll down to “Traditional and Roth IRA Contributions” and click “Start”
5. Select “traditional IRA”
6. Answer “No” to “Is This a Repayment of a Retirement Distribution?”
7. Enter the amount you contributed of 6,500
8. Answer “No” to the recharacterized question on the “Did You Change Your Mind?” screen
9. Answer the next questions until you get to “Any Nondeductible Contributions to Your IRA?” and select “Yes” if you had nondeductible contributions before this tax year
10. Enter your basis in the Traditional IRA from your 2022 Form 8606 line 14 (since you had a basis in the prior year, should be $6,000)
11. 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 1099-R conversion:
 

1. Click "Federal Taxes" on the top and select "Wages & Income"
2. Click "I'll choose what to work on"
3. Scroll down and click "Start" next to "IRA, 401(k), Pension Plan (1099-R)"
4. Answer "Yes" to the question "Did You Have Any of These Types of Income?"
5. Click "I'll Type it Myself"
6. Choose "Form 1099-R, Withdrawal of Money from 401(k) Retirement Plans, Pensions, IRAs, etc."
7. Click "Continue" and enter the information from your 1099-R
8. Answer questions until you get to “What Did You Do With The Money” and choose “I moved it to another retirement account”
9. Then choose “I did a combination of rolling over, converting, or cashing out money.” and enter the amount next to "Amount converted to a Roth IRA account"
10. On the "Your 1099-R Entries" screen click "continue"
11. Answer "yes" to "Any nondeductible Contribution to your IRA?" since you had any nondeductible contributions in prior years.
12. Answer the questions about the basis from line 14 of your 2022 Form 8606 and the value of all traditional, SEP, and SIMPLE IRAs

@cameronl21 

[dmertz · Accepted solution]

The contribution made for 2022 was reportable on your 2022 tax return, on line 1 of 2022 Form 8606 if nondeductible.  Line 1 will fall through to line 14 (assuming no 2022 distributions) to be carried forward to line 2 of your 2023 Form 8606 to be added to the nondeductible contribution made for 2023 shown on line 1.

[Don135]

I’m in the same boat as OP where I made my 2022 contribution and 2023 back door Roth IRA conversions in 2023 contributing $6000 and $6500, respectively. So does that mean in form 8606, I would put 6500 in line 1 and 6000 in line 2 so that line 14 comes out as 0? Thanks ahead for the help. 

[dmertz · Accepted solution]

@Don135 , that's correct if your 2022 From 8606 has $6,000 on line 14.  If you used TurboTax to prepare your 2022 tax return and you transferred your 2022 tax file into 2023 TurboTax to begin your 2023 tax return, TurboTax will already have the $6,000 on line 2 of your 2023 Form 8606 unless you deleted (or caused to be deleted) the information carried in from the 2022 tax file.

[PeteB22]

Hi - did you ever get this figured out? I'm in the same boat. Thanks!

[DanaB27]

If you made in 2023 a contribution for 2022 and  for 2023 and then converted it in 2023 then you should have entered the nondeductible contribution for 2022 on your 2022 tax return. This will result in a 2022 Form 8606 with the basis on line 14. You will enter this basis during the interview on the 2023 tax return. Please review the instructions below.

To enter the nondeductible contribution to the traditional IRA for 2023 on the 2023 tax return (you should have entered this on your 2022 tax return for the 2022 contribution as well):

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 2022 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 2022 Form 8606 and the value of all traditional, SEP, and SIMPLE IRAs

@PeteBCarlson 

[yam-potatoes]

I’ve done this for the 2024 tax year but still getting a message that I will have a penalty for excess contributions. Should I just ignore that or did I miss something? 

[DanaB27]

To confirm you followed the entry steps from How do I enter a backdoor Roth IRA conversion?

To confirm, did you have taxable compensation, like from wages or self-employment income? Please see Compensation for details.

For 2024, the total contributions you make each year to all of your traditional IRAs and Roth IRAs can't be more than:

• $7,000 ($8,000 if you're age 50 or older), or
• If less, your taxable compensation for the year (IRS)

@yamasaki-erika 

[yam-potatoes]

Thank you!