Calendar year 2016 was the first year that I was not covered by a retirement plan at work since I retired in 2015. In calendar year 2016 my wife and I initially contributed $2,000 each to traditional IRAs and then almost immediately converted the funds to Roth IRAs as we weren’t sure at the time that we would have enough earned income for us both to make the full contributions and conversions. Now in early 2017, as we are preparing our taxes, we realize that we can contribute the full amount. We do not want to make the contributions deductible for a number of reasons including wanting to convert the remaining $4,500 funds to Roths, so when Turbotax asked what portion we wanted non deductible we each selected $6,500. As an aside we have no other traditional IRA assets either deductible or non deductible. The non deductibles were converted to Roth IRAs in the years we made the non deductible contributions.
So here’s the issue, when we indicated in the Turbotax interview that the remaining $4,500/person is to be contributed between January 1, 2017 and April 18, 2017, line 4, of form 8606 shows $4,500 which makes sense. However, for line 5 (subtraction of line 4 from 3) shows $2,000. When you work your way through the form the $2,000 ends up being non taxable and the $4,500 taxable. Why isn’t all $6,500 non taxable if we each intend to convert the non deductible (self selected) $4,500/each to Roth IRAs by April 18th? Why do we end up with a $4,500 basis on funds that are non deductible and converted to Roths? In previous years when we did backdoor Roth conversions nothing was taxable and no bases were created. Finally, we modified the existing 1099-Rs to show $6,500 in boxes 1 & 2A of our 1099-Rs. When we eventually add the new 1099-R’s showing $4,500 each we back down the originals to $2,000.
It doesn't. Make sure that when you enter the total of $6,500 each as your contributions for 2016 you also indicate that $4,500 of that was contributed between January 1 and April 18, 2017. Also make sure that you are not including the $4,500 when you tell TurboTax your year-end balance in traditional IRAs (which should be zero if you expect your entire $2,000 of basis to be applied to your Roth conversion).
However, the instructions for line 4 of Form 8606 say:
"If you made contributions to traditional IRAs for 2016 in 2016 and 2017 and you have both deductible and nondeductible contributions, you can choose to treat the contributions made in 2016 first as nondeductible contributions and then as deductible contributions, or vice versa."
To force TurboTax to treat this the way you desire, I need to modify my previous instruction. You must indicate that NONE of your contribution was made between January 1 and April 18, 2017. This will result in Form 8606 line 4 showing zero (as permitted by the IRS) and your entire $2,000 of basis will be applied to your $2,000 Roth conversion. Do not use overrides.
Thanks for the follow-up. I learned something new about TurboTax.
There are a number of other items that I've reported that are much more common situations, some frequently mentioned on this forum, that Product Quality simply considers to be either unsupported calculations or situations that have an adequate workaround. The more I think about it, the more it seems like I might have helped one other person in a situation similar to yours a few years ago. Since this is the sort of question I look for to help out on this forum, I think I would have come across it more if it was a pervasive issue.
Right. With only $2,000 of the $6,500 nondeductible contribution converted, you end up with the remaining $4,500 of basis transferring to 2017.
1) You have basis from your nondeductible contributions for 2016 because the contribution was made for 2016. However, any of the 2016 addition to basis that was the result of a contribution after 12/31/2016 is not basis that is available to apply to a 2016 distribution.
2) The amount on 2016 Form 8606 line 14 will transfer to your 2017 Form 8606 line 2 to be used in calculating the taxable amount of any distribution or conversion you do in 2017.
3) There is no requirement that you wait to do a Roth conversion. Any basis that you add in 2017 as the result of a contribution for 2016 will be included on line 2 of your 2017 Form 8606 as I mentioned in 2) above. Although you haven't asked about it, any basis that you add in 2017 as the result of a nondeductible contribution for 2017 will appear on line 1 (and will not be subtracted out on line 4).
(Don't refer to it as a nondeductible IRA. You have basis in nondeductible contributions, not nondeductible IRAs. Your basis applies across all of the traditional IRAs that you yourself own.)