turbotax icon
cancel
Showing results for 
Search instead for 
Did you mean: 
turbotax icon
cancel
Showing results for 
Search instead for 
Did you mean: 
turbotax icon
cancel
Showing results for 
Search instead for 
Did you mean: 
turbotax icon
cancel
Showing results for 
Search instead for 
Did you mean: 
Announcements
Close icon
Do you have a TurboTax Online account?

We'll help you get started or pick up where you left off.

Why is Backdoor Roth Conversion taxable when MAGI is too low to require backdoor Roth?

Background

I went through the process of implementing the backdoor Roth IRA for both my wife and myself.  In the process of going through TT, I found that my MAGI was not high enough to require using the backdoor Roth.

 

Problem

When I plugged in the numbers into TT,  there were no issues with my conversion.  It correctly, I believe, reported that my conversion was not taxable.  When I entered my wife's conversion, TT reported the amount she converted ($6000) as taxable. 

 

Note

When I artificially bumped up my MAGI, my wife's conversion changed to not taxable.

 

Question

I hope I included enough information but does this sound right?  Could someone explain why my wife's conversion is taxable and mine was not?

 

Thanks for any explanation!

 

Connect with an expert
x
Do you have an Intuit account?

Do you have an Intuit account?

You'll need to sign in or create an account to connect with an expert.

2 Best answer

Accepted Solutions

Why is Backdoor Roth Conversion taxable when MAGI is too low to require backdoor Roth?

your (her)  contribution must have been elected to be non-deducible for this to work

also your (her) starting and ending traditional IRA balance must be zero

View solution in original post

dmertz
Level 15

Why is Backdoor Roth Conversion taxable when MAGI is too low to require backdoor Roth?

With MAGI below the threshold, it's your choice whether to treat the traditional IRA contribution as deductible or nondeductible.  With no other money in traditional IRAs at year-end and the entire amount converted, the taxable result will be the same either way.  I suppose if there is no other reason that your tax return would include Schedule 1, treating the contribution as nondeductible on Form 8606 Part I would result in one less page in your tax return; that's the only benefit of treating this otherwise deductible traditional IRA contribution as nondeductible.  (The Roth conversion makes Form 8606 Part II required in either case.)  Of course if there is  other money in an individual's traditional IRAs at year-end, it makes no sense to treat a deductible traditional IRA contribution as nondeductible.

View solution in original post

6 Replies

Why is Backdoor Roth Conversion taxable when MAGI is too low to require backdoor Roth?

your (her)  contribution must have been elected to be non-deducible for this to work

also your (her) starting and ending traditional IRA balance must be zero

dmertz
Level 15

Why is Backdoor Roth Conversion taxable when MAGI is too low to require backdoor Roth?

Form your description, is appears that the traditional IRA contribution for 2019 and the Roth conversion both occurred in 2019.  If the traditional IRA contributions is deductible, don't complicate things, just deduct it.  The deduction will offset the taxable income of the Roth conversion.  There would only be a difference if the year for which the traditional IRA contribution was made is different than the year in which the Roth conversion was done.  In that case the deduction would appear on the tax return for the year for which the contribution was made while the taxable income would occur on the tax return for the year in which the deduction was done.  If the marginal tax rate for both years is the same, the net taxable difference over the two years combined will still be zero and you'll have an extra year to earn interest on the tax liability that was delayed for a year.  You might even benefit further if your marginal tax rate for the year of the Roth conversion is lower than the marginal tax rate for the year for which the traditional IRA contribution was made.

Why is Backdoor Roth Conversion taxable when MAGI is too low to require backdoor Roth?

Thank you for your response @fanfare.  This pretty much answers my question but I guess I can't figure out why, for my wife's conversion, TT prompts me to "Choose Not to Deduct IRA Contributions" whereby I select "Yes, make part of IRA contribution nondeductble".   I then just enter the entire contribution amount of $6000.

 

For my conversion, on the other hand, it automatically assumes it's nondeductible.  I'm wondering if I'm entering something different/incorrectly for my wife.  From what I could tell, it doesn't seem like it.

 

Anyway, thanks again!  I think you set me on the right track.  I appreciate the help.

Why is Backdoor Roth Conversion taxable when MAGI is too low to require backdoor Roth?

Thanks @dmertz.  Your assumption was correct that this all occurred in 2019..  When I was doing this, I didn't realize I was able to contribute directly to an IRA without penalty but I will keep this in mind for 2020.  I didn't mark yours as the best answer but it is the most thorough.  Thanks!

dmertz
Level 15

Why is Backdoor Roth Conversion taxable when MAGI is too low to require backdoor Roth?

With MAGI below the threshold, it's your choice whether to treat the traditional IRA contribution as deductible or nondeductible.  With no other money in traditional IRAs at year-end and the entire amount converted, the taxable result will be the same either way.  I suppose if there is no other reason that your tax return would include Schedule 1, treating the contribution as nondeductible on Form 8606 Part I would result in one less page in your tax return; that's the only benefit of treating this otherwise deductible traditional IRA contribution as nondeductible.  (The Roth conversion makes Form 8606 Part II required in either case.)  Of course if there is  other money in an individual's traditional IRAs at year-end, it makes no sense to treat a deductible traditional IRA contribution as nondeductible.

Why is Backdoor Roth Conversion taxable when MAGI is too low to require backdoor Roth?

Thank you @dmertz!  Your explanation was very helpful.👍

 

Edit: Just for completion, my wife and I had/have no other money in traditional IRA's

message box icon

Get more help

Ask questions and learn more about your taxes and finances.

Post your Question
Manage cookies