Why is ROTH conversion being taxed?

[robinbrown447]

I contributed money for both 2015 and 2016 before April of 2016 to a traditional IRA which was then immediately converted to a ROTH IRA.  This should not be taxable but it is getting treated that way in TT.  The 1099-R forms I have from this appear to have the total for both year contributions.  This would total more than the allowed amount for a single year.  How can I input this properly for just this year and have it not be taxable income in TT?

[DexterS · Accepted solution]

Depending on your situation the backdoor Roth can become much more complex.

Here's a comprehensive discussion of the issues:

https://www.kitces.com/blog/how-to-do-a-backdoor-roth-ira-contribution-while-avoiding-the-ira-aggreg...

[robinbrown447]

Thanks so much for the help!!

[DexterS]

You did fine, now that I know it's a backdoor ROTH.

Here are the steps you need to complete.

A Backdoor ROTH conversion consists of two parts. 

1. The nondeductible contribution  
2. The non-taxable distribution

To record the nondeductible contribution in TurboTax Deluxe do the following:

• Federal Taxes >> Deductions & Credits >> I'll choose what I work on >> Scroll Down to >> Retirement & Investments >> Traditional and Roth IRA Contributions
• Select >> Start/Update
• Traditional IRA and Roth IRA >> Select >> Traditional
• Did (Name) Contribute To a Traditional IRA  >> Select >> Yes
• Was This a Repayment of a Retirement Distribution? >> Select >> No
• Tell Us How Much You Contributed >> Fill In as appropriate >> Select >> Continue
• Did You Change Your Mine? >> Select >> No
• Retirement Plan at Work >> Select >> Yes/No
• Any Excess IRA Contributions Before 2016 >> Select >> Yes/No
• Any Nondeductible Contributions to (Name) IRA? >> Select >> Yes >> Select >> Continue
• Let’s Find Your IRA Basis >> Fill In as appropriate >> Select >> Continue
• Income Too High To Deduct an IRA Contribution >> Select >> Continue
• Choose Not to Deduct IRA Contributions >> Select >> Yes >> Select >> Continue
• Your IRA Deduction Summary >> Your IRA Deduction >> $0 >> Select >> Continue

Now we’ll report the Non-taxable distribution into the Roth

• Federal Taxes >> Wages & Income >> Select >> I’ll choose what I work on
• Scroll Down to >> Retirement Plans and Social Security >> IRA, 401(k), Pension Plan Withdrawals (1099-R) >> Select >> Start/Update
• Your 1099-R >> Select >> Yes >> Select >> Continue
• Let Us Enter Your 1099-R >> Select >> I’ll type it myself >> Select >> Continue
• Tell Us Which 1099-R You Have >> Select >> 1099-R >> Select >> Continue
• Fill In as appropriate >> Select >> Continue
• Let Us Know a Little More About This Distribution >> Select >> From a traditional IRA
• Is this IRA subject to an early withdrawal penalty >> Select >> No >> Select >> Continue
• Did (Name) Inherit This (Name) IRA? >> Select >> No >> Select >> Continue
• What Did You Do With The Money From Fidelity? >> Select >> (Name) moved the money to another retirement account >>
• Select >> (Name) converted all of this money to a Roth IRA >> Select >> Continue
• Move Funds? >> Select >> No (Name) left the money in the Roth IRA >> Select >>Continue

[robinbrown447]

Thanks this is what I've done but it still shows the majority of it as taxable.  There is an additional question about the value of all traditional IRA accounts that I am getting.  I have a traditional IRA as well and I input that value here.  I just don't understand how I can be taxed on money I have already been taxed on, these are post-tax dollars.  The conversion was done immediately so there were no earnings before conversion.  I've done it both with a basis of 0 and a basis of the 2015 contribution with no change.

[DexterS]

If you took a deduction for the contribution to a traditional IRA, when you convert it to a ROTH you are taxed on the conversion.  When you take qualified distributions from the ROTH those are not taxed.

If you did not take a deduction for one or both traditional IRA contributions, sometimes referred to as a "backdoor" ROTH, please repost your question with more detail.

[robinbrown447]

This was a backdoor ROTH in that the contribution to the traditional IRA was a non-deductible contribution and immediately converted to the ROTH, but for both years 2015 and 2016 at the same time. When I enter the 1099-R forms in TT, it even states that I do not owe taxes based on the code in box 7, yet it shows as taxable income.  The totals for the 1099-R equal both years contributions but the entire amount is showing as taxable.  I am not sure what other detail to provide.