Help: Roth IRA conversion penalty

[legendhfwang]

I followed all the steps but was surprised I need to pay penalty annually for the backdoor Roth IRA conversion. Below are my steps.

1. Sign in to your TurboTax account
2. Open your return if it’s not already open
3. Select Federal from the menu, then Deductions & Credits
4. Locate the Retirement and Investments section and select Show more
5. Select Start or Revisit next to Traditional and Roth IRA Contributions
6. Check the Traditional IRA box and select Continue
7. Answer Yes to the question, Did you Contribute To a Traditional IRA?
8. Answer No to the question, Is This a Repayment of a Retirement Distribution?
9. On the screen, Tell Us How Much You Contributed, enter the amount (6000) contributed and select Continue
10. Answer Yes on the screen Did You Change Your Mind?,.

After that, I put "Your IRA Explanation Statement", No for "Any Excess IRA Contributions Before 2024?", "Yes" to "Any Nondeductible Contributions to Haifeng's IRA?" and 0 for Total Basis of 2023-12-31

What surprised me is that the money I put to Roth is considered excess contribution and need to pay penalty of 6% each year if the money is not returned to traditional IRA. Yes, my AGI is slightly above the 240000 limit, but I thought this is what backdoor Roth IRA is for. 

Thank you for your help.

[DanaB27 · Accepted solution]

You entered a recharacterization instead of a conversion. The conversion will be entered in the retirement section when you enter the Form 1099-R. Delete the entry on the "Tell Us How Much You Transferred" screen since this is for recharacterizations.

To enter the nondeductible contribution to the traditional IRA for 2024:

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 made in 2024: 

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 additional information. 

[lihy16]

I did not get step 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”" that was provided in this answer.

[AnnetteB6]

If you were trying to report a backdoor Roth IRA conversion, then answering the question that you 'converted' some or all of it to a Roth IRA would be correct.  

@lihy16