IRA Distribution and Contribution in the same year

[macuser_22]

Since that bug has existed for years and I just reported it yesterday, I would not expect a fix anytime soon. 

This probably affects very few users however, because it is unusual to make the *first* non-deductible contribution to an IRA and then take a distribution in the same year, AND have non-zero value IRA at years end.

Most taxpayers would not put the new money into the IRA in the first place if they were just going to take a large distribution and would be unable to remove that same contribution tax free because of a year end balance.

Those doing a real "backdoor Roth" do not run into this problem because a backdoor Roth requires a zero balance Traditional IRA at the start and a zero balance at the end so the lack of the questions makes no difference.

Not to say that this is not a serious problem that can (and probably has) caused some unknowing taxpayers to have underpaid their tax when they had a scenario like yours.   It also prevents the pro-rated basis to be passed to future years that will result in overpaying tax for all future distributions.,

[cfcan]

Congratulations for all your work to figure this out.  I've been trying to get Intuit TurboTax Support to take this issue seriously for over a month now.  By the way, I found this issue in TTax after trying FreeTaxUSA.com just to see what it was.  I inputted the data from my TTax return to FreeTaxUSA and found they agreed to the dollar.  That was a good result.  FreeTaxUSA then prompted me to find more ways to save and suggested making an IRA Contribution to partially offset a distribution using Form 8606.  I won't go into all the details, but I am convinced TurboTax is not programmed correctly for an IRA Contribution made during the tax year (2020 in this case), the contribution was not made Jan 1, 2021, up to Apr 15, 2021.  The Step-by-Step instructions only asks for the contribution made, the date (2020 or 2021).  If made in 2020, it does not ask you for the Total Year-End Value of all other IRAs, excluding Roths.  To me, it looks like a strategy for the coming year (2021) is to make a contribution to my spouse's IRA in 2021, so that whatever distribution is made in 2020 becomes at least partially non-taxable.  The max. contribution is $7000 for 2020, don't know about 2021 yet.  If the Dec 31 year-end IRA values are not too large compared to the contribution, some of the distruibution become non-taxable and one can save a few bucks in taxes.  But, the way TTax currently works, it ignores the calculation for the percentage of contribution to total year-end value because the Step-by-Step Interview fails to ask the question about year-end values.  Hence, TTax gives you a saving of your marginal rate times the full non-deductible contribution.  That's wrong, but that's the way it works.  And, the Error Check (Review) doesn't flag the error, thus one would just file the taxes as calculated thinking all was correct.  Buy Audit Defense for $45 and you're covered.  Now that's not right to do, but we'll see whether TurboTax fixes the problem to make it work correctly for 2021.

[macuser_22]

This is a year old post and  it seems that TurboTax and other companies that use the worksheet are doing it the way the IRS accepts that can result in a lower tax. 

TurboTax certainly DOES ask for the year end balance and always has, if you say yes, you have non deductible contributions when the interview asks.

[cfcan]

I disagree with some of macuser_22's response that TurboTax asks for year-end values if you say YES to the "did you make non-deductible contributions".  That question asks if you made any non-deductible contributions in "2019 or prior years".  I made  the contribution in 2020, did not have any non-deductible contributions in 2019 or earlier, so I answered NO to the question.  Is the question as written incorrect in that it should say "2020 or prior years"?  If I made the non-deductible contribution in 2020, and if the question is correct about "2019 or prior years", then the answer is NO, and you do NOT get to question about entering the 2020 Year-End Value.  I still claim TurboTax is not handling the IRA Contribution topic correctly.  And, the 8606 Form seems to want input for lines 7 & 8, also.  Where are those questions?  BTW-I just went into TurboTax and answered the non-deductible contribution question as YES.  It then wants to know about 2019 total basis.  It never asked anything about 2020 Year-End Values. 

[macuser_22]

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@cfcan wrote:

I disagree with some of macuser_22's response that TurboTax asks for year-end values if you say YES to the "did you make non-deductible contributions".  That question asks if you made any non-deductible contributions in "2019 or prior years".  I made  the contribution in 2020, did not have any non-deductible contributions in 2019 or earlier, so I answered NO to the question.  Is the question as written incorrect in that it should say "2020 or prior years"?  If I made the non-deductible contribution in 2020, and if the question is correct about "2019 or prior years", then the answer is NO, and you do NOT get to question about entering the 2020 Year-End Value.  I still claim TurboTax is not handling the IRA Contribution topic correctly.  And, the 8606 Form seems to want input for lines 7 & 8, also.  Where are those questions?  BTW-I just went into TurboTax and answered the non-deductible contribution question as YES.  It then wants to know about 2019 total basis.  It never asked anything about 2020 Year-End Values. 

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If you made 2020 non-deductible contribution then those go on the 8606 line 1 and must be entered in  the 2020 IRA contribution interview to get it there.    That will  then automatically become your basis.

You do not enter 2020 contributions in that box.

Enter IRA contributions here:
Federal Taxes,
Deductions & Credits,
I’ll choose what I work on (if that screen comes up),
Retirement & Investments,
Traditional & Roth IRA contribution.

OR  Use the "Tools" menu  (if online version under My Account) and then "Search Topics" for "ira contributions" which will take you to the same place.

[cfcan]

You are right.  This discussion is from March 2020.  It's now March 2021 and this topic have not been corrected.  It's behavior seems to be the same as it was a year ago, and most likely even before that.  So much for TurboTax's claim to accuracy.  I wonder why they won't fix it?  Seems like a major bug to me, even if encountered infrequently.  They are allowing entries that reduce the tax due, not finding it in the error checking, and allowing users to file incorrect returns.   

Come on Intuit.  Fix this, or explain to us why it's correct as is.  I don't think you can.

[macuser_22]

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@cfcan wrote:

You are right.  This discussion is from March 2020.  It's now March 2021 and this topic have not been corrected.  It's behavior seems to be the same as it was a year ago, and most likely even before that.  So much for TurboTax's claim to accuracy.  I wonder why they won't fix it?  Seems like a major bug to me, even if encountered infrequently.  They are allowing entries that reduce the tax due, not finding it in the error checking, and allowing users to file incorrect returns.   

Come on Intuit.  Fix this, or explain to us why it's correct as is.  I don't think you can.

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TurboTax works fine and there is no bug.

Are you trying to do a "backdoor Roth"?

[dmertz]

@macuser_22 , perhaps I see the problem that cfcan is talking about.  When you have no basis carried in from the previous year and made a nondeductible contribution in the current year, if you indicate that you converted any amount to Roth, TurboTax asks for your year-end balance.  However, under these same circumstances if you simply say that you cashed out the entire distribution, TurboTax fails to ask for the year-end balance and completes Form 8606 incorrectly.

[macuser_22]

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@dmertz wrote:

@macuser_22 , perhaps I see the problem that cfcan is talking about.  When you have no basis carried in from the previous year and made a nondeductible contribution in the current year, if you indicate that you converted any amount to Roth, TurboTax asks for your year-end balance.  However, under these same circumstances if you simply say that you cashed out the entire distribution, TurboTax fails to ask for the year-end balance and completes Form 8606 incorrectly.

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I seem to remember a similar issue last year, but I thought that was fixed.  I can't remember if it was the same  circumstance or not.  The workaround was to enter $1 of past years basis when asked, then the years end value questions appeared, after entering the years end value, use the "back" button and enter 0 (zero) for the basis and the years end value will remain on the 8606.

[cfcan]

I think I may have discovered my problem with the IRA Contribution interview not asking for IRA Year-End values.  I failed to answer one of the Interview questions correctly when adding the 1099-R for an IRA Distribution that was actually a conversion to a Roth IRA.  When it asked what I did with money, I answered something like I kept it (cash out) instead of moving the money to another retirement account.  When I corrected that, it then asked about moving the money to a Roth vs another account or returning it to the same account, and then asked about 2019 basis and 2020 Year-End value.   The Form 8606 and IRA Tax Worksheet then seemed to fill out and calculated correctly.  I see now that while my income is above the limit for contribution deductibility, TurboTax seems to be accounting for how much of a distribution is taxable when making a non-deductible contribution with after-tax money.   This also points out that you have to be extremely careful during the Interview.  If you answer incorrectly, the program won't know, thus error check won't find it, and you can file an incorrect return.  Thanks to everyone who contributed to this discussion, as I was eventually able to find my mistake.  I really couldn't believe TurboTax was wrong after all these years.  But, I sure got fooled by my mistake for a while.

[macuser_22]

Glad you found it.    Unfortunately, tax returns must be precise - one wrong answer can make major changes and there is not way for software to detect it.