Multiple 1099-R forms

[stan24mjs]

I'm using TurboTax premium. At the end of 2023 I had a traditional IRA with a cost basis of 0. At the beginning of 2024 I did a non-deductible contribution of $8000 to the traditional IRA. I then immediately did a conversion of the $8000 to a Roth IRA. This included $1 of interest so the total conversion was $8001. At this point my traditional IRA contained $0. Later in 2024 I did a rollover of a large amount of a 401K to the traditional IRA. The remaining part of the 401K was converted to a Roth 401K. I have received two 1099-R forms, one for the conversion, and one for the rollover. At the end of 2024 the traditional IRA contained the rollover amount plus interest earned. Both 1099-Rs were imported into TurboTax. The rollover 1099-R was processed correctly with the amount that was moved to the Roth 401K being taxable. However the 1099-R for the conversion (the $8001) is being almost fully taxed, where the tax should only be for $1. The problem is that TurboTax does not allow the specification of the tax basis of the IRA at the time of the conversion to be $0. Instead it is using the amount at the end of the 2024, which includes the 401K rollover amount (plus interest earned). Form 8086 supports this scenario (I verified this with a CPA), but there seems to be no way in TurboTax to support this scenario. Please indicate if there is a way in TurboTax to support this scenario, otherwise I will likely stop using TurboTax.

[DanaB27]

If you rolled over pre-tax funds from your 401k in your traditional IRA then the pro-rata rule applies. This means that with each distribution/ conversion you will have a taxable and nontaxable part.

TurboTax is correctly using the pro-rata rule. It doesn't matter that you converted the funds before you rolled over the 401k. Timing doesn't matter, it only counts that you had still a balance on December 31, 2024. 

Form 8606 line 6 instructions state: "Enter the total value of all your traditional, traditional SEP, and traditional SIMPLE IRAs as of December 31, 2024, plus any outstanding rollovers. A statement should be sent to you by January 31, 2025, showing the value of each IRA on December 31, 2024. However, if you recharacterized any amounts originally contributed, enter on line 6 the total value, taking into account all recharacterizations of those amounts, including recharacterizations made after December 31, 2024."

The Backdoor Roth only works if your traditional/SEP/SIMPLE IRAs do not have any pre-tax funds in the account at the end of the year.  If you plan to use this strategy in the future you might want to think about a reverse rollover where you rollover IRA money to a company plan, like a 401(k). Only pre-tax funds can be rolled from an IRA to a company plan. Therefore, you would isolate the basis and could start the Backdoor Roth procedure fresh. But it only works if your employer allows it, not all plans do.

If you rolled over any nontaxable portion of your qualified retirement plan to a traditional, traditional SEP, or traditional SIMPLE IRA that wasn’t previously reported on Form 8606, line 2, include the nontaxable portion on line 2 (Form 8606 line 2 instructions).