Backdoor Roth IRA conversion - IRA basis

[jay1209]

Hi, 

I have a question about how to correct my IRA basis. Here is the backstory of my situation:

In July 2020 I made a $6,000 contribution to my Traditional IRA account for year 2019 and another $6,000 contribution for 2020. When I filed Form 8606 for tax year 2020, it asked me to “Enter your nondeductible contributions to traditional IRAs for 2020, including those made for 2020 from January 1, 2021, through April 15, 2021.” Based on this, I put down $6,000 on line 1. 

In early 2021 I contributed $6000 (for year 2021) to my Traditional IRA account and later that year I transferred $18,000 (nondeductible contributions for 2019,2020,2021) plus all earnings in that account to a Roth IRA, as part of a backdoor Roth IRA conversion.  When trying to input the conversion in TT , it is asking for my Basis thru Dec 31, 2020. It technically should be $12,000, but it's saying it is different than what I entered on Form 8606 in 2020 which was $6,000.

Question:

Since I contributed $6,000 (2019 contribution) to my Traditional IRA in 2020, does that mean I have to fill out Form 8606 for 2019? Or would this be amended to my 2020 tax return? And if so, do I submit my 2021 tax forms with the IRA basis that I think should be correct ($12,000) and explain I'm amending a previous tax return? 

Thank you. 

- Jay

[DanaB27]

Yes, you will need to report the 2019 nondeductible traditional IRA contribution on your 2019 tax return and have Form 8606 included. You will also need to update your 2020 Form 8606 since line 2 should have had the $6,000 from 2019 listed and line 14 should have been $12,000.  Please see How to amend (change or correct) a return you've already filed.

Yes, you will enter $12,000 as your prior year basis on your 2021 tax return.

On your 2021 tax return to enter the nondeductible contribution to the traditional IRA:

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” since you had a nondeductible contribution before this tax year.
9. Enter the $12,000 basis in the Traditional IRA.
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 1099-R distribution/conversion: 

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 "Your 1099-R Entries" 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 2020 Form 8606 ($12,000) and the value of all traditional, SEP, and SIMPLE IRAs

[jay1209]

Thank you! Your reply is very helpful. But this has led me to think about my wife’s IRA account and how it’s running into a similar problem. She has not done a backdoor Roth conversion yet, but I did notice that the IRA basis was not updated to include the aggregate amount over the years. I read that you can only amend prior-year returns for up to 3 years but unfortunately she has nondeductible IRA contributions that date pass that by a couple of years. Is there any way to still amend? And if not, is the consequence being that she would need to pay taxes on nondeductible contributions because it was too late to amend? I appreciate your help. 

[DanaB27]

If you didn't file Form 8606 for prior years then you can file Form 8606 on a standalone basis, even past the usual three-year limit for requesting a refund.

There can be a penalty of $50 for not filing Form 8606 on a timely basis, but the penalty can be waived if you can show reasonable cause for not filing. File these delinquent forms separately from your tax return.

Please see Prior year Form 8606 and instructions and this information for suggestions regarding “reasonable cause.”

@jay1209

[jay1209]

@DanaB27  Just a question regarding the steps you provided.  In the first section step #10, I never reach that screen. After step 9, I get the following screens: 

"Tell Us the Value of All Your Traditional IRA Accounts"

"Income Too High to Deduct an IRA Contribution"

I'm using the downloaded software and not the online version. Any help would be appreciated. 

- Jay

[DanaB27]

The “Tell us the value of all your traditional IRA accounts” screen during the contribution interview only comes up if you contributed more than the allowed amount. Make sure that you only entered the traditional IRA contribution (no Roth contribution) and that you didn’t contribute more than $6,000 ($7,000 if you're age 50 or older), or if less, your taxable compensation for the year.

The “Income Too High to Deduct an IRA Contribution” is fine. If you have a retirement plan at work and are over the income limit your traditional IRA contribution will be nondeductible automatically. You only get the warning and then a screen saying $0 is deductible. You can continue.

@jay1209