Trouble with Backdoor Roth IRA for myself and spouse

[PeteB22]

Hello community! Here's my situation: In 2023 my spouse and I both contributed $6,500 apiece ($13k in total) to a Traditional IRA and then immediately rolled over the money into a Roth IRA (backdoor Roth). My spouse also contributed $6k in January 2023 to count for a 2022 Roth IRA contribution. This means we contributed $19k in total in 2023, $6k of which applied to 2022. For some reason on TurboTax, $6k of which is showing up as "Taxable" - see screenshot below. I can't figure this out and believe I'm paying higher taxes here. Any help appreciated! 

[DanaB27]

You should have entered the nondeductible contribution for 2022 on the 2022 tax return and therefore have a 2022 Form 8606 with a basis on line 14. This has to be entered either in the IRA contribution interview (steps 9 and 10) or in the retirement section (steps 9 and 12).

To enter the nondeductible contribution to the traditional IRA:

1. Open your return
2. Click “Deductions &Credits” on the top
3. Click "I'll choose what to work on"
4. Scroll down to “Traditional and Roth IRA Contributions” and click “Start”
5. Select “traditional IRA”
6. Answer “No” to “Is This a Repayment of a Retirement Distribution?”
7. Enter the amount you contributed
8. Answer “No” to the recharacterized question on the “Did You Change Your Mind?” screen
9. Answer the next questions until you get to “Any Nondeductible Contributions to Your IRA?” and select “Yes” for your spouse since your spouse had nondeductible contributions before this tax year
10. Enter your basis in the Traditional IRA from your spouse's 2022 Form 8606 line 14 (if you had a basis in the prior year)
11. 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 conversion: 

1. Click "Federal Taxes" on the top and select "Wages & Income"
2. Click "I'll choose what to work on"
3. Scroll down and click "Start" next to "IRA, 401(k), Pension Plan (1099-R)" 
4. Answer "Yes" to the question "Did You Have Any of These Types of Income?"
5. Click "I'll Type it Myself"
6. Choose "Form 1099-R, Withdrawal of Money from 401(k) Retirement Plans, Pensions, IRAs, etc."
7. Click "Continue" and enter the information from your 1099-R
8. Answer questions until you get to “What Did You Do With The Money” and choose “I moved it to another retirement account”
9. Then choose “I did a combination of rolling over, converting, or cashing out money.” and enter the amount next to "Amount converted to a Roth IRA account"
10. On the "Your 1099-R Entries" screen click "continue"
11. Answer "yes" to "Any nondeductible Contribution to your IRA?" for your spouse since your spouse had any nondeductible contributions in prior years.
12. Answer the questions about the basis from line 14 of your spouse's 2022 Form 8606 and the value of all traditional, SEP, and SIMPLE IRAs

[Bristol-TP]

Not sure the reply solved this user's issue.  And we are having a similar issue.  Using TurboTax online, we are trying to add a Backdoor Roth Conversion of $7500 but it is calculating a Taxable Amount of $7453 and it should, of course, be $0.  Followed these instructions: backdoor-roth-ira-conversion  but to no avail.  Appreciate any help or guidance.  Thanks!

[Bristol-TP]

Update...figures, as soon as I post I find the problem. 

For a true backdoor Roth contribution, you must:

start with a zero balance in your traditional IRA before beginning this adventure

 end with a zero balance in your Traditional IRA by converting it all to Roth

Even though it asks you for your IRA value at the end of the year, you must enter $0, as that is what is left after the conversion (even if your IRA has other funds in it).  Instructions are not clear to do this.  

[AnnetteB6]

Entering zero if your Traditional IRA has other funds in it is not the correct thing to do.  If your Traditional IRA has other funds in it, those funds must be taken into account when taking any distribution from any of your Traditional IRA accounts.  

Every distribution from a Traditional IRA account is made up of a combination of pre-tax and after-tax money in the account.  You cannot pick and choose to take a distribution of only the after-tax money that was placed in the account for the purpose of the back-door Roth IRA conversion.  This is called the pro-rata rule.  

@Bristol-TP 

[PeteB22]

Thanks - I'm still struggling with this. So if you enter "0" does that drop your taxable amount from $7,453 to $0? What were you entering as your Traditional IRA value prior? I'm still confused why it's giving me a taxable amount of $6k.

[DanaB27]

To confirm, did you enter the $6,000 basis from the 2022 Form 8606 line 14 during the interview?

Did your spouse have any pre-tax funds in her traditional/SEP/SIMPLE IRAs? If yes, then the pro-rata rule applies. This means that with each distribution/ conversion you will have a taxable and nontaxable part. 

@PeteB22 

[PeteB22]

Thanks, Dana. So we contributed the $6,000 for 2022 after we filed our 2022 taxes, so we didn't call anything out in our 2022 taxes. She didn't have any pre-tax funds in her Traditional IRA, as we opened it explicitly to transfer to a Roth. We essentially opened the Traditional and the Roth at the same time. 

[DanaB27]

You will need to amend your 2022 tax return to add the 2022 Form 8606 to report the nondeductible traditional IRA contribution for 2022. This will result in the $6,000 basis on line 14 of Form 8606 which you will enter on your 2023 return.

@PeteB22