1099-R

[Andre L]

Hello,

I am married, we file our taxes jointly, and our MAGI is over $208,000 so we are not allowed to contribute directly to a Roth IRA plan.

I made a Traditional IRA contribution of $6,000 in Dec/2020 (post-tax), and without investing in any stock, so no capital gains were added to the amount, I immediately converted the full amount to a Roth IRA plan. 

I received the 1099-R for the tax year 2020 from the broker with the amount of $6,000 on both boxes 1 and 2a (Gross distribution and taxable amount). Box 2b was checked (taxable amount not determined) and also "Total Distribution" field was checked. Field 7 had the distribution code "2", and the IRA/SEP/SIMPLE box was checked.

When I added this information to TurboTax the amount of taxes due go up. I believe this should not be the case and that the distribution code should have been "R". Is this correct? Or I will receive another 1099-R for the tax year 2021 with the distribution code "R"?

I am planning to keep doing this conversion every year.

Thanks!

Andre

[Mike9241]

the 1099-R is correct and should be entered as is

you need to indicate the IRA is a nondeductible contribution. then since you have basis in the IRA there is no taxable income or tax on the conversion.

1099-R leave the taxable amount blank and then on the 1099-R worksheet complete lines b4 and b5 

on the IRA contribution wks enter the amount of the IRA contribution on line 1 and on line 15 (the nondeductible portion) enter the amount on line 1 

there will be form 8606-T in your return. but no 5329

[macuser_22 · Accepted solution]

The 1099-R code 2 is correct.    This is NOT a recharactorization (code R).

You probably failed to enter the contribution into the IRA contribution section a make it non-deductible so it would go on a 8606 form line 1 to offset the tax (or part of the tax if the total year end IRA value was not zero.)

Here is the complete procedure:

The "Backdoor Roth" does not exist in tax law. It is a procedure used by some to take advantage of a quirk in tax law that allows making a non-deductible contribution to a Traditional IRA when one cannot contribute to a Roth IRA, and the immediately converting the Traditional IRA to a Roth IRA, thereby getting the money into the Roth via "backdoor" tax free.

That "procedure" can only work of all these requirements are met:
1) No Traditional IRA account whatsoever can exist (that includes any SEP or SIMPLE IRA accounts) at the start. If existing IRA's contain any before-tax money or earnings then it will be partly taxable.
2) The Tradition IRA contributions must be reported on a 8606 form as non-deductible.
3) The conversion to a ROTH must be shortly after the contribution to avoid taxable gains.
4) The entire Traditional IRA value must be zero that the end of the year of conversion.

Otherwise the conversion will be partly taxable.

First you must enter your Traditional IRA contributions (if there were 2020 contributions).

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

Be SURE to answer the follow up that the are choosing to make this contribution NON-DEDUCTIBLE - if that screen comes up. (DO NOT say that you moved (recharacterized) the money to a Roth) – this is a conversion, not a recharactorazition.

Then enter the 1099-R that shows the distribution.

Federal Taxes,
Wages & Income
I’ll choose what I work on (if that screen comes up),,
Retirement Plans & Social Security,
IRA, 401(k), Pension Plan Withdrawals (1099-R).

Answer the follow-up questions answer the question that you moved the money to another retirement. The screen will open up with choices of where it was moved. Choose you converted it to Roth IRA.

When asked if you have made any non-deductible contributions say " "yes" if you did then enter the non-deductible contributions made for tax years before 2020.     (Usually zero unless you also made a 2019 or earlier non-deductible contribution. If you do have prior year basis then enter the last filed 8606 line 14 value.).

Enter the 2020 year end value of your Traditional IRA a "0" (zero) - if it is in fact zero - this tax free Roth conversion will not work if it is not zero.

[If you had any other Traditional IRA at the end of 2020, then the nondeductible "basis" must be pro-rated over the current distribution and the total IRA value and only a portion of the Roth conversion will be non taxable and part will be taxable, with the remaining non-deductible basis carrying forward for future distributions. You can never only withdrew the nondeductible basis as long as the IRA exists and has a value more than zero.]

The non-deductible amount of your contribution will be subtracted from the taxable amount of the conversion on then 8606 form and enter on line 4a of them 1040 form and a zero taxable amount on line 4b if you did it right.

Also see this TurboTax FAQ:
https://ttlc.intuit.com/questions/4350747-how-do-i-enter-a-backdoor-roth-ira-conversion

[Andre L]

Thank you so much!

As you said, I had forgotten to enter our 2020 contributions to the Traditional IRAs.

Best regards!

Andre