Accidental excess contribution with a Backdoor Roth conversion

[mm808]

I accidently contributed a non-deductible amount of $7,000 to a traditional IRA ($500 more than I should have) and did a backdoor Roth conversion on the whole amount. This all happened in $500 increments throughout 2023.

If I take that $500 out as an excess contribution, what do I need to do with TurboTax? The route I tried ended up with me paying income tax on the excess.

[DanaB27]

To confirm, were all of your traditional IRAs empty after the conversion? If yes, then please follow these steps in TurboTax:

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” if you had a nondeductible contribution before this tax year.
9. Enter your basis in the Traditional IRA from your 2022 Form 8606 line 14 (if you had a basis in the prior year)
10. On the "Tell us the Value of all of your Traditional IRA accounts" screen enter the value (should be $0 if all were empty after conversion)
11. On the "Your currently have a Penalty" screen don't enter anything as withdrawn.
12. 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 Form 1099-R 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 "Review your 1099-R info" 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 2022 Form 8606 and the value of all traditional, SEP, and SIMPLE IRAs

If you had $0 value on December 31, 2023 then TurboTax won't calculate the 6% penalty because it is calculated as the smaller of the excess contribution or the value on December 31, 2023. Therefore, you will not enter the excess amount as removed on the penalty screen and then you will have the full $7,000 basis (nondeductible contributions) on Form 8606 for the 2023 conversion.

You still have the $500 excess contribution in the Roth IRA and you will need to request the withdrawal of excess contribution plus earnings. You will receive Form 1099-R for this distribution and the earnings will be taxable.

[mm808]

Thanks @DanaB27 . my traditional IRA is current at $0.

If I wanted to leave that $500 excess in my Roth and apply it to 2024 (and pay the 6% penalty for 2023), how would I go about doing that in TurboTax 2023 (desktop version)?

[DanaB27]

The only way to trigger the 6% penalty calculation in TurboTax in your situation is to enter a $500 Roth IRA contribution but then this would look like you made a $500 excess contribution to the Roth IRA in addition to the $500 excess traditional IRA contribution. It might be best to request the withdrawal of excess contribution in the Roth IRA plus earnings and then just make a new contribution.

[mm808]

Thanks @DanaB27 .

Unfortunately, my Roth IRA custodian said they couldn't withdraw the excess because of some issue tied to the backdoor conversion. Based on what you are saying, I would have to pay the 6% penalty on the nondeductible $500 that I first put into my normal IRA then pay the penalty again on the same $500 that was converted to the Roth? If so, how would that get entered into TurboTax?

[DanaB27]

No, TurboTax won't calculate the 6% penalty for your excess traditional IRA contribution because it is following the rule to use the smaller of the excess contribution or the value on December 31, 2023 (including contributions made for 2023 in 2024). Therefore, you won't have the 6% penalty calculated since your value in the traditional IRA is $0.

You converted the excess traditional IRA contribution to a Roth IRA which was an invalid conversion and therefore you created an excess in the Roth IRA. But TurboTax cannot calculate the 6% penalty on this since this calculation is only triggered by the entry of an excess contribution in the Roth IRA contribution section.

Therefore, you cannot get the 6% penalty calculated with TurboTax on your 2023 return.

I would double check with the financial institution if you can withdraw the excess contribution plus earnings from the Roth IRA. Explain to the custodian that $500 of the conversion is disallowed since it was funded by an excess contribution.  If you cannot withdraw it as an excess contribution you should at least request the excess amount plus earnings as a regular distribution.