Accounting for Backdoor ROTH IRA conversion

[TheUnluckyOne]

Here is my problem. I contributed $7,000 to Traditional IRA in March 2021 for the prior year 2020 and converted to ROTH IRA for tax returns 2020. I later contributed $7,000 to Traditional IRA in Aug 2021 for the Year 2021. I received 1099-R for $14,000.03 for 2021. Upon my entry, I am charged about $3,200 in additional taxes

I contacted TurboTax online help. Two of them tried and gave up. They agree it should not add to my tax bottom line and gave up. One gentleman who helped me asked me to change the way entry is done and asked me to uncheck Taxable Amount Not Determined and make Taxable Amount 0.00 while in the form it is checked and the taxable amount shows $14,000. By doing so, it did not add to taxes. But I felt I cannot alter the content of the form. He said the explanation clarifies. This makes me uncomfortable. Contacting two others gave a different answer. One of them said, there is no backdoor and the other just showed how to enter 1099-R

My expectation is to add Zero dollars to my taxes because I contributed an amount to Traditional IRA that has not been deducted from my taxable income. I immediately converted to ROTH IRA. Any help in how to account for this is appreciated.

Am I wrong? Please advise

[macuser_22]

Sounds like you did not enter your contributions properly ..

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. [Congress has been talking about changing the tax law to prohibit this but has not yet done so.]

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 2021 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 2021.     (Usually zero unless you also made a 2020 or earlier non-deductible contribution. If you do have prior year basis then enter the last filed 8606 line 14 value.).

Enter the 2021 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 2021, 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

[MaryK4]

Did you enter the traditional IRA contributions in the Deductions & Credits section?  This is the part that shows you have basis in the traditional (because you are not taking a deduction for the contribution.

Step 1:  Enter the Non-Deductible Contribution to a Traditional IRA

1. Open your return if it’s not already open
2. Inside TurboTax, search for ira contributions and select the Jump to link in the search results
3. Select Traditional IRA on the Traditional IRA and Roth IRA screen and Continue
4. Answer No to Is This a Repayment of a Retirement Distribution?
5. On the Tell Us How Much You Contributed screen, enter the amount contributed and continue
6. Answer No on the Did You Change Your Mind? screen
7. Answer the questions on the following screens, until you reach Choose Not to Deduct IRA Contributions. Select Yes, make part of my IRA contribution nondeductible and Continue

[TheUnluckyOne]

Thank you macuser_22 and Maryk1101 for responding. I am using turbotax online. Somehow the details, that shows up for me and you all is different. Here are my screenshots for reference: ( I cannot attach screenshots either)

[TheUnluckyOne]

Just frustrated, want to go to a tax consultant. I know backdoor ROTH is tax free because my contributions were after tax since I am not eligbile to take deductions on my contributions to Traditional IRA and I dont have any kind of IRA other than this for a week or so after which I move the money to ROTH IRA. Here are the details:

1) Federal Refund (In Progress): $3,345

2) Wages and Income -  Retirement Plans and Social Security - IRA, 401(k), Pension Plan Withdrawals (1099-R) - Visit

3) Did you get a 1099-R in 2021? - Yes

    - Get ready to be impressed - Continue

    -  Lets import your tax info - Change how I enter my form

    -  How do you want to enter your 1099-R - Upload it from my computer - Continue

    - Upload your 1099-R - Browse - Choose your file - Hit open - Wait for 45 seconds

    -  Review your 1099-R Info - Review

    -  Who does this 1099-R belong to - Joe - Continue

    -  Who gave you 1099-R

         Who paid you

          Address

          Payer TIN

          - CONTINUE

    - Enter your 1099-R details from National Financial Services LLC as agent forFIDELITY INVESTMENTS

        Box 1 - Gross distribution: $7,000

        Box 2a - Taxable amount: $7,000

        Box 2b - Taxable amount not determined box is checked, Total distribution is checked

        Box 7 - Distribution code : 2, IRA/SIMPLE/SEP box is checked

        - CONTINUE

    -  Good news! You don’t owe any extra taxes, BUT my FEDERAL TAX REFUND IS REDUCED TO $1,665

    - CONTINUE

    - Do any of these situations apply to you? - None of these apply - Continue

    -  Tell us if you moved the money through a rollover or conversion - I converted some or all of it to a Roth IRA - Continue

    - Did you convert all of this $7,000.00 (Box 1) to a Roth IRA? - Yes, all of this money was converted to a Roth IRA - Continue

    - Here's your 1099-R info - CONTINUE

    -  Have you ever taken a disaster distribution before 2021? This includes repayments of prior year disaster distributions in 2021. - No - Continue

    -  Any Nondeductible Contributions to Joe's IRA?

Let us know if Joe made and kept track of any nondeductible contributions to Joe's traditional IRA from 2020 or prior years. (This is not common.) Most people do not make or track any nondeductible contributions to their IRAs.

Yes, Joe made and tracked nondeductible contributions to Joe's IRA

    - CONTINUE

    -  Let's Find Your IRA Basis - Joe's total basis as of Dec 31st, 2020 is 0

    -  Continue

    - Value of Joe's Traditional, SEP, Simple IRAs on Dec 31st, 2021 - 0

    - Continue

    -  Tell Us The Value of Joe's Roth IRA - Enter the value of Joe's IRA as of Dec 31, 2021 - Include any contributions made after Dec 31st 2021 that were designated for 2021 - 21,264 (This is confusing)

    -  Continue

    - Explain Your recharacterization - In August 2021, Contributed after tax dollars to Traditional IRA for 2021 and move it to ROTH IRA - Done

I am back to WAGES and INCOME. I started with a Federal Refund (In Progress): $3,345 and ended with Federal Refund of $1,665

Am I doing anything wrong? Where am i steering it incorrectly. Please advise

[macuser_22]

---

@TheUnluckyOne wrote:

    -  Any Nondeductible Contributions to Joe's IRA?

Let us know if Joe made and kept track of any nondeductible contributions to Joe's traditional IRA from 2020 or prior years. (This is not common.) Most people do not make or track any nondeductible contributions to their IRAs.

Yes, Joe made and tracked nondeductible contributions to Joe's IRA

    - CONTINUE

    -  Let's Find Your IRA Basis - Joe's total basis as of Dec 31st, 2020 is 0

    -  Continue

    - Value of Joe's Traditional, SEP, Simple IRAs on Dec 31st, 2021 - 0

---

Yes.     You failed to enter your basis for the non-deductible contribution.

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. [Congress has been talking about changing the tax law to prohibit this but has not yet done so.]

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 2021 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 2021.     (Usually zero unless you also made a 2020 or earlier non-deductible contribution. If you do have prior year basis then enter the last filed 8606 line 14 value.).

Enter the 2021 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 2021, 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

[TheUnluckyOne]

Thank you. You are correct. When I entered Traditional IRA basis as as on Dec 31st, 2020 as $7,000, the refund came back. I am one step ahead now.

Coming to my problem. it is little more acute. I am above 50 years. I made a contribution of $7,000 to traditional ira on March 2021 for Prior Year 2020 and immediately transferrred to ROTH IRA. My wages are above deductible contribution limits. So I am sure it is non deductible. Later in Aug 2021, I again made a contribution of $7,000 again and converted to ROTH IRA. This was for year 2021

The 1099-R from Fidelity for year 2021 shows 14,000.03 and taxable amount also shows the same amount. How do I account this? Please advise

[macuser_22]

---

@TheUnluckyOne wrote:

Thank you. You are correct. When I entered Traditional IRA basis as as on Dec 31st, 2020 as $7,000, the refund came back. I am one step ahead now.

Coming to my problem. it is little more acute. I am above 50 years. I made a contribution of $7,000 to traditional ira on March 2021 for Prior Year 2020 and immediately transferrred to ROTH IRA. My wages are above deductible contribution limits. So I am sure it is non deductible. Later in Aug 2021, I again made a contribution of $7,000 again and converted to ROTH IRA. This was for year 2021

The 1099-R from Fidelity for year 2021 shows 14,000.03 and taxable amount also shows the same amount. How do I account this? Please advise

---

A 2020 contribution must be reported on your 2020 tax return and if non-deductible on a 2020 8606 form line 1 3 & 14.      That would transfer to the 2021 8600 line 2 so line 3 woiud then be the total of 2020 and 2021 ($14,000).

[TheUnluckyOne]

Yes, My 2020 contribution is reported on my 2020 tax return and yes it is non-deductible on a 2020 8606 form and is on line 14.  That was my first year of contribution

What does this mean?

That would transfer to the 2021 8600 line 2 so line 3 would then be the total of 2020 and 2021 ($14,000).

Where will I see this carried forward in TurboTax? I mean currently, it is taxing my $7,000 and my tax refund is reduced to $1,665 from $3,345

[TheUnluckyOne]

Just wondering, what should the below values be

Tell Us the Value of Your Traditional IRA

Enter the total value of all Joe's traditional IRA, SEP and Simple IRAs on Dec 31st, 2021. This information is sent by mail on form 5498. Do not include ROTH IRAs

Value of Joe's Traditional, SEP and Simple IRAs on Dec 31st, 2021: ________________

Outstanding Rollovers:________________

Outstanding Recharacterizations:__________________

Here are contents of my form 5498

Account Number xxx-xxxxxxxx
1.IRA contributions (other than amounts in boxes 2-4, 8-10, 13a and 14a)..........$7,000.00
5.Fair market value of account........................................................$0.00
7.IRA Type..............................................................................IRA
11.Required Minimum Distribution for 2022................................................

The very next screen asks:

Tell Us The Value of Joe's Roth IRA

Enter the value of Joe's Roth IRAs on December 31, 2021

Note: Include any contributions made after December 31, 2021 that were designated for 2021

Roth IRA Value:

My Roth IRA value as per Dec 31st, 2021 statement is $21,264. Why would TurboTax want that? It is my contributions plus growth? My total contributions till Dec 31st, 2021 is $14,000

I am guessing, that question is not framed correctly

[macuser_22]

---

@TheUnluckyOne wrote:

Yes, My 2020 contribution is reported on my 2020 tax return and yes it is non-deductible on a 2020 8606 form and is on line 14.  That was my first year of contribution

What does this mean?

That would transfer to the 2021 8600 line 2 so line 3 would then be the total of 2020 and 2021 ($14,000).

Where will I see this carried forward in TurboTax? I mean currently, it is taxing my $7,000 and my tax refund is reduced to $1,665 from $3,345

---

If it did not trans fer then the 1099-R question  that asks if you had non-deductible contribution then asks for any prior year contributions - you enter it there.

[macuser_22]

---

@TheUnluckyOne wrote:

Just wondering, what should the below values be

Tell Us the Value of Your Traditional IRA

Enter the total value of all Joe's traditional IRA, SEP and Simple IRAs on Dec 31st, 2021. This information is sent by mail on form 5498. Do not include ROTH IRAs

Value of Joe's Traditional, SEP and Simple IRAs on Dec 31st, 2021: ________________

Outstanding Rollovers:________________

Outstanding Recharacterizations:__________________

Here are contents of my form 5498

Account Number xxx-xxxxxxxx
1.IRA contributions (other than amounts in boxes 2-4, 8-10, 13a and 14a)..........$7,000.00
5.Fair market value of account........................................................$0.00
7.IRA Type..............................................................................IRA
11.Required Minimum Distribution for 2022................................................

The very next screen asks:

Tell Us The Value of Joe's Roth IRA

Enter the value of Joe's Roth IRAs on December 31, 2021

Note: Include any contributions made after December 31, 2021 that were designated for 2021

Roth IRA Value:

My Roth IRA value as per Dec 31st, 2021 statement is $21,264. Why would TurboTax want that? It is my contributions plus growth? My total contributions till Dec 31st, 2021 is $14,000

I am guessing, that question is not framed correctly

---

Your year end value is zero if you had no other IRA accounts.

(outstanding rollovers and recharacterizations leave blank since you have none.

[TheUnluckyOne]

In Deductions and Credits - Traditional IRA and Roth IRA, How should I answer the below question or What does this question mean?

Tell Us How Much You Transferred

How much of the $7,000 you contributed to a traditional IRA for 2021 did you switch or "recharacterize" (this does not include conversions or rollovers) to a ROTH IRA (Learn More)

Amount switched from a Traditional IRA contribution to a Roth IRA Contribution:_____________________ 

Here is what Learn More says

This means that you first contributed money to a traditional IRA, but then later moved your money to a Roth IRA. This is sometimes referred to as a "recharacterization." A recharacterization such as this is different from a Roth conversion because your Roth IRA contribution is for the same year as the original traditional IRA contribution. So, the money would be both contributed to the traditional IRA and subsequently moved to the Roth IRA during the time period of January 1, 2021 until April 18, 2022 unless you file an extension in which case you would have until October 17, 2022.

Question: Is me moving after-tax contributions from traditional IRA to ROTH IRA the same year in 10 days' time recharacterization or ROTH conversion. If I answer $0.00 then I get my full refund. Just want to be sure, it is not recharacterization.

[macuser_22]

I thought you original question said you contribute to a Roth and then switched to a Traditional IRA (recharctorized).   You do NOT go to the IRA contribution section and select Traditional IRA contribution , you select Roth contributions and switch that to a Traditional IRA.   I think you are doing it backwards.