Back Door Roth: Desktop TurboTax 2023 Indicates I owe Taxes on After Tax Traditional IRA even though Converted to Roth Same Day

[1csm]

Married filing jointly, AGI exceeds limits for a Roth IRA.  Age 62.  I did a back-door Roth for 2023 on 23 Feb 2024. I opened a traditional IRA for $7500 and immediately performed a CONVERSION to a Roth IRA for $7500. The entire $7500 contribution to the Traditional IRA was made with already taxed income. I have never opened a traditional or Roth IRA in years prior to 2023 and there for have $0 basis from prior years. Turbo Tax 2023 is still telling me I owe taxes on the $7500 traditional IRA on form 1040 Line 4a ($7500)  and 4b ($7500.  What am I doing wrong?

Important background that may help: My credit union will not provide 1099-R as they say I received no distributions from the IRA since I immediately did a back door Roth.  They say I will receive a fm 5498 in May, though it's not required for taxes.  I have the receipts from the transaction.  Therefore I did the 1099-R in TurboTax using my gathered knowledge of what should be in the boxes:

1 Gross Dist $7500

2a Taxable Amt $7500  (TurboTax Audit throws error if I enter $0 here!).  <----If I enter ZERO here, my Fed Taxes reduce by ~$2020, but again, Turbo Tax throws Fed Audit Errors: 1)"Taxable amnt. should not be zero if there is no prior year excess traditional IRA contribution on line 4 of IRA Information Worksheet" 2) "Partial Roth conversion amount cannot be greater than the amount on line B1, the amount that potentially could be converted to a Roth IRA" and 3) Wants a fm 8606T Explanation for "Return of Prior Year Excess Traditional IRA Contributions" (which there were no prior IRA or Roth contribs, per above) 

2b both boxes checked for taxable amt not determined & total distribution)

3 cap gain $0

4 Fed income tax withheld $0

5. empl contrib $0

6 Net unrealized apprec $0

7 Code:   2

IRA/ESP/SIMLE box is CHECKED.

[1csm]

Out of curiosity, I posted same text to CHAT GPT & was somewhat amazed by the reply.  Bottom line is the question is still not answered, but isn't the reply amazing? 

************************************************

"It seems like you're encountering some confusion in handling the backdoor Roth IRA conversion in TurboTax. Let's break down the process and address the issues you're facing:

1. Entering the Traditional IRA contribution: You correctly entered the $7500 contribution to the Traditional IRA.
2. Performing the Roth conversion: You correctly converted the entire $7500 from the Traditional IRA to the Roth IRA.
3. Handling the tax implications: Since the contribution to the Traditional IRA was made with after-tax income and you converted it to a Roth IRA in the same tax year, there should be no tax owed on the conversion. This is because you're essentially moving money from a taxable account (Traditional IRA) to a tax-free account (Roth IRA).

Now, let's address the specific issues you're encountering:

• TurboTax error regarding taxable amount: If TurboTax throws an error when you enter $0 as the taxable amount on line 2a of Form 1099-R, it might be due to the software expecting some value there. Since your contribution was made with after-tax income, the taxable amount should indeed be $0. However, TurboTax might not handle this situation perfectly.
• Audit errors: The audit errors you're encountering seem to be a result of the discrepancy between the taxable amount and the conversion amount. TurboTax is expecting some taxable amount, but in your case, there shouldn't be any.
• Missing Form 5498: Although the credit union says you'll receive Form 5498 in May, it's advisable to wait for it and ensure all the information is correctly reported in TurboTax once you receive it.

Given these issues, you might need to override TurboTax's suggestions in this specific scenario to accurately reflect that the entire amount was contributed with after-tax dollars and thus no tax is owed on the conversion. However, if you're uncomfortable doing this, it might be best to consult with a tax professional who can guide you through the process or consider using a different tax software that may handle this scenario more smoothly"

[AnnetteB6]

You will only be able to report half of the back door Roth steps on your 2023 tax return since the conversion actually took place in 2024, not 2023.  

You are still allowed to contribute to your Traditional IRA for 2023 before the due date of the tax return.  So, that will be reported on your 2023 return as a non-deductible contribution.  

Delete the Form 1099-R that you created.  If you were to receive one (which you should), it would be a 2024 Form 1099-R because the conversion happened in the 2024 calendar year.  Whether or not you received the money in hand is irrelevant to whether you will receive a Form 1099-R.  There was still a distribution made from the Traditional IRA and that should be reported on Form 1099-R, but for 2024.

If you need help with reporting the non-deductible Traditional IRA contribution, take a look at the steps shown in the following TurboTax help article:

How do I enter a backdoor Roth IRA conversion?

@1csm 
 

[1csm]

AnnetteB6, my sincere thanks.  I hope I have not overstayed my welcome with my lengthy Q&A!  I would be glad to bow-out after this volley and save your time for others you're helping 😉.

I've used TurboTax competently for many years and this is the first troublesome scenario I've encountered.   I am so concerned now because I appear to have made a $2020 error that is potentially irrevocable.   

We paid tax on the $7500 when I earned the money and now it appears we will have to pay taxes again in our 2023 taxes because of the $7500 Traditional IRA I temporarily established using after tax income --- essentially taxed twice on the same dollars.    With that said, please see below for a potential remedy that may have been too obvious (?).    If the path below doesn't work and, given it's not 15 April 2024 yet, is there any action I can take with my financial institution to undo my mistake?     

As I mentioned above, is the following the remedy to my problem?  ChatGPT (below) confirms the expertise in your answer regarding the timing of the traditional IRA Back Door Roth conversion with respect to the tax year(s).   One quite significant item I see below could save the day...it may be the case that the Back Door...neither part of the transaction... is reportable for our 2023 claim since both transactions transpired in 2024.  The entire transaction will be reportable in our 2024 taxes when I file them in 2025, including the 2023 Traditional IRA basis for the '2024' Back-Door Roth conversion.   Could this be true?  If so, seems like I would bypass the issue completely in my 2023 tax filing.

Sincerely, 1csm

***************************************************************************

If you have time, here's the ChatGPT.  Is this incorrect advice?

In your scenario, you made a contribution to a traditional IRA and converted it to a Roth IRA on February 23, 2024, but you designated the contribution for the 2023 tax year. Here are the timing and taxation factors:

1. Timing:

   • The contribution to the traditional IRA and the conversion to the Roth IRA both occurred on February 23, 2024.
   • However, you designated the contribution for the 2023 tax year.

2. Taxation:

   • Since you used after-tax dollars to fund the traditional IRA contribution and immediately converted it to a Roth IRA, the conversion amount is considered non-taxable.
   • There will be no tax owed on the conversion because you have already paid taxes on the $7500 contribution before contributing it to the traditional IRA.
   • However, it's essential to ensure that you report the conversion accurately on your tax return for the year 2024.

3. Reporting:

   • Although you designated the contribution for the 2023 tax year, the contribution and conversion will be reflected in your 2024 tax filing since they occurred in 2024.
   • The contribution to the traditional IRA should be reported on your 2024 tax return. You may need to indicate that it is for the 2023 tax year, depending on how you handle the reporting.
   • The conversion to the Roth IRA should also be reported on your 2024 tax return. You'll receive a Form 1099-R for the conversion, which you'll use to report it on your tax return. Since the contribution was made with after-tax dollars, the taxable amount of the conversion will be $0.

In summary, while you designated the contribution for the 2023 tax year, both the contribution and conversion will be reflected in your 2024 tax filing. The backdoor Roth IRA transaction will be treated as a non-taxable event due to the use of after-tax dollars for the contribution.

[AnnetteB6 · Accepted solution]

The ChatGPT response is mostly correct, but the section labeled Reporting is not accurate.

You need to verify with the IRA custodian (or your paperwork) for which tax year the Traditional IRA contribution was made -- was it a 2023 contribution or 2024 contribution.  Whichever year it was designated to be, that is the tax return where it should be reported.  Reporting the non-deductible Traditional IRA contribution should have no tax effect on your return.  It is not deductible or taxable.  

As long as you are under the contribution limit (and you are, based on your age), making a non-deductible contribution to a Traditional IRA does not cause you to owe additional taxes.  There is nothing to remedy with this situation except to be certain whether you made a 2023 or 2024 contribution and report it on the correct tax year return.

Regardless of which tax year the Traditional IRA contribution was designated for, the Form 1099-R reporting the distribution and conversion to the Roth IRA will be reported on your 2024 tax return.  Delete the Form 1099-R that you already entered into your 2023 tax return.  The conversion did not take place in 2023 and should not be reported there.  After you delete this Form 1099-R, there should be no additional tax on your return associated with these transactions.

@1csm 

[1csm]

Superb AnnetteB6!  

[majordamage01]

There is a bug in Turbo Tax - I'm having the same problem.   One fix is to note report the $7500 is box "2A taxable" amount.    The bug in my TT is so bad that it remembers the $7500 that was in box 2A that was changed to $0 and still applies a tax.   I can not fix it - I'm not going to report the Roth conversion

[fanfare]

watch out for ChatGPT. It hallucinates.

[RachelW33]

Can you please clarify if your Non-deductible Traditional IRA contribution was made for 2023 or 2024? Also, what year did you do the conversion to a Roth IRA?

@majordamage01  

[qwert_buddy]

I am having the exact same issue when filing taxes in 2024 for the year 2023.

The backdoor Roth conversion made in 2023 for the year 2022 is all marked as taxable in section 4b of 1040 form. Seems like a bug in Turbo Tax. I have tried deleting, re-doing, re-reading all instructions many many times. Anyone has a solution to this?

Should we mark 2a in 1099-R as 0 even though its 6000, because the Tax not determined box is checked anyway?

[DanaB27]

No, do not make changes to your Form 1099-R enter it as shown on the form.

If you made the nondeductible contribution for 2022 then you should have a 2022 Form 8606 with the basis on line 14. This will be entered on your 2023 tax return.

Please review the Backdoor Roth instructions below.

To enter the nondeductible contribution to the traditional IRA for 2023:

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 “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 made in 2023: 

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

Please be aware the Backdoor Roth only works if you do not have any pre-tax funds in your traditional/SEP/SIMPLE IRAs on December 31, 2023. If you had any pre-tax funds in traditional/SEP/SIMPLE IIRAs then the pro-rata rule applies. This means that with each distribution/ conversion you will have a taxable and nontaxable part.

@qwert_buddy 

[qwert_buddy]

@DanaB27 

I have followed these instructions to a T, which were posted elsewhere. I also got on a call with Turbo Tax support and went over each step on a screen share. The agent acknowledged that Turbo Tax is having issues with the IRA calculation and that the technical team is looking into it. However my case was closed the next day and I still see that my 4b(taxable IRA ) has the max IRA amount.

My case number is [PII removed] [If I paste the case number as numeric it says  'phone number removed']

Why is Turbo Tax not able to fix this issue? Happy to go over all the steps again with you over screen share, the end result is 4b on my 1040 is my full traditional IRA contribution. So I'm being taxed on my nondeductible contributions made to my tradional IRA (which I used for backdoor Roth IRA).

My understanding is that 4b of form 1040 should be 0, because I made contribution to my Traditional IRA with after tax money, and then converted that to Roth. Since 4b is my full contribution amount to Traditional IRA, I'm effectively being taxed twice.

[qwert_buddy]

@DanaB27 

I have followed these instructions to a T, which were posted elsewhere. I also got on a call with Turbo Tax support and went over each step on a screen share. The agent acknowledged that Turbo Tax is having issues with the IRA calculation and that the technical team is looking into it. However my case was closed the next day and I still see that my 4b(taxable IRA ) has the max IRA amount.

My case number is [PII removed] [If I paste the case number as numeric it says  'phone number removed']

Why is Turbo Tax not able to fix this issue? Happy to go over all the steps again with you over screen share, the end result is 4b on my 1040 is my full traditional IRA contribution. So I'm being taxed on my nondeductible contributions made to my tradional IRA (which I used for backdoor Roth IRA).

My understanding is that 4b of form 1040 should be 0, because I made contribution to my Traditional IRA with after tax money, and then converted that to Roth. Since 4b is my full contribution amount to Traditional IRA, I'm effectively being taxed twice.

[DanaB27]

Please be aware this is public forum, do not post the case number or any other Personal Identifying Information.

It would be helpful to have a TurboTax ".tax2023" file that is experiencing this issue. You can send us a “diagnostic” file that has your “numbers” but not your personal information. If you would like to do this, here are the instructions for TurboTax Online: 

1. From the left menu select Tax Tools. 
2. Then select Tools below Tax Tools. 
3. A window will pop up which says Tools Center.  
4. On this screen, select Share my file with Agent. 
5. You will see a message explaining what the diagnostic copy is. Click okay through this screen and then you will get a Token number. 
6. Reply to this thread with your Token number and add @DanaB27 . This will allow us to open a copy of your return without seeing any personal information.  

The instructions for TurboTax Download: 

1. On your menu bar at the very top, click "Online"
2. Select "Send Tax File to Agent"  
3. Click "Send"
4. The pop-up will have a token number
5. Reply to this thread with your Token number and add @DanaB27 . This will allow us to open a copy of your return without seeing any personal information.  

We will then be able to see exactly what you are seeing and we can determine what exactly is going on in your return and provide you with a resolution.

@qwert_buddy 

[qwert_buddy]

 @DanaB27 

Token number : 1214678

thanks in advance