Backdoor Roth Conversion in Turbo / unclear @ ending IRA values

[TaxDocMama]

Hello,

I am entering my Backdoor Roth conversion in TurboTax for 2 IRAs —> Roth IRAs (each $6500) this year for myself and my husband. Usually, the ending value of all IRAs on Dec 31st of the prior year is ZERO on my Forms 5498, but this year - I have 2 nonzero values ($3.08 and $3.88). So White Coat Investor says this should be ZERO (which it has been for past 4 years of doing this). But Turbo says a nonzero number on this 5498 form means that my conversion will have the pro-rate rule applied to it. So, are these ending values really insignificant and I should just enter ZERO when prompted….or should I enter the $3 and then figure out how it affects the conversion?

Thanks everyone! TaxDocMomma

[DavidD66]

It sounds like the last time you did a Back Door Roth conversion your traditional IRA earned a little bit of interest - which is normal now that interest rates are greater than zero.  Since the amounts are reported on the Form 5498 I would enter them.  You are correct that the amounts are insignificant.  It will result in 0.046% of your conversion to be taxable - or $3.00.  You can verify on your account statement whether there is a balance other than zero in the account at year end.  If so, the next time you do a back door Roth, be sure to have your advisor convert the entire balance, including the $3.08 or whatever it is at the time.  

[TaxDocMama]

Thanks for your help. Now does this mean my Basis is now not zero anymore? My 8606 forms from prior years all have 0 as line 2 for basis…but now I’m confused since basis is the total amount in IRAs. Turbo says to NOT confuse basis with the ending fair market value on forms 5498. Not sure how to proceed here. 

[DavidD66]

Your basis will be $3.00 in your IRA and $4.00 husband's after reporting your conversions.  I suggest you should proceed the same way you have in prior years. If you do a backdoor Roth conversion for 2024 convert the entire balance in your account at the time of the conversion.  Your basis will revert back to zero.

[Edited 03-19-2024 5:30 PM EDT]  

[bugmenot]

Could you clarify this a bit please? This is really helpful. I used TurboTax last year. It pulled in my basis which was 0. However my Fair Market Value reported on 5498 was 0.80 because I earned interest on the one day the contribution was present there. Any recommendation here? Can I keep the TurboTax cost basis at 0? Form 8606 from last year is a 0 on line 14. Thank you!!

[DanaB27]

Please be aware, basis and value on December 31, 2023 is not the same.

Yes, you will keep the carried over basis from your 2022 Form 8606 line 14 ($0). This will be entered when TurboTax asks "Any nondeductible Contributions to your IRA?" and TurboTax will leave line 2 of your 2023 Form 8606 blank. And you will enter the value on December 31, 2023 when TurboTax asks "Tell us the value of all your Traditional IRAs". Then TurboTax will use the pro-rata rule to calculate the new basis on line 14 of the 2023 Form 8606, which you carry over to the 2024 return.

@bugmenot 

[bugmenot]

Just double checking this again. I don't think that GROWTH will affect basis. Cost basis is from your nondeductible contributions.

https://www.bogleheads.org/wiki/Non-deductible_traditional_IRA#Cost_basis

Maybe someone else can correct me??

[fanfare]

if you contributed $4000 but your IRA is $4002 the next day when you convert, the correct action is to convert 100% or $4,002 to Roth IRA. That will use up all your basis.

For small dollar amounts the impact should be negligible, i.e. it will round down to zero dollars remaining in basis.

@bugmenot 

[bugmenot]

I think we both replied at almost the same time, so I didn't see your reply. So I filed taxes today. I reviewed the 2023 form 8606 that it generated, and that showed a value of 1 on line 14. So NEXT year, my cost basis will be 1, correct? Is that what you meant when you replied to the OP and indicated that since she finished the year with $3-4 in her accounts, she would then have a cost basis?

[bugmenot]

Unfortunately, the way it works with my broker, you can't do the contribution and conversion on the same day. Sadly. So, what happened is I did them on back to back days. But with interest rates high, that generated an average balance for the month. So I did everything and thought I had a clean backdoor Roth. But interest pays out monthly. So at the end of the month, I got like 0.63 or something in interest. JUST enough to be above 0.50, so it rounds up to 1. I know it isn't that much, but it is enough to change things and mess things up for the IRS. I reported everything in TT the way I am supposed to, I think. Hopefully I didn't mess it up this year and won't next year.

@fanfare @DanaB27 @TaxDocMama @DavidD66 since it appears that Intuit doesn't notify you by email when someone replies even though the box is checked.

[DanaB27]

Yes, since you have a $1 basis on line 14 of your 2023 Form 8606 this will carry over to your 2024 return, Form 8606 line 2.

[bugmenot]

Unless I convert that balance plus a new $7000 contribution this year? That is what I was planning on doing. Just clearing it out to 0. Maybe now that I know this, I'll contribute at the end of the month and let the interest/dividends hit and convert the whole thing.

To summarize to make sure I've got it, you report the FMV one year, and that balance becomes your cost basis the next year?

@DanaB27 

[DanaB27]

Not necessarily, you can see the calculation on Form 8606 (or the Taxable IRA Distribution Worksheet if you have a * next to line 13). If you have pre-tax funds (because of earnings) and the basis mixed and your value isn't $0 at the end of the year then the the pro-rata rule applies. This means that with each distribution/ conversion you will have a taxable and nontaxable part. TurboTax will calculate this for you. All you need to do is to make sure the basis from your previously filed Form 8606, line 14 is carried over to the next year and answer the question about the value of all traditional, SEP, and SIMPLE IRAs on December 31.

On your 2024 return you will have to carry over the $1 basis from your 2023 Form 8606 line 14. This will be entered on line 2. The reported nondeductible contributions for 2024 will be entered on line 1. TurboTax will do this all for you when you answer the questions in the interview.

Yes, it will be best to try to convert the full amount and have the account empty at the end of 2024.

[bugmenot]

Thank you so much! I've always done this in TurboTax so it should carry forward. This is also the first time I've ever had a balance at the end of the year greater than $0.50. I've never had deductible contributions. Always done a backdoor Roth. So next year it looks like it'll be a cost basis of $1 plus $7000 in nondeductible contributions. I assume TurboTax will carry that cost basis forward for me since it's showing on the form 8606 now for 2023.

Hopefully will wipe the balance down to $0 this year. However I'm looking at the money market fund's interest rate which is about 5%. Doing some quick math on this, you can see that this is about $0.95 in daily interest. So I'll have the same problem again next year since I can't convert on the same day. Would it make sense then to just do two conversions?? Convert the $7000 then convert the $1 or so in interest when you convert?

I guess at the end of the day, as long as TurboTax keeps track of this, and I answer the questions correctly, it doesn't really matter. Is that a fair statement?

[DanaB27]

Yes, that is correct.

Yes, you could do a second conversion to convert the interest.

@bugmenot