Backdoor Roth Generating Tax and Overpayment penalty

[vaca]

I've read over and over and I just can't figure this out.  I am grateful for any help.  Numbers are fake, but situation is accurate.

I earn over the usual MAGI Roth limits. I contributed $15K to a traditional IRA and then immediately used that to backdoor convert into a Roth.  My understanding is that this should incur no tax and it should also not be considered an overpayment and incur a penalty. However, Turbotax is taxing that $15K and also telling me I am over the Roth limits and owe a penalty tax.  I did enter my 1099-R for the traditional IRA. 

Should I be incurring any tax and should I be penalized on this conversion?  If not, how do I get Turbotax to understand?

I've tried many combos of buttons and answers...

[ThomasM125]

You shouldn't be penalized on a backdoor Roth IRA conversion. In order to do this you need to make a non-deductible contribution to your traditional IRA and then roll it over to a Roth IRA. You need to enter the Form 1099-R rollover to the Roth IRA properly, as well as designate the contribution to your traditional IRA as a non-deductible contribution. Also, you will be asked in the program to enter balances from your IRA's in prior and current year. You need to pay particular attention to those questions so that the calculations will be accurate in the program.

For the backdoor IRA, enter a traditional IRA contribution in the Deductions and Credits section of TurboTax, then Retirements and Investments, then Traditional and Roth IRA Contributions. Indicate that your traditional IRA contribution is non-deductible when asked in the program:

When you enter the 1099-R form in TurboTax, you need to first indicate that you moved the money to another retirement account and that you did a combination of rolling over, converting or cashing out the money. Then, enter the amount converted to a ROTH IRA. Later on you need to indicate that you tracked non-deductible contributions to your IRA. Then you will be asked for your beginning and ending basis in the traditional IRA.

[baldietax]

Sounds correct as long as (1) you started with no IRA and therefore 100% of your IRA consists of your nondeductible ("after tax") money (your "basis"), and therefore 0% is taxable; (2) your earned income (W2 not passive income) is above your traditional IRA contribution amount and therefore eligible to begin with.

Did you put in the 15k non-deductible contribution under Deductions & Credits > Tradition and Roth IRA Contributions, as well as the 1099-R, and answer all the questions e.g. balance of IRAs as of 12/31/24.

This should create a form 8606 with your cost basis and does the math on how much of the Roth conversion is taxable.  See if you have a form 8606.  Line 8 should have the Roth conversion amount, lines 9-12 figure out the taxable amount, etc.

I'll pause there to see if that helps and you can provide more color on whether you input these things and what your 8606 looks like.

[ThomasM125]

I was assuming you didn't have any non-deductible traditional IRA money to begin with, but the program does ask you about that so it should still work in that case. You do need to have sufficient earned income to do the non-deductible IRA contribution.

You do enter the non-deductible contribution in the section where you enter IRA contributions as you mention. When you enter the 1099-R form you do answer the questions regarding IRA balances. 

Line 8 on form 8606 does list the conversion amount and the lines below it are used to determine the taxable amount listed on line 15.

[vaca]

I don't get the same screens you showed.  I'm using Turbotax for the web, maybe that's the difference.

Once I complete deductions I get:

You Have an Excess Roth Contribution

Roth IRAs offer some great benefits, but they have restrictions too.

Part or all of your contribution to your Roth IRA isn't allowed due to certain restrictions on Roth IRAs.

Based on the information you've entered so far, these situations apply to you:

* Your contribution is over the allowed limit of $7,000 ($8,000 if age 50 or older)

* Your modified adjusted gross income is too high 

Because your contribution isn't permitted, it's considered an excess contribution of $13,300.

Then it tells me I have a penalty.

Later when I review my deductions it shows me a table:

Traditional IRA Contributions: $0 -- shouldn't this be $15000?

Roth IRA Contributions: $15000

Less Excess ROTH Contributions: -$15000 -- Reinforcing excess

I thought there is no excess when converting...stuck.

below is my full workflow.  I feel out of options.

INCOME:

I enter 1099-R: Gross Distribution $15K, Taxable: $15K, "taxable amount not determined" is checked.

Screen then says: "Good news! you don't owe extra taxes...You may still need pay regular tax, but you avoided an extra 10-25%."

None of the next options apply to me (not simple or sep, etc.)

Did I move the money through a rollover or conversion?  I check "I converted some or all of it to a Roth IRA"

Did I convert alk ($15K) to a ROTH IRA? "Yes, all of this money was converted to a Roth IRA"

No disaster.

"Yes, I made and tracked nondeductible contributions to my IRA"

Went to my 2024 12/31 statement and prior year form 8606 and entered basis "6500"

Value of IRA on 12/31: 189

Value of Roth on 12/31: 113,716

On the deductions side:

Check I have traditional and Roth.

Not repayment.

"Enter the total amount I put into a traditional IRA for 2024, even if you later transferred some or all of it to a Roth IRA" $15,000

Amount switched to Roth: $15,000

No excess contributions.

Yes, I made and tracked nondeductible contributions to my IRA.

Basis on12/31: $15000

Did I make a Roth contribution )not counting conversion): no

Did I have a Roth before? Yes.  

Do you want us to track?  No (for now)

Excess ROTH contributions? No

Value on 12/31 of Roth: 113,716.

ERROR! EXCESS ROTH!

[vaca]

I don't get the same screens you showed.  I'm using Turbotax for the web, maybe that's the difference.

Once I complete deductions I get:

You Have an Excess Roth Contribution

Roth IRAs offer some great benefits, but they have restrictions too.

Part or all of your contribution to your Roth IRA isn't allowed due to certain restrictions on Roth IRAs.

Based on the information you've entered so far, these situations apply to you:

* Your contribution is over the allowed limit of $7,000 ($8,000 if age 50 or older)

* Your modified adjusted gross income is too high 

Because your contribution isn't permitted, it's considered an excess contribution of $13,300.

Then it tells me I have a penalty.

Later when I review my deductions it shows me a table:

Traditional IRA Contributions: $0 -- shouldn't this be $15000?

Roth IRA Contributions: $15000

Less Excess ROTH Contributions: -$15000 -- Reinforcing excess

I thought there is no excess when converting...stuck.

below is my full workflow.  I feel out of options.

INCOME:

I enter 1099-R: Gross Distribution $15K, Taxable: $15K, "taxable amount not determined" is checked.

Screen then says: "Good news! you don't owe extra taxes...You may still need pay regular tax, but you avoided an extra 10-25%."

None of the next options apply to me (not simple or sep, etc.)

Did I move the money through a rollover or conversion?  I check "I converted some or all of it to a Roth IRA"

Did I convert alk ($15K) to a ROTH IRA? "Yes, all of this money was converted to a Roth IRA"

No disaster.

"Yes, I made and tracked nondeductible contributions to my IRA"

Went to my 2024 12/31 statement and prior year form 8606 and entered basis "6500"

Value of IRA on 12/31: 189

Value of Roth on 12/31: 113,716

On the deductions side:

Check I have traditional and Roth.

Not repayment.

"Enter the total amount I put into a traditional IRA for 2024, even if you later transferred some or all of it to a Roth IRA" $15,000

Amount switched to Roth: $15,000

No excess contributions.

Yes, I made and tracked nondeductible contributions to my IRA.

Basis on12/31: $15000

Did I make a Roth contribution )not counting conversion): no

Did I have a Roth before? Yes.  

Do you want us to track?  No (for now)

Excess ROTH contributions? No

Value on 12/31 of Roth: 113,716.

ERROR! EXCESS ROTH!

[baldietax]

one thing I can suggest is check the entries related to the IRA basis something looks off to me...

under INCOME you wrote:

Went to my 2024 12/31 statement and prior year form 8606 and entered basis "6500"

Value of IRA on 12/31: 189

under Deduction you wrote:

Yes, I made and tracked nondeductible contributions to my IRA.

Basis on12/31: $15000

I think that question under Deduction is asking for the basis as of 12/31/23, which wouldn't be 15k.  And then above you said it was 6500 but the value of the IRA at the end of all this is 189?  I'm not quite understanding the state of your IRA before you did the 15k contribution - was it zero or did it have a balance and/or a basis?

With the online version I don't know how you see your 8606, in desktop there is Forms mode which shows the 8606, you should be able to look at the PDF of the return?  All these questions end up there so that may help troubleshoot and you can see what 8606 is reflecting in terms of your basis and contribution.

[vaca]

Thank you again.  On the web version, the form creation only happens once you pay for filing...so I can't see the raw forms, only the results.  

I fiddled around with many permutations, leaving only my 10-99R data as fully accurate.  Every combo I can think of comes back with I over contributed, almost as if I didn't move the money from a traditional IRA to the Roth but rather contributed directly. 

Am I (and my advisor) wrong that the Roth contribution limit doesn't apply to a same year recharacterization?

[baldietax]

The only other thing I can suggest if not tried is to delete the 1099-R and enter the IRA contribution without the conversion to make sure that part works and then update it and put in the 1099-R in.

i feel like you’re flying blind with the online version I’ve seen a lot of posts here about the behavior and cost.  The desktop version is a lot more flexible to dig into forms and details at any stage.  Desktop is not without issues there seems to have been some downturn in technical quality this year and redesign of the 1099 input, but you could consider switching to desktop.  Not sure prices on Amazon etc but it was discounted there more than intuit directly.  No guarantee of different outcome but I think it will be easier to troubleshoot and be confident in the return.

I’m not a CPA/expert but what you’ve described this sounds like correct backdoor roth, which works for people above the limits to contribute directly.  One pitfall is not being eligible to make the nondeductible contribution to the IRA to start with, which can happen if you don’t have “earned” income from W2 etc.

[DanaB27]

To clarify, you received a Form 1099-R with code 2 for the conversion? The conversion will only be entered in the retirement section, not as a new contribution.

If you made nondeductible traditional IRA contributions for 2024 then you will enter this in the IRA contribution section. Please note, for 2024, the total contributions you make each year to all of your traditional IRAs and Roth IRAs can't be more than:

• $7,000 ($8,000 if you're age 50 or older), or
• If less, your taxable compensation for the year

Please use the following instructions to enter a "Backdoor IRA" to ensure it is calculated correctly in TurboTax.

To enter the nondeductible contribution to the traditional IRA for 2024:

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 2023 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: 

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 2023 Form 8606 and the value of all traditional, SEP, and SIMPLE IRAs

@vaca