Backdoor Roth Interest

No, you do not need to withdraw the $4, this is not an excess contribution. Earnings will be taxable income when you convert it to the Roth IRA.

Please see How do I enter a backdoor Roth IRA conversion? for additional information.

the proper action is to convert $7,004 or 100% to your Roth IRA.

Then you can use the "backdoor" again next year.

@USER987456 

My CPA friend is telling me that I will be fined for the $4 every year it stays in the account though? Can you explain why the $4 is not treated as an excess etc? Thank you!

you  made a $7,000 contribution which is not greater than the allowed amount.

Therefore, there is no excess contribution.

@USER987456 

Your CPA friend is not thinking straight.

What about the additional $4 in interest that was converted to the Roth, doesn't that $7004 make it over the $7000 limit? thanks

The $7,000 limit only applies to your contribution. It does not apply to your Roth conversion.

Ok, but TurboTax is saying that I am subject to 6% penalty for excess contribution to the IRA, so since I rolled it all into the Roth there is no penalty?   My CPA is saying I need to take it out of the Roth and put it back into the IRA? Vanguard I think is saying the Roth conversion is not reversible? I'm totally confused.

You do not have an excess contribution, assuming you had enough compensation to make the $7,000 nondeductible traditional contribution. A conversion is not a new Roth IRA contribution. Do not enter it as Roth IRA contribution in the IRA contribution section. Also, make sure you don't enter a recharacterization in the IRA contribution section. The "Tell Us How Much You Transferred" screen in the IRA contribution interview is for recharacterization not conversion. 

The conversion is entered in the retirement section only.

Please review the instructions for backdoor Roth.

@USER987456