Backdoor Roth taxable income incorrect

[amulder87]

I've done this for the past several years and have reattempted following the steps for this year to enter a backdoor Roth correctly, but I can't get it to mark the entirety of the IRA distributions as nontaxable income. I've entered 2 1099-Rs for the traditional IRA distributions for myself and spouse totaling $12k with distribution code 2, IRA/SEP/SIMPLE checked, and "taxable amount not determined" checked. I've also entered the $12k in contributions we've made in total to traditional IRAs, said it wasn't recharacterized and such to the rest of the IRA contribution questions. It says our IRA Deduction is $0 due to being over MAGI limits, so this should count as after-tax money, but after all that, it reports the value in 4b on the 1040 for the taxable amount on the IRA distributions as $11,450 instead of $0, which raises the tax bill by several thousand dollars. I've followed the guides verbatim and tried deleting both 1099-Rs and the traditional IRA contributions repeatedly and starting from scratch, to no avail.

[amulder87]

I was able to fix this by entering $0 for the "Tell Us the Value of All Your Traditional IRA Accounts" questions, which is not actually $0 because we have rollover IRAs from past 401(k)s.... After doing that, it recalculated and removed the taxable income for the IRA distributions. Immediately after that, I went back through the traditional IRA contribution forms and put the correct values for this question back, and it let me do it without adding the taxes back. This seems clearly buggy to me.

[DanaB27 · Accepted solution]

Please be aware, if you had pre-tax funds from your 401k rollover in your traditional IRA now the pro-rata rule applies. This means that with each distribution/ conversion, you will have a taxable and nontaxable part. You can see the remaining basis on line 14 of Form 8606, this basis can be carried forward. Therefore, each distribution/conversion in the future will have a taxable and nontaxable part until the basis is all used.

The Backdoor Roth only works if your traditional/SEP/SIMPLE IRAs are empty.  If you plan to use this strategy in the future you might want to think about a reverse rollover where you rollover IRA money to a company plan, like a 401(k). Only pre-tax funds can be rolled from an IRA to a company plan. Therefore, you would isolate the basis and could start the Backdoor Roth procedure fresh. But it only works if your employer allows it, not all plans do.

@amulder87 

[amulder87]

@DanaB27 Wow, thank you for this! I thought that rule applied to each specific account and that keeping a separate traditional IRA for doing conversions with vs the rollover IRA would prevent the after-tax contributions from "mixing" with the pre-tax money in the rollover IRA. It is now painfully clear from the page you linked that this is not the case and that TurboTax was correctly telling me I'd have to pay taxes if I attempted a backdoor Roth and that it's effectively pointless unless I can get get rid of the pre-tax money in the traditional IRA. I'll look into rolling it into my current company's 401(k) ASAP, thank you again!