Excess Contribution & Backdoor Roth!

[ks903]

Hello!

Some background on my situation:

• In 2022, I was heads down working on a startup. I had no earned income.

• In that same year (2022) and out of habit, I made a backdoor Roth contribution (via Traditional IRA).

• This month, in 2023, I came to understand that this counted as an excess contribution since I had no earned income.

• I spoke with my brokerage and they have withdrawn the excess contribution + the gains on that contribution.

• I understand that I can report the 2023 withdrawal (excess distribution) in my 2022 return even though I will not receive the corresponding 1099-R until 2024. This alleviates the need to file an amended 2022 return.

• I should then effectively have two 1099-Rs that I report for TY2022:

  • Traditional IRA - Backdoor Roth conversion distribution

  • Roth IRA - Excess distribution

I can enter these 1099-Rs into TurboTax just fine. However, I can only seem to either:

1. assess a 6% excise tax because it thinks there are funds in the Traditional IRA
2. pay income tax on the Traditional IRA distribution.

I should not have to pay either of these since it was post-tax money and I have withdrawn before the penalty date. 

Maybe this is a bug or not a well-traveled flow? Perhaps this is not possible to do with TurboTax Online? Should I use TurboTax CD and manually modify forms there?

I've spent hours trying to get this to work. Any help is appreciated. Thank you!

[DanaB27]

Yes, this situation can be a little tricky. To confirm your balance of the traditional IRA was $0 on December 31, 2022.  If yes, then you should not get the 6% penalty calculated when you enter the nondeductible traditional IRA contribution and don't enter on the penalty screen that you withdrew the excess. "Excess contributions are taxed at 6% per year for each year the excess amounts remain in the IRA. The tax can't be more than 6% of the combined value of all your IRAs as of the end of the tax year." (IRS)

If you make the traditional IRA contribution nondeductible and don't tell TurboTax that you withdrew the excess on the penalty screen TurboTax will still create Form 8606. And if your balance in the traditional IRA is $0 you should have the penalty calculated as $0 on line 17 on Form 5329.

If this doesn't work you might have to use the TurboTax download version and override entries. Please be aware, returns that contain overrides cannot be e-filed and may not be covered under the 100% Accurate Calculation Guarantee. Please see How do I override (replace) an amount calculated by TurboTax? for additional information.

[ks903]

Thanks for the response.

Yes, the Traditional IRA balance was $0 on December 31, 2022.

This is what I am doing:

1. Start on "Deductions & Credits".
2. Next to "Traditional & Roth IRA Contributions", clicked "Edit".
3. On "Traditional IRA and Roth IRA", ticked "Traditional IRA" and clicked "Continue".
4. On "Did you Contribute To a Traditional IRA?", clicked "Yes".
5. On "Is This a Repayment of a Retirement Distribution?", clicked "No".
6. On "Tell Us How Much You Contributed", entered "5990" and clicked "Continue".
7. On "Did You Change Your Mind?", clicked "No".
8. On "Retirement Plan Coverage?", clicked "No".
9. On "Any Excess IRA Contributions Before 2022?", clicked "No".
10. On "Any Nondeductible Contributions to Your IRA?", clicked "No". (This seems to only pertain to 2021 and prior years - not 2022.)
11. On "Tell Us the Value of All Your Traditional IRA Accounts", entered "0" into "Value of your Traditional IRAs on December 31, 2022" and clicked "Continue".
12. On "Your IRA Contribution Isn't Permitted", clicked "Continue".
13. On "You Currently Have a Penalty", entered "0" into "Excess Contribution Withdrawn Before Due Date of Your Return" and clicked "Continue".
14. On "You Have an Excess Roth Contribution", clicked "Continue".
15. On "You Currently Have a Penalty" [for the Roth], entered "5990" into "Contribution Withdrawn Before Due Date of Your Return" and clicked "Continue".
16. On "Your IRA Deduction Summary", clicked "Continue".

At this point the software is assessing the 6% excise tax on the Traditional IRA. Not sure how to make it understand it was a backdoor Roth conversion even though the initial contribution was disallowed.

[DanaB27]

Please don't enter anything in the Roth contribution section, you only enter your traditional IRA contribution in the contribution section. You can check Form 5329 to verify that the penalty is $0 on line 17. You should have any entries in part IV.

To see Form 5329 (you might have to pay first):

1. Select Tax Tools on the left and then Print Center 
2. Select Print, save or preview this year's return
3. Select Federal return

If you still are having issues 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. 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.

@ks903