Have Non-Deductible IRA basis from 2020, converted to Roth in 2021 (backdoor Roth). How to enter this in Turbo Tax?

[kvkeee]

Hello Experts,

I have non-deductible contributions ($6K) to my IRA in 2020, and my 2020 returns included Form 8606 to reflect the same. I then converted all that money ($6K) to Roth IRA in 2021. I received a 1099-R from my broker that reflects this, and it has Distribution Code 2 in Box-7. 

After entering my 1099-R, I was getting some questions about this conversion but none of them reflecting exactly what I have done. I have selected these options which best suits my situation, please see below screen.

After this, TurboTax is automatically making this $6K taxable. It is not considering my non-deductible IRA basis from 2020 for this conversion.

Also, it is not generating Form 8606 though I used TurboTax Home & Biz (same version, both years) last year.

I tried entering this conversion in the Deductions section as well, but it is not helpful either.

Can someone please advise how to report this activity?

Thanks

[MarilynG1]

Doing a backdoor Roth conversion is a two-step process.  

Step 1: Enter the Non-Deductible Contribution to a Traditional IRA

1. Open your return if it’s not already open
2. Select the Federal Taxes tab (this is Personal in TurboTax Home & Business), then Deductions & Credits
3. Select I'll choose what to work on. On the list of sections, locate Retirement & Investments, then select Start or Update next to Traditional & Roth IRA Contributions
4. Check the box for Traditional IRA and Continue
5. Answer Yes to Did you contribute to a traditional IRA?
6. Answer No to Is This a Repayment of a Retirement Distribution?
7. On the Tell Us How Much You Contributed screen, enter the amount contributed and continue
8. Answer No on the Did You Change Your Mind? screen
9. Answer the questions on the following screens, until you reach Choose Not to Deduct IRA Contributions. Select Yes, make part of my IRA contribution nondeductible, enter the amount you contributed, and Continue

Click this link for more info on How to Enter a Back-Door Roth Conversion.

This should make your conversion non-taxable and generate Form 8606 for you. 

[kvkeee]

Thank you @MarilynG1 for your prompt response. Looks like your steps are valid only if both actions ( contributed non-deductible funds to my IRA and then converted to Roth) took place in 2021. In my case, I already had the Non-Deductible IRA Basis from 2020 itself. I filed Form 8606 along with my 2020 return, which shows IRA Basis as 6000.

I haven't contributed any money to my IRA in 2021. In that case, what I should be entering at Step #7 in your list?

If I enter 0 here and continue, it is not doing anything. Simply ending the wizard saying "Your IRA Deduction is 0".

I went through the other link you have shared already, and also entered my 1099-R already. If you look at the screenshot I have shared, it is the step #2 mentioned in the other link.

Appreciate if you can take a closer look this, as this is a bit unique situation.

Tagging few other Turbo Tax experts here.

@PatriciaV  @PattiF @DianeW777 @RaifH @MinhT1 @AamilD 

Thank you.

[MarilynG1]

Enter 6K for step 7 (even though the non-deductible contribution was made in 2020) as that is the basis you are converting. 

Click this link for more detail on Roth Back Door Conversions.

[kvkeee]

@MarilynG1 I tried the way you have suggested, put $6000 in Step#7. It did generate From 8606 but it increased my IRA basis by that much. Step #7 clearly says its the amount contributed for 2021. Please see my screenshot in my above post, highlighted in Yellow.

Here is what I did after entering $6000 in Step#7.

Step #8 (Did You Change Your Mind?), I chose No.
Any Excess IRA contributions before 2021? I chose No.
Any Nondeductible Contributions to my IRA? I chose, "Yes, I made and tracked nondeductible contributions to my IRA"
Then it pulled my IRA basis of 6000 from 2020 return. Hit Continue.
Then it says "Income too high to deduct an IRA Contribution". (See below screenshot). Hit continue.

 Then final screen, Your IRA Deduction is $0. Hit Continue.

It brings me to the main Deductions & Credits screen.
I never reached your Step #9, "Choose Not to Deduct IRA Contributions", I think because of my income.

As mentioned in the other thread you shared Step 2: Enter the Conversion from a Traditional IRA to a Roth IRA decided to re-enter 1099-R for the IRA to Roth conversion. So I deleted my already entered 1099-R thinking the order matters. Looks like it did. After entering 1099-R the IRA basis went down by $6000, but it is negating only the amount I entered in Step#7 Tell Us How Much You Contributed .

Do you have any videos explaining these steps showing someone actually following these steps to correctly generate the form 8606? Or are you available for a quick call? 

I spoke to 3 CPAs  yesterday, and none of them have a clue of how this software works.

Thanks

[FangxiaL]

Skip the first step if you did not make any contribution to your IRA in 2021:

Follow these steps instead:

1. Open or continue your return
2. In the search box, type 1099-r  and hit the Enter key, select the Jump to 1099-r link at the top of the search results
3. Answer Yes to Did you get a 1099-R in 2021?, then Continue
   • If you land on Your 1099-R Entries screen, select Add Another 1099-R
   • When entering your 1099-R form, make the boxes checked on the form are also checked when you enter the info in TurboTax
4. Select how you want to enter your 1099-R (import or type it in yourself) and follow the instructions
5. Answer None of these apply when you reach the screen Do any of these situations apply to you?
6. Select I converted some or all of it to a Roth IRA on the Tell us if you moved the money through a rollover or conversion screen
7. Next, choose Yes, all of this money was converted to a Roth IRA
8. You should see a screen that asks Any Nondeductible Contributions to your IRA? Select Yes
9. Enter the IRA basis as of December 31, 2020.
10. Enter the value of your IRA as of December 31, 2021. It should be $0. 
11. Continue.

To check the results of your backdoor Roth IRA conversion, see your Form 1040:

1. On the left side of your screen, select Tax Tools, then Tools
2. Under Tool Center, select View Tax Summary
3. On the left side of your screen, select Preview my 1040
   • Your backdoor Roth IRA amount should be listed on Form 1040, Line 4a  as IRA distributions
   • Taxable amount should be zero unless you had earnings between the time you contributed to your Traditional IRA and the time your converted it to Roth IRA, then the earnings would be taxable
   • Schedule 1, Line 20 IRA deduction, should be blank
4. Select Back on the left side of your screen to return to where you left off in TurboTax

@kvkeee

[kvkeee]

@FangxiaL 

Are these instructions for Turbo Tax Live or Desktop? I do not see the Tax Tools options at all on my desktop version. I didn't get a chance to try your inputs today, but I will try again tomorrow.

I was able to go into forms and then located the IRA Contributions Worksheet, then manually edited the contribution to 0. That actually reduced my IRA Basis back to what it was originally from 2020 and finally my 8606 is showing 0 as my remaining IRA basis.

Another question I have is, does the backdoor Roth increase the basis in my Roth IRA by the amount of the conversion? Currently TurboTax is not doing that.

Thanks again.

@MarilynG1 

[FangxiaL · Accepted solution]

The previous one is for TTO. Here is the TTD: I will post some screenshots here. You can compare them with what you see on your own screens. All the money you contributed/converted to Roth IRA is your tax-tax dollars. So the Roth conversion will increase your basis in Roth IRA. Use the worksheet to track your Roth contributions and conversions. 

@kvkeee

[FangxiaL]

Continued from the above:

To check the conversion on Form 1040:

@kvkeee

[FangxiaL · Accepted solution]

Replace  the 3rd screenshot from above with this one below:

@kvkeee

[kvkeee]

These are very helpful @FangxiaL. This knocked off all the check boxes related to my backdoor Roth conversion. Kudos to your knowledge with this software.

Thank you again.

[kvkeee]

In addition to what you have stated @FangxiaL, I would like to mention about the adjustment I had to make to my NJ return. After following your instructions, the $6000 Roth conversion became taxable amount for NJ and reduced my refund.  

Below screenshot shows where i made the adjustment. This comes under NJ Adjustments. I had to say this $6000 was already taxed by NJ. Then it brought my refund back to where it was before.