How do I enter a backdoor Roth IRA conversion?

[swturner33]

I found a mistake in my answers.  Fixing that, fixed my problem.  I had entered the 2021 contribution as being made in 2022 (between Jan 1 and April 18).  That would have made the conversion happen in 2022 - which is incorrect.  I do this at the start of every year, and failed to recognize that this question is about last year's conversion...

So - consider my case resolved.

[Rajeeva Raju]

Hey, This exactly my situation my situation. Did $7000 IRA contribution for me and my wife for 2021.  My AGI is above the limit of IRA contribution. This contribution I made was non-deductible IRA and for backdoor ROTH.

I did conversion in 2021. But, TurboTax showing penauty !!  I don't get this..... The Turbo Tax Fix is expected, what is the file # you used and where did you send it? can you elaborate on this please.

Thanks'

Raju

[RobertB4444]

@Rajeeva Raju  A backdoor Roth conversion is a two step process.  Make sure that you have entered everything according to these instructions here.

[DanaB27]

If you are still having issues after reviewing the instructions that expert RobertB4444 provided then you can send us a file with the instructions below.
 

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 Download: 

1. On your menu bar at the very top, click "Online"
2. Select "Send Tax File to Agent"
3. Click "Send"
4. The pop-up will have a token number
5. 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.

 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.  

@Rajeeva Raju 

[omkarprabhu]

Hi @DanaB27 

Here is the file sent to you. As you see in the file - I have the penalty. Also I did add the 6000$ into Traditional IRA and moved it within 60 days. 

Token 959199

Let me know if you have further questions.

Regards

Omkar

[omkarprabhu]

Do you have an update?

[DanaB27]

I reviewed your file. Sorry for the delay.

First, the penalty you are seeing in the summary isn't because of your contributions, there is no penalty calculated on Form 5329. You have a penalty in your summary because you haven't had enough taxes withheld in 2021. Please see Topic No. 306 Penalty for Underpayment of Estimated Tax for more details.

Second, it seems as if you had pre-tax amounts in your traditional/SEP/SIMPLE IRAs. For a backdoor Roth to work correctly your traditional/SEP/SIMPLE IRAs need to be empty or at least only have after-tax funds in them. Otherwise, each distribution/conversion will have a taxable and nontaxable part because of the pro-rata rule.

TurboTax used the IRS Worksheet 1-1. Figuring the Taxable Part of Your IRA Distribution to calculate the nontaxable part. And since you seem to have pre-tax funds left in your traditional/SEP/SIMPLE IRAs only a small amount of the conversion will be tax-free. The rest of the basis is carried forward on line 14 of Form 8606 for future distributions/conversions.

@omkarprabhu

[omkarprabhu]

Thanks @DanaB27 for your response. So you are saying that the Back Door IRA was correctly entered and the taxes were correctly calculated but I need to fill up a worksheet to keep track of my basis and calculate things on form 8606. 

[DanaB27]

Yes, you entered everything correctly.

Yes, you need to keep Form 8606 to keep track of your basis (line 14) that you can carry over to future distributions/conversions. TurboTax already created Form 8606 and IRS Worksheet for you for 2021.

 Whenever you take a distribution/make a conversion in the future please make sure you enter the basis from your 2021 Form 8606 when asked for the prior year basis. Then TurboTax will create a new Form 8606 and will calculate the new remaining basis on line 14 to use in the next distribution/conversion.

@omkarprabhu

[GT0934]

Hi! I do not get the below screen although have followed instructions from here https://ttlc.intuit.com/community/entering-importing/help/how-do-i-enter-a-backdoor-roth-ira-convers....

My key is 962938 

Let me know anything I need to fix - thanks!

[omkarprabhu]

Hi @DanaB27 

I have calculated and entered the basis correctly now.  However wrapping up everything shows me this now. 

                                                                             TOTAL       TAXABLE

Traditional and Roth IRA distributions       $6,000         $5,218 

How is it possible that 5218 is taxable? I have not taken a distribution and contributions in Roth grow Tax free correct?

Regards

Omkar

[omkarprabhu]

Hi @DanaB27 

I have calculated and entered the basis correctly now.  However wrapping up everything shows me this now. 

                                                                             TOTAL       TAXABLE

Traditional and Roth IRA distributions       $6,000         $5,218 

How is it possible that 5218 is taxable? I have not taken a distribution and contributions in Roth grow Tax free correct?

Regards

Omkar

[DanaB27]

Please be aware that conversion will be listed under distributions and generally conversions from a traditional IRA to Roth IRA are taxable because you move pre-taxed funds into an after-tax account. Therefore, you will have to pay taxes on any amount that is converted that isn't covered by a basis. As mentioned before because of the pro-rata rule only a small part of the conversion is allocated to have a basis therefore most of your conversion is taxable. 

Yes, funds in the Roth IRA will be growing tax-free and if you take later Qualified Distributions then these distributions will be tax-free. With nonqualified distributions, the earnings will be still taxable. 

@omkarprabhu

@GT0934 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 that it isn't deductible because of your income. The next screen will say $0 is deductible. 

I verified that your $6,000 contribution is nondeductible. But you had pre-tax funds in the traditional/SEP/SIMPLE IRAs and therefore the pro-rata rule applies. Each distribution/conversion will have a taxable and nontaxable part. 

TurboTax used the IRS Worksheet 1-1. Figuring the Taxable Part of Your IRA Distribution to calculate the nontaxable part. And since you seem to have pre-tax funds left in your traditional/SEP/SIMPLE IRAs only a small amount of the conversion will be tax-free. The rest of the basis is carried forward on line 14 of Form 8606 for future distributions/conversions.

[omkarprabhu]

@DanaB27 - Thanks for being patient with me but I didn’t move Pre tax money correct in back door Roth . I moved after tax money which is Being taxed. I also added the basis. Is there anyway this money cannot be tax by changing mind or moving it back to Traditional IRA?

[DanaB27]

Unfortunately, recharacterizations (changing your mind) of conversions are no longer allowed. 

The issue is that your traditional IRA account wasn't empty when you made the contribution and the value of your traditional IRA/SEP/Simple IRAs on December 31 was more than $0. Therefore, the pro-rata rule applies and only a small amount is nontaxable and the rest of the basis is carried forward to future years. Unfortunately, you cannot just pick to move the after-tax funds to the Roth IRA.

For the future, if you have a 401k plan that accepts rollovers from an IRA you could roll over the funds to the 401k.  Since you can only rollover pre-tax funds to a 401k, this would leave the basis in the traditional IRA. Then you could make a clean backdoor Roth in the future.

[Edited 3/20/2022 | 7:34am PST]

@omkarprabhu