non-deductible traditional IRA contribution converted to Roth IRA

[ZaneRayClancy]

I'm 55. I don't qualify for deductible contributions to an IRA because I have an employer 401K and I make to much for a Roth IRA.  I do have a traditional IRA to which I made deductible contributions when I was a teenager through age about 23.  I have not contributed to that IRA since then and have just let it grow.

In 2020 my investment advisor told be about a backdoor way to contribute to a Roth.  Before April 15, 2020, I opened a new traditional IRA and contributed $7,000 to it as a 2019 contribution.  A few days later before any earnings accrued, I transferred the $7,000 to a new Roth IRA.  I did the same think in 2021 for the 2020 tax year, so that I now have over $14,000 in my Roth IRA.

I have never received a 1099-R from my investment advisors firm.  I never filed an 8606 for a non-deductible IRA contribution.  I have used TurboTax for 7 years and I don't see any of these forms in my return for 2019 created by TurboTax. This year TurboTax says I may owe a penalty. I'm not sure if I am entering all my information correctly as the term "conversion" and "recharacterization" are used and their meaning is not clear to me.

Can someone from TurboTax review my 2019 tax year file and determine if I have to make some correction, and then guide me on how to enter things correctly for 2020 tax year filing?  Is this service available.  I'm lost.

[DMarkM1]

This service is available in TurboTax.  It is TurboTax live.  If you using an TurboTax online product, in the top right hand corner you will see "TurboTax Live Help".  Click there and follow the prompts to set a call with an expert who will be able to view your return with you and help make the correct entries.  

If you are using a desktop version use this link to make a contact appointment.

Generally, you will be converting your non-deductible IRA contributions to a Roth.  You would only be recharacterizing if you wanted to change an action you already took.  In your case conversion is the correct route.

[ZaneRayClancy]

I would like the Turbotax Live help, but I don’t see a “TurboTax Live Help” in the upper right of my screen or anywhere in the menus.  I have TurboTax Premier for Mac.  Please help me find the option.  I tried the Help Center and then entered TurboTax live in the search box and got directions for using TurboTax Live, but no information on how to get that product.  I clicked on the Upgrade button and it just had the option to upgrade to the Home & Business product.  There was no option to upgrade to Turbo Tax Live.  Please help. Thank you.

[EbonyA]

It seems like the issue is because you are using the desktop version of Turbo Tax; Turbo Tax Live is only available with online versions - the following FAQ provides further details: Turbo Tax Live @ZaneRayClancy.

[ZaneRayClancy]

OK thanks.  Let's see if I can figure this out with the TurboTax for Mac.  If not I may have to switch to TurboTax online and start all over again which would be a lot of work.

In the Federal Taxes / Deductions & Credits section / Tell Us How Much You Contributed screen, I entered my $7,000 contribution, and I entered that all $7,000 was contributed between 1/1/21 and 5/17/21.  The next screen asks "Tell Us How Much You Transferred.  How much of the $7,000 you contributed to the traditional IRA for 2020 did you switch, or "recharacterize" (this does not include conversions or rollovers), to a Roth IRA? Amount Switched from a Traditional IRA Contribution To a Roth IRA Contribution:"
I did transfer the $7,000 (non-deductible contribution to the traditional IRA) to a Roth IRA a day later.    Do I enter $7000 or 0?  The question confuses me.  I can't tell if my transfer is a recharacterization or a conversion. It says enter the amount if it is a recharacterization, but don't include conversions. An earlier response to my original question said it was a conversion, but I read elsewhere that a conversion is when you transfer money contributed in a prior year to a Roth, but if the transfer is money contributed in the same year is a recharacterization.

Also, do I have to file a separate form (I think 8606) since my original contribution was non-deductible? Can I just add that somehow with Turbotax?  I don't think turbotax has me file that last year when I did the same thing in early 2020 for the 2019 tax year.

[macuser_22]

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@ZaneRayClancy wrote:

OK thanks.  Let's see if I can figure this out with the TurboTax for Mac.  If not I may have to switch to TurboTax online and start all over again which would be a lot of work.

In the Federal Taxes / Deductions & Credits section / Tell Us How Much You Contributed screen, I entered my $7,000 contribution, and I entered that all $7,000 was contributed between 1/1/21 and 5/17/21.  The next screen asks "Tell Us How Much You Transferred.  How much of the $7,000 you contributed to the traditional IRA for 2020 did you switch, or "recharacterize" (this does not include conversions or rollovers), to a Roth IRA? Amount Switched from a Traditional IRA Contribution To a Roth IRA Contribution:"
I did transfer the $7,000 (non-deductible contribution to the traditional IRA) to a Roth IRA a day later.    Do I enter $7000 or 0?  The question confuses me.  I can't tell if my transfer is a recharacterization or a conversion. It says enter the amount if it is a recharacterization, but don't include conversions. An earlier response to my original question said it was a conversion, but I read elsewhere that a conversion is when you transfer money contributed in a prior year to a Roth, but if the transfer is money contributed in the same year is a recharacterization.

Also, do I have to file a separate form (I think 8606) since my original contribution was non-deductible? Can I just add that somehow with Turbotax?  I don't think turbotax has me file that last year when I did the same thing in early 2020 for the 2019 tax year.

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If you made a non-deductible contribution *for* 2019 *in* 2020 then that must be reported on your 2019 (or amended) 2019 tax return - not in 2020.    That will produce a 2019 8606 form with the contribution on lines 1, 3 and 14.     You will need that line 14 amount to report the 2020 1099-R for the conversion.

If you also made a 2020 non-deductible Traditional contribution you enter that the same was that will produce a 2020 8606 with that contribution on line 1.

Here is the entire backdoor Roth procedure:

The "Backdoor Roth" does not exist in tax law. It is a procedure used by some to take advantage of a quirk in tax law that allows making a non-deductible contribution to a Traditional IRA when one cannot contribute to a Roth IRA, and the immediately converting the Traditional IRA to a Roth IRA, thereby getting the money into the Roth via "backdoor" tax free.

That "procedure" can only work of all these requirements are met:
1) No Traditional IRA account whatsoever can exist (that includes any SEP or SIMPLE IRA accounts) at the start. If existing IRA's contain any before-tax money or earnings then it will be partly taxable.
2) The Tradition IRA contributions must be reported on a 8606 form as non-deductible.
3) The conversion to a ROTH must be shortly after the contribution to avoid taxable gains.
4) The entire Traditional IRA value must be zero that the end of the year of conversion.

Otherwise the conversion will be partly taxable.

First you must enter your Traditional IRA contributions (if there were 2020 contributions).

IRA contribution
Federal Taxes,
Deductions & Credits,
I’ll choose what I work on (if that screen comes up),,
Retirement & Investments,
Traditional & Roth IRA contribution.

Be SURE to answer the follow up that the are choosing to make this contribution NON-DEDUCTIBLE - if that screen comes up. (DO NOT say that you moved (recharacterized) the money to a Roth) – this is a conversion, not a recharactorazition.

Then enter the 1099-R that shows the distribution.

Federal Taxes,
Wages & Income
I’ll choose what I work on (if that screen comes up),,
Retirement Plans & Social Security,
IRA, 401(k), Pension Plan Withdrawals (1099-R).

Answer the follow-up questions answer the question that you moved the money to another retirement. The screen will open up with choices of where it was moved. Choose you converted it to Roth IRA.

When asked if you have made any non-deductible contributions say " "yes" if you did then enter the non-deductible contributions made for tax years before 2020.     (Usually zero unless you also made a 2019 or earlier non-deductible contribution. If you do have prior year basis then enter the last filed 8606 line 14 value.).

Enter the 2020 year end value of your Traditional IRA a "0" (zero) - if it is in fact zero - this tax free Roth conversion will not work if it is not zero.

[If you had any other Traditional IRA at the end of 2020, then the nondeductible "basis" must be pro-rated over the current distribution and the total IRA value and only a portion of the Roth conversion will be non taxable and part will be taxable, with the remaining non-deductible basis carrying forward for future distributions. You can never only withdrew the nondeductible basis as long as the IRA exists and has a value more than zero.]

The non-deductible amount of your contribution will be subtracted from the taxable amount of the conversion on then 8606 form and enter on line 4a of them 1040 form and a zero taxable amount on line 4b if you did it right.

Also see this TurboTax FAQ:
https://ttlc.intuit.com/questions/4350747-how-do-i-enter-a-backdoor-roth-ira-conversion

[ZaneRayClancy]

Thank you.   I read that "The backdoor "procedure" can only work 4 requirements are met.  The first is that:
1) No Traditional IRA account whatsoever can exist (that includes any SEP or SIMPLE IRA accounts) at the start. If existing IRA's contain any before-tax money or earnings then it will be partly taxable.

I have separate traditional IRA to which I made deductible contributions over 30 years ago and I have done nothing since except to let it grow.    Does this mean should not have made my recent $7,000 deductible contribution to a separate traditional IRA and then transferred them to the Roth IRA for for both the 2019 and 2020 tax years?  Have I done something wrong that I have to undo now?

[macuser_22]

No.   It is too late to "undo" a 2020 conversion.   When you enter the 1099-R as directed above then the 8606 calculations will prorate the non-deducible contributions between the current conversions and remaining total IRA value.   This is why the so called "backdoor Roth"  only works if the year end value if ALL IRA accounts is zero.

A "Backdoor Roth" is simply a Traditional IRA with a non-deductible basis but must follow the normal pro-rated rules.

You can NEVER withdraw ONLY the nondeductible part - it must be prorated over the entire value of ALL Traditional IRA accounts which include SEP and SIMPLE IRA's. (For tax purposes you only have ONE Traditional IRA which can be split between as many different accounts as you want, but for tax purposes they are all added together).

For example using rough figures: if you had $60K of nondeductible contributions in an IRA with a total value of $600K (10:1 ratio), then when you take a $60K distribution from any IRA account $6,000 would be nontaxable and $54,000 would be taxable (same 10:1 ratio) , with the remaining $54K of basis staying in the IRA for future distributions. As long as there is any money in the IRA, there will be some basis.

TurboTax will ask for your non-deductible "basis" and then the *Total Value* of *all* Traditional IRA, SEP and SIMPLE accounts as of Dec 31, of the tax year. That is so the prorating of the basis can be properly proportioned between the current years distribution and the remaining IRA value. That is done on the 8606 form.