back door roth problem with basis

[dlemonroe63]

I am having a problem reporting a back door roth conversion.  MAYBE it is due to the glitch that I am reading about that MAY be remedied on 3/31/22, but maybe i am doing something wrong.  My wife's traditional IRA had 14,000 basis at the end of 2020.  i added 7000 in 2021 (bringing the basis up to 21,000).  I converted 15,000 in 2021 to the roth.  My understanding is that the entire conversion should not be taxable since I have more than enough basis to cover the conversion (the basis should go down to $6000 after the conversion).  however, what my TT deluxe is doing is to claim that I have $2863 in non taxable contribution and $12,137 in taxable contribution and the basis for 2021 will be $18,137.  does that sound right to the experts out there or is there a software glitch?

[Mike9241]

are you aware of the IRS pro-rata rule?

tax basis in IRAs $21

IRA value (all her IRAs) $84

Step 1: Calculate non-taxable portion of total Non-Roth IRA’s: Total after-tax contributions / Total Non-Roth IRA Balance = Non-Taxable %:

$21 / $84 = 25.00%

Step 2: Calculate the non-taxable amount by converting the result to Step 1 into dollars:
25.00% x $15 = $3.75

Step 3: Calculate the amount that will be added to your taxable income:
$15 – $3.75 = $11.25

see form 8606 where taxable and nontaxable portions are calculated

so it would seem that the value of your spouse's IRAs is more than her tax basis making a portion of the conversion taxable.

[dlemonroe63]

so, are you saying that even if the amount converted is post tax money, that a portion of that money may still be taxed again?  

[fanfare]

 since I have more than enough basis to cover the conversion (the basis should go down to $6000 after the conversion).

completely wrong you must use the calculation on Form 8606.

You can never convert only pre-tax contributions.

Backdoor roth conversion only works if you start the process with no money in Traditional IRAs.

[dlemonroe63]

is this pro-rata rule new since 2020?  as i looked through my turbotax filing, turbotax handled these roth conversion differently for 2018 (the last time I did it compared to 2020).  it looks like in 2018, there wasn't this complicated pro rata rule (either that or i did it wrong in 2018).

[dmertz]

The pro-rata rule has applied ever since nondeductible traditional IRA contributions have been permitted, more than 30 years.  Because your wife' traditional IRAs have more than just basis, any distribution will be a mix a nontaxable basis and taxable amounts.  She'll always have some basis in her traditional IRAs until she has no more money in traditional IRAs at year end.  Whatever basis was not permitted to be included in a particular distribution will remain in her traditional IRAs to be applied to future distributions.