IRA to Roth Conversion 100% or Zero Taxable??

[Bethboat]

The page "How do I enter a backdoor Roth IRA conversion?" lists the steps for a Roth Conversion but at the end it has a section:"To check the results of your backdoor Roth IRA conversion, see your Form 1040:" 

Under step 3 it states "

• Line 4a IRA Distributions. Your backdoor Roth IRA amount should be listed
• Line 4b Taxable amount should be zero, unless you had earnings between the time you contributed to your Traditional IRA and the time you converted it to a Roth IRA"

I thought any money I move from a regular IRA to a Roth IRA is 100% taxable.  Why would the taxable amount be zero? @ttlc.intuit.com/turbotax-support/en-us/help-article/retirement-benefits/enter-backdoor-roth-ira-con...

https://ttlc.intuit.com/turbotax-support/en-us/help-article/retirement-benefits/enter-backdoor-roth-...

[loreann79]

When you convert money from a traditional IRA to a Roth IRA, said money is added to your normal income on your tax return.  You owe tax on your normal income as is worked out on your tax form so said money is taxed.

[Bethboat]

Thank you for answering my question so quickly. If the distribution is taxable, why do Turbotax support end up making the entire distribution NON taxable and the instructions say that that's what it's supposed to nontaxable. So the support page is wrong. Here's what I get if I follow the instructions.

1040 4A IRA Distributions: $150,160

1040 4B taxable amount: $0

How can I enter the Roth conversion without it making it nontaxable?

[Bethboat]

I think the instructions for checking the 1040 at the end are wrong.  The taxable amount should not be zero it should be equal to the amount converted from the reg IRA to the ROTH IRA. 

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

1. Check the box for Traditional IRA and Continue

are wrong.  You need to check the box "Roth IRA"

Then all the numbers work out.

4a: Ira Distributions: $150160

4b: Taxable amount: $150160

@https://ttlc.intuit.com/turbotax-support/en-us/help-article/retirement-benefits/enter-backdoor-roth-ira-conversion/L7gGPjKVY_US_en_US?uid=lfabjfq3

[Bethboat]

My fix of marking the Roth IRA box didn't work because then I get socked with a big penalty for the over limit Roth IRA.  Does anyone know how to to a Roth Conversion where the taxable part of the IRA distribution is actually added to income to be taxed but doesn't charge a big penalty of a over max Roth contribution?

[DanaB27]

Yes, generally a conversion from a traditional IRA to Roth IRA is taxable because you move pre-tax funds into an after-tax account. But for the backdoor Roth strategy you make nondeductible contributions to the traditional IRA and therefore these are after-tax contributions and you will have a basis in the traditional IRA. If someone converts the contribution right away and only had nondeductible contributions then the full amount converted will be nontaxable because there were no earnings.

Please do not enter the Roth conversion amount as a Roth IRA contribution. You only will enter an IRA contribution (traditional or Roth) if you made one for 2022.

If you only made deductible contributions to your traditional IRA then your conversion will be fully taxable. Do not enter that you had a basis in prior years.

Please follow these steps to enter your conversion (TurboTax Desktop):

1. Click "Federal Taxes" on the top and select "Wages & Income"
2. Click "I'll choose what to work on"
3. Scroll down and click "Start" next to "IRA, 401(k), Pension Plan (1099-R)" 
4. Answer "Yes" to the question "Did You Have Any of These Types of Income?"
5. Click "I'll Type it Myself"
6. Choose "Form 1099-R, Withdrawal of Money from 401(k) Retirement Plans, Pensions, IRAs, etc."
7. Click "Continue" and enter the information from your 1099-R
8. Answer questions until you get to “What Did You Do With The Money” and choose “I moved it to another retirement account”
9. Then choose “I did a combination of rolling over, converting, or cashing out money.” and enter the amount next to "Amount converted to a Roth IRA account"

Please follow these steps to enter your conversion (TurboTax Online):

1. Click on "Search" on the top right and type “1099-R”  
2. Click on “Jump to 1099-R”
3. Click "Continue" and enter the information from your 1099-R
4. Answer questions until you get to “Tell us if you moved the money through a rollover or conversion” and choose “I converted some or all of it to a Roth IRA”

@Bethboat 

[loreann79]

This is how I understand it although I am not an expert.  All funds removed from a traditional IRA are taxable as ordinary income.  As far as I know, if you convert traditional IRA to ROTH there is not a tax on this conversion to ROTH when it is big.  Later, when you do withdraw from ROTH, even if is years from now, there is no tax because you paid tax when you contributed to ROTH.

What you may be encountering is a new rule - If your total income exceeds 250,000.00, due to a larger than usual (do not know what constitutes usual) withdrawal from trad IRA for conversion to Roth, there is an additional tax on the IRA withdrawal amount that causes your income to exceed 250,000.00.  It is reported on line 23 of form 1040.  I believe it is approximately 3.2% of IRA withdrawal causing you to exceed 250,000.00.  This is not a tax on Roth contributions - my understanding is it is part of having wealthier people pay more tax. 

Don't know if this fits your case, but it may explain what is going on.