Non Deductible IRA to Roth IRA conversion reporting

[CloudSurferB]

Hello,
I've been trying to figure out how best to convert my Traditional IRA which I set up solely for the purpose of converting back to my Roth in 2015.  I've been kicking this can down the road for a while trying to figure out how to do it and, in the meanwhile, I haven't been investing in an attempt to keep it from getting too messy.  I'm about to just convert all of it to get it done, but was advised doing a large sum could really hit me as large additional income if I don't do it right. 

Here's the situation:
In 2014 I had contributed $5500 ahead of time to a Roth as I used to always do.
In April 2015, before the filing deadline, I realized my income made me ineligible to have made a full contribution to my Roth and so my bank advisors said I could re-characterize the $2100 portion that I was ineligible to contribute into a newly created Traditional (still nondeductible contributions) IRA and then convert it back. I filled out the form and faxed it in to do so before the tax filing deadline. But because it had earned interest in the Roth that year, the actual amount that went into the traditional IRA was $2368.80 (vs $2100 I requested and listed on my Nondeductible IRA Contribution Form 8606 with my return.

I never did/still have not invested any of it, or the subsequent annual contributions I’ve made every year since.

The contributions were:
$2100 in 2014 (reported as $2100 on 8606 on my return but which Schwab listed on Form 5498 in 2014 and then on a 1099-R in 2015)
$5170 in 2015 (8606 submitted)
$1300 in 2016 (8606 submitted)
$5500 in 2017 (which for some reason my tax software didn’t submit an 8606 nondeductible contribution form for, but which I did not deduct and later added into the cost basis I declared on the subsequent 8606 the following year. I plan to submit a 2017 year 8606 form to correct that now along with possibly a $50 late fee I'm reading about)
$5500 in 2018 (8606 submitted)
Total cost basis is $19570 unless that initial $2368.80 counts as cost basis too (vs the $2100) in which case cost basis equals $19838.80.
The account now has 19915.80 which is like $77.00 in bank interest but otherwise no interest on the initial contributions.

I want to convert all to Roth. I don’t want to get taxed again on it as it was almost all nondeductible.  How do I report this on my tax software so that I am not taxed on it aside from the minimal bank interest?  Thank you and sorry for the long question!
-B.

[fanfare]

without a non-deductible basis, you cannot avoid taxation on a conversion.

When you convert N dollars to a Roth, that is N dollars of ordinary income added to your total income.

 One strategy is to convert only part of it each year until it is all done.

Right now would be a good time to convert because, if you are like most long investors, your investments are down 30%,

And Trump is about to send you helicopter money.

[fanfare]

With a non-deductible basis of everything you put into the IRA, plus earnings of $77 for all your efforts,

then you can convert it all and pay an income tax on $77.

[CloudSurferB]

Thanks.  Yeah I think the 8606’s should all show the basis (minus the one missing one from 2017, but I’ll submit that too.). Just wondering how that basis is shown when doing your taxes when it is all converted over at once so it doesn’t bump your taxable income. 

[CloudSurferB]

That’s what I was hoping.  Where/how do you note that cost basis.  Will the software prompt for that basis?  Thank you!

[macuser_22 · Accepted solution]

You enter

This so-called “back-door Roth” method ONLY works if you have NO OTHER Traditional IRA accounts.  If you do, then the non-deductible part must be spread over ALL accounts and cannot be withdrawn by itself.  Only if you started with NO Traditional, SEP & SIMPLE IRA and ended up with a zero amount in ALL Traditional, SEP & SIMPLE IRA accounts will this Roth conversion not be taxable.

First you must enter your Traditional IRA contributions (if there were 2019 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 2019.     (Usually zero unless you also made a 2018 or earlier non-deductible contribution. If you do have prior year basis then enter the last filed 8606 line 14 value.).

Enter the 2019 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 2019, 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

[CloudSurferB]

Thanks for the detailed rundown.  

I only have the one Traditional IRA ,and My Roth--no other Traditional IRA money.  The Traditional was set up just for this back-door so it should be pretty clean.  My 8606 from 2018 filing year shows on line 14. a basis of 19,570.00 for "total basis in traditional IRAs for 2018 and earlier years"  

If I convert it now, I assume it wont show until next year when doing 2020 taxes.  I have not yet made my contribution for 2019 as I have not yet done my taxes to determine my limit.  I plan to do this conversion first, to zero it out.  Then before the filing deadline, I will make my additional contribution and right away convert it over too then next day.  Will that generate another 1099-R to address separately, or will those combine into one for next year? 

Again, I assume I will deal with all of this on next year's return as it's now 2020.  But I want to covert it now to start investing it while the market is down and to make it cleaner going forward.

[macuser_22]

Any conversion or distribution in 2020 would be reported next year on your 2020 tax return.   All 2020 distributions for the same IRA should be combined on a single 1099-R.

[CloudSurferB]

Thank you!

[scottdickman1]

I have converted my IRA to a Roth IRA through Vanguard which both accounts are in. My question is on my 1099-r what should be my distribution code be. it says 7 but i think it needs to be something to do with IRA conversion not just distribution

[macuser_22]

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@scottdickman1 wrote:

I have converted my IRA to a Roth IRA through Vanguard which both accounts are in. My question is on my 1099-r what should be my distribution code be. it says 7 but i think it needs to be something to do with IRA conversion not just distribution

---

7 is correct.

You must tell TurboTax that it was a conversion.

Enter a 1099-R here:

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).

OR  Use the "Tools" menu (if online version under My Account) and then "Search Topics" for "1099-R" which will take you to the same place.

Be sure to choose which spouse the 1099-R is for if this is a joint tax return.
Be sure to pick the correct 1099-R type: Standard 1099-R, CSA-1099-R, CSF-1099-R, RRB-1099-R.

If this was a  conversion, answer the question that you moved the money to another retirement account (can be the same account). The screen will open up with choices of where it was moved.  Say that it was converted to a Roth

[NOTE: When you get to the "Your 1099-R Entries" screen where you can add another 1099-R, use "continue" to keep going as there are additional interview questions after that screen in most cases. You can always return as shown above.]

[goyal_raj]

I had a conversion of deductible IRA and non deductible IRA to Roth in 2020. My 1099-R shows it. When I uploaded it and answered questions on Turbo Tax, it created a 8606 but in part 1 it does not show any conversion in Line 8. Should it show there?

And for 2019 I contributed to non deductible IRA (later converted to Roth) in Feb 20 (for year 2019)  and it shows on Line 1 but not on Line 4. Isn't line 4 about contributions made in the next year but applicable for previous year?

I have the following contributions and activity:

1. 5500 to 'deductible' IRA for 2018, contributed in Apr 2019.

2. 5591 of deductible IRA converted to Roth on 2/24/20

3. 6000 to non deductible IRA for 2019, contributed on  25 Feb 2020

4. 6000 to non deductible IRA for 2020, contributed on 25 Feb 2020

5. 12000 of non deductible IRA converted to Roth on 2/26/20

My 8606 shows the following:

Line 1- 6000

Line 2- 6000

Line 3- 12000

Line 4 - blank 

Line 8 - blank - should it not show what i converted to Roth? How do i get it if yes?

Line 14- 0 - is this correct?

Line 16- 17592 - this looks correct

Line 17- 12000- this looks correct

Line 18- 5592 - this looks correct

Thanks,