TurboTax says I owe income tax for my backdoor Roth even though I used taxed earned income for the contribution

[sarahjgreen14]

In 2024, I contributed $7000 to my traditional IRA and then I did a backdoor Roth conversion my Roth IRA. Both accounts are in Fidelity. The $7000 that I contributed were after-tax dollars, so this should be a non-taxable event. 

I received a 1099-R from Fidelity for the Traditional IRA account, which shows a gross distribution of $7000 (box 1) and taxable amount of $7000 (box 2a). When I go through the steps of entering everything in TurboTax, it comes out that the $7000 is being included in my taxable income, and it shows I owe taxes on it. 

Is this an issue with how I'm entering it in TurboTax or is this an issue with the 1099-R classification from Fidelity?

[ThomasM125]

It appears to be an issue with how you entered the transaction in TurboTax, since I recreated what you mention and the distribution I entered didn't appear as taxable. 

Make sure you entered a traditional IRA contribution in TurboTax for the $7,000 and indicate that it is non-deductible. Enter the Form 1099-R into the program and indicate that it was from a traditional IRA. Also indicate that you moved the money to another retirement account and did a combination of rolling over, converting, or cashing out the money, and enter the amount you converted to the IRA:

You also must enter the value of your IRA, SEP or Simple accounts at the end of the year when asked.

[sarahjgreen14]

Ok I think I got that figured out now.

If I selected 'I did a combination of rolling over and converting some or all of this money', it brought me to Separate your rollover and conversion, which didn't seem right because the only option was to delete the 1099-R and enter two separate ones.

The best option on the Tell us if you moved the money through a rollover or conversion page was to select 'I rolled over some or all of it to an IRA or other retirement account within the time limits (normally 60 days)'.

That brought me to Did you roll over all of this $7,000.00 (Box 1) to another retirement account?

I selected 'Yes, I rolled over $7,000.00 to another traditional IRA or retirement account (or returned it to the same account).' which brought me to the not owing taxes page!

[sarahjgreen14]

@ThomasM125 When I'm in the Deductions & Credits section, under the Traditional IRA and Roth IRA page, should I indicate Traditional or Roth? 

[ThomasM125]

Traditional IRA. You are reporting the non-deductible contribution to your traditional IRA. You put the contribution to a traditional IRA then move it to the Roth IRA to complete the backdoor Roth IRA conversion

[sarahjgreen14]

@ThomasM125 does this look right?

On the Tell Us How Much You Contributed page, I entered $7000 for contributions. Or should this be $0 since it was a rollover in the Wages & Income section and here it says do not enter rollovers?

Then on the next page Tell Us How Much You Transferred, I enter $7000 for the amount switched to Roth IRA?

[ThomasM125]

No, you didn't switch or recharacterize the contribution so you just report the non-deductible contribution to the traditional IRA. You physically make that contribution to your traditional IRA, then you instruct the pension plan to roll it over to your Roth IRA. So you enter the non-deductible IRA contribution and then enter the Form 1099-R you receive from the broker reporting the rollover to the Roth IRA.