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, assuming you made a non-deductible contribution to your traditional IRA. Otherwise, the rollover/ conversion to the ROTH IRA would 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.

[Edited 3/26/25 at 9:04 AM PST]

@sarahjgreen14 

[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 conversion to the Roth IRA.

[Joey29]

Hi, Are you saying that a Roth IRA backdoor conversion is considered a rollover?

[ThomasM125]

First of all, I have been assuming you entered a non-deductible contribution to your traditional IRA as that is necessary for a backdoor IRA conversion, and you mentioned in your original post that you were doing a backdoor IRA conversion. If you had made a normal/deductible contribution to your traditional IRA to begin with, the the conversion to the ROTH IRA would be taxable.

I am using the term rollover and conversion interchangeably to refer to a transfer of funds from one IRA to another.

[sarahjgreen14]

@ThomasM125 Yes, I made a non-deductible, after-tax contribution, and on the 1099-R form in box 7 Distribution code(s) is 2, which is "Early distribution, exception applies (under age 59 ½)."

[ThomasM125]

You need to enter the non-deductible traditional IRA contribution in TurboTax and indicate that it is non-deductible. You need to be careful when answering the questions regarding basis in traditional IRA's in prior years and non-deductible contributions in prior years. Also, you need to enter the correct balance in your IRA at the end of the current year. I think you must be answering one of those questions wrong, they are used to determine the taxation on your distribution when you enter the Form 1099-R.

[bosox555]

I have the same issue, which does not correctly classify the Roth IRA backdoor contribution.  I should not be taxed on my contribution.  I moved $2600 of non-deductible funds to an IRA and immediately moved the same $2600 to my Roth IRA.  Turbo tax says I owe tax on a portion of that $2600, meaning I have been taxed twice on the same amount (double taxation).  I didn't do a rollover.  I can see the workflow in my broker account, and that the same transfer has been classified as a conversion to a ROTH IRA.  The broker should have noted on the 1099R that it was not taxable; they clearly know that, since they also checked that the taxable status was not determined.

[bosox555]

the info on the 1099R instructions says as much

Box 2a. This part of the distribution is generally taxable. If there is no entry in this box, the payer may
not have all the facts needed to figure the taxable amount. In that case, the first box in box 2b should
be checked. You may want to get one of the free publications from the IRS to help you figure the
taxable amount. See Additional information. For an IRA distribution, see IRAs and Roth IRAs above.
For a direct rollover, other than from a qualified plan, sec. 403(b) plan, or governmental sec. 457(b)
plan to a designated Roth account in the same plan or to a Roth IRA, zero should be shown, and you
must enter zero (-0-) on the "Taxable amount" line of your tax return. If you roll over a distribution
(other than a distribution from a designated Roth account) from a qualified plan, section 403(b) plan,
or governmental section 457(b) plan to a Roth IRA, you must include on the "Taxable amount" line of
your tax return the amount shown in this box plus the amount in box 6, if any.

Box 2b. If the first box is checked, the payer was unable to determine the taxable amount, and box 2a
should be blank, except for an IRA. It is your responsibility to determine the taxable amount. If the
second box is checked, the distribution was a total distribution that closed out your account.

[AnnetteB6]

First, make sure that the non-deductible contribution to your Traditional IRA was reported on your tax return for the year that you made the contribution.  This will report the $2600 basis on Form 8606 and allow that portion to be considered non-taxable when it is converted to a Roth IRA later.

If you did do this, but a portion of the $2600 that was converted is still being taxed, then it could be due to the pro-rata rule.  This comes into play when you consider all of your Traditional IRA accounts and some of the money in the account was pre-tax contributions and some was after-tax contributions.  If that is the case, then every distribution from any of your Traditional IRA accounts will be made up of a proportional mixture of pre-tax and after-tax funds.  This would make a portion of the $2600 that was converted to the Roth IRA taxable.  

If you need to double-check that you have entered the non-deductible contribution correctly so that it is reported on Form 8606, see the instructions in the TurboTax article below:

How do I enter a backdoor Roth IRA conversion?

@bosox555