software appears to be incorrect

[chickenchimichanga]

So... I have the SAME problem as the person who started this thread and it is making me super annoyed. My wife and I are each over 50 years old so we can contribute up to $8K to our IRAs for 2024. However, due to our higher income limit, we need to do non-deductible (post-tax) contributions to our Traditional IRAs and then do backdoor Roth conversions. Even after selecting all or some was converted to a Roth IRA, then the other statement that all was converted to Roth IRA, Turbo Tax states that we have a $7,743.00 taxable amount for those contributions/conversions. This is even after being given the "good news, you don't owe any taxes" statement for both my wife and me. I called Turbo Tax nearly two weeks ago to resolve this and they promised to call me back, but never did. I do not want to pay additional fees for Live Tax advice for helping Turbo Tax resolve their software error. Please someone help, otherwise I will be forced to do this all by hand as I am losing confidence in this software and this specific error could prevent me from getting an additional $3K in refunds, and is also potentially causing around a $275 underpayment penalty, despite not having any taxes due.

[AnnetteB6]

Based on the information you shared, it seems like the basis of the Traditional IRA accounts that were converted to Roth IRAs may not be entered into your tax return.  

If you made the non-deductible contributions to the Traditional IRA in the 2024 calendar year, then you need to report those contributions as part of your return.  This should make the Roth IRA conversion non-taxable unless there was a lag between the contribution and the conversion and the account grew in value during that lag.

Take a look at the TurboTax article below for guidance to enter the Traditional IRA contribution information.  If this does not cover all of your questions, please add some additional information.  You referenced another thread in your question, but your question stood alone without any prior threads.

How do I enter a backdoor Roth IRA conversion?
 

[Hal_Al]

This year's contribution cannot be converted in isolation from any existing traditional (including rollover) IRA(s). It's best explained by example. Let's say you have a $95,000 balance in all your existing traditional IRAs and that balance consist of $45,000 in deductible contributions, $10,000 in previous non-deductible contributions and $40,000 in earnings (interest, dividends & capital gains). This year you make a $5000 non-deductible contribution and convert $5000 to a Roth. Only 15% of the $5000 conversion ($750) will be tax free. Your basis, in all your IRAs, is $15,000 (the previous $10,000 of non-deductible contributions plus this year's $5000 contribution). TurboTax will divide that $15,000 basis by the $100,000 balance ($95K+5K) to arrive at the 15% tax free ratio. This is the way the IRS requires it to be done. The calculations will be shown on form 8606.

[dmertz]

"This is even after being given the "good news, you don't owe any taxes""

That's not what TurboTax said.  TurboTax said that you don't own any "additional" taxes, referring to early-distribution penalties as an additional tax.  (The 10% early-distribution penalty is an excise tax.)  This is being indicated by the code 2 in box 7.

If funds remain in the individual's traditional IRAs at year-end, not all of the basis can be applied to the individual's traditional IRA distributions, including Roth conversions.  Some basis remains to be applied to future distributions from the individual's traditional IRAs.

[chickenchimichanga]

Hi everyone, thank you for all of your responses. I figured out what I was doing wrong. As I already paid taxes on the Traditional IRA contributions, and hence non-deductible, I needed to choose the rollover option in Turbo Tax, NOT the conversion option, for reporting the subsequent transfer of those funds from my Traditional IRA to my Roth IRA (backdoor Roth). That cleared the additional tax and penalty that was previously being shown when I had been reporting it incorrectly as a conversion.

[dmertz]

"I needed to choose the rollover option in Turbo Tax, NOT the conversion option"

@chickenchimichanga , if you moved funds from a traditional IRA to a Roth IRA, you must report it as a Roth conversion, not a rollover.  Reporting it as a rollover will result in an incorrect tax return by, among other things,  failing to prepare the required Form 8606 Part II.  What you don't want to do in this case is report it as a recharacterization by telling TurboTax that you "switched" the contribution from being a traditional IRA contribution to being a Roth IRA contribution.

[chickenchimichanga]

Thank you, very much appreciated. So, for the case when I enter it "correctly" documenting a conversion vs a rollover, why would I have to pay nearly $4K total in taxes (Federal/State) on that contribution when I already paid taxes on the Traditional IRA contribution (non-deductible) that I immediately transferred over to my Roth IRA without realizing any capital gains? That just seems insane, why would I even put any money into my IRA accounts at that point? Just doesn't make any sense. If indeed I need to report as a conversion and assuming Turbo Tax software is correct, I guess I will stop contributing to my IRAs at all, which seems to defeat the purpose of a backdoor Roth IRA, or an IRA at all for that matter. Yes, my income is in a decent place now, which is preventing direct contribution to my Roth IRA, but that is transitory. I don't know why the IRS/government needs to make this so difficult and like voodoo math. I'm certainly paying my share of taxes already.

[chickenchimichanga]

This is super helpful and concurs with my thinking, that I shouldn't be taxed on the conversion. There was no lag, no gains, prior to transfer from my Traditional IRA to my Roth IRA. However, Turbo Tax showed $4K extra in taxes (Federal/State). Therefore my assumption that the software has a glitch/error. I communicated this with a Turbo Tax agent, who stated they would call me back to discuss, but I never received a return phonecall. They tried to get me to pay extra for getting personal help from Turbo Tax, but my taxes this year aren't so complicated and on principal, I don't want to pay extra for resolving a Turbo Tax software error. Honestly, Turbo Tax should pay me for helping troubleshoot this for them! (assuming the software indeed has an issue - I'm not 100% certain, but no one from Turbo Tax has confirmed either way yet)

[chickenchimichanga]

My reply, above, is intended for AnnetteB6 based on the following statement:

"This should make the Roth IRA conversion non-taxable unless there was a lag between the contribution and the conversion and the account grew in value during that lag"

[dmertz]

Because only a proportionate amount of your basis applies to traditional IRA distributions, if you have anything in traditional IRAs at year end, only part of your traditional IRA distributions will be nontaxable and the rest of your basis will remain with your traditional IRAs to be applied to future distributions.  Also, make sure that you have entered the nondeductible traditional IRA contribution so that TurboTax will add that to your basis.