Split Backdoor ROTH

[JFereb]

For 2023 tax year, my wife and I contributed directly to a ROTH and in April 2024, Turbotax informed us this was an issue so we converted that amount to an IRA to prevent any penalties. We then contributed to that same IRA in 2024 and did a backdoor conversion in 2024 to a backdoor ROTH IRA. Now when filing for our 2024 tax year, Turbotax is indicating that we make too much money to contribute to a ROTH but it should be acceptable. We did not overcontribute to our IRA.

Especially since the amounts increased over time, we are very confused on what values to put where to make turbotax happy with our backdoor roth IRA. Considering we did a transfer on a separate financial year, I have read this term may be a SPLIT backdoor roth IRA. Can you help us with guidance?

[DaveF1006]

Yes, this does result in Split-Year Back Door Backdoor Roth since contributions and conversions occur in different tax years.  ere are a few things to consider. First of all, I must caution you not to put in values that will make TurboTax happy.  Just stick to the facts that are listed on your 1099 R but most importantly, make sure your 2023 and 2024 forms 8606 are correct. Let me give you a few tips to consider. 

1. Form 8606: This form is crucial for reporting nondeductible IRA contributions and conversions. You’ll need to ensure that both your 2023 and 2024 contributions are properly accounted for.
2. 1099-R Forms: If you prepared two 1099-R forms (one for each year), make sure they are entered correctly in TurboTax. The distribution codes on these forms will determine how the conversion is taxed.
3. Pro-Rata Rule: If you had any pre-tax money in your IRA before converting, the IRS may apply the pro-rata rule, which could result in unexpected tax liabilities. 
4. TurboTax Entry: When entering your backdoor Roth IRA details, ensure that:

• Your 2023 nondeductible IRA contribution is reported on Form 8606 for 2023. This means in looking at your prior year's 8606.
• Your 2024 contribution and conversion are reported correctly on Form 8606 for 2024. 

For reference, I would suggest you read this guide as it's helpful to explain the context of Split-Year Backdoor Roth's. Now let's address the issue of the 8606, which is critical. This may be a reason why you received the error message regarding this year's Roth overcontribution. Here is how to properly fill out a form 8606 for 2023 and 2024. Every line listed here's a line item on Form 8606.

Part I: Nondeductible Contributions to Traditional IRAs

Line 1: Enter the total nondeductible contributions made to your traditional IRA for the tax year.

Line 2: If you have prior-year nondeductible contributions, enter the total basis from previous years.

Line 3-5: Calculate your total basis and contributions.

Line 6-12: If you took distributions from your IRA, report them here.

Line 14: This is your remaining basis that carries forward to future years.

 

Part II: Roth Conversions

Line 16: Enter the total amount converted from a traditional IRA to a Roth IRA.

Line 17: If you had pre-tax money in your IRA, this is where the pro-rata rule comes into play.

Line 18: This determines the taxable portion of your conversion.

Part III: Roth IRA Distributions

If you took distributions from a Roth IRA, report them here.`

If you find that your2023 Form 8606 was incorrectly reported, you will need to amend your 2023 to correct it before preparing your 2024 8606 to ensure a proper flow of information between the two years and to ensure everything is reported accurately to the IRS. Transparency is everything!!