Traditional IRA to Roth Conversion Rollover Turbo Tax steps

[OzzieX20]

Dear TurboTax Community,

Hope everybody is doing well. I am using TurboTax - desktop version. Filling jointly with my wife. Struggling with my wife's particular situation as follows:

As it happened, we converted/rolled over first her only traditional IRA to Roth - $7.5K (to avoid pro-rata rule for upcoming back-doors) on March 2021. I am aware we owe taxes on the full amount. We did this from Merrill Edge to Vanguard

Then, performed a back-door Roth IRA of 7K on April of 2021 for 2020 on Vanguard. Conversion from Trad. IRA was immediate, so we don't owe taxes. 

Thirdly, performed another back-door Roth IRA of 5K on December of 2021 for 2021 on Vanguard. Conversion from Trad. IRA was immediate, so we don't owe taxes.

Received form 1099-R from Vanguard with Line 1 & 2a for $ 19.5K (total); line 7 shows code 2; and IRA/SEP/SIMPLE checked. I was expecting to get a specific form from Merrill Edge showing the initial conversion/roll over, and the coding so we can reflect the taxes that we owe. Should I contact them? 

Please let me know how should I go about capturing this scenario in Turbo Tax desktop? Any particular order/steps? What are the expectations as far as 8606 for my wife's and the 1040? 

I have done some research and have done different scenarios in TurboTax, but I am still struggling to make sure I have it right. 

Note - I did something similar for myself but didn't have to perform the initial step of converting/rolling over, but just two backdoor roths. First one of 7K in April 2021 for 2020, and second one of 2K in December 2021 for 2021. I think I am good on how to approach my specific situation, but I'd greatly appreciate any advise on my wife's as the initial conversion/rollover we performed for her make things confusing as to how to approach them with the software. 

Thanks in advance & Best regards!

Ozzie 

[macuser_22]

The "Backdoor Roth" does not exist in tax law. It is a procedure used by some to take advantage of a quirk in tax law that allows making a non-deductible contribution to a Traditional IRA when one cannot contribute to a Roth IRA, and the immediately converting the Traditional IRA to a Roth IRA, thereby getting the money into the Roth via "backdoor" tax free. [Congress has been talking about changing the tax law to prohibit this but has not yet done so.]

That "procedure" can only work of all these requirements are met:
1) No Traditional IRA account whatsoever can exist (that includes any SEP or SIMPLE IRA accounts) at the start. If existing IRA's contain any before-tax money or earnings then it will be partly taxable.
2) The Tradition IRA contributions must be reported on a 8606 form as non-deductible.
3) The conversion to a ROTH must be shortly after the contribution to avoid taxable gains.
4) The entire Traditional IRA value must be zero that the end of the year of conversion.

Otherwise the conversion will be partly taxable.

First you must enter your Traditional IRA contributions (if there were 2021 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 2021.     (Usually zero unless you also made a 2020 or earlier non-deductible contribution. If you do have prior year basis then enter the last filed 8606 line 14 value.).

Enter the 2021 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 2021, 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

[dmertz]

Apparently the traditional IRA was moved from Merrill Edge to Vanguard by nonreportable trustee-to-trustee transfer and then was converted to Roth at Vanguard.  With Roth conversions in 2021 at Vanguard of $7,500, $7,000 and $5,000 = $19,500, you have $19,500 of Roth conversions in 2021 properly reported on the code-2 Form 1099-R.

The nondeductible contribution for 2020 was reportable on your wife's 2020 Form 8606.  The amount from line 14 of the 2020 Form 8606 (presumably $7,000) transfers to line 2 of her 2021 Form 8606 to be combined with the $5,000 nondeductible contribution for 2021,  and the resulting $12,000 is subtracted from the $19,500 of Roth conversions leaving $7,500 as taxable on the 2021 tax return.

Nothing about these Roth conversions was reportable on the 2020 tax return.

[OzzieX20]

Thanks so much macuser_22. We do greatly appreciate it!!

Created a TEST account in TurboTax desktop. 

I am following the steps, and when I got to "What did you do with the money from Vanguard" - I chose - Moved money to another retirement account, then I chose - did a combination of rolling over, converting, or cashing out the money.

For next question - how much of the $ 19.5K TEST moved to IRA, 401K or other retirement account, captured:

7.5K for amount rolled over to another (or back to the same) retirement amount; and $12K for amount converted to a Roth IRA account. Then TurboTax tells me that to report this, I need to enter two separate 1099-Rs, one for the rollover and one for the conversion, and to allocate the numbers of them so the total equal the amounts on the original 1099-R. 

Actually tried this and for the 1099-R with 7,5K I used code H - Direct rollover of a designated Roth under box 7. I left the original 1099-R but with 12K and code 2 under box 7. So, this is the part that got me confused as to what the steps are to show this accurately as we created a tax event when we converted the trad IRA from Merrill Edge to Roth at Vanguard in 2021. We wanted to avoid the pro-rata rule as my wife doesn't have any other IRAs, and hopefully we don't owe any taxes on the backdoors as we moved the money from Trad to Roth at Vanguard very quickly. It is also my understanding that we have a basis of 7K as we performed the very first back door at Vanguard in "April" 2021 but contributed for 2020. 

Please let me know your thoughts and further guidance.

Have a great weekend,

Thanks,

Ozzie

[OzzieX20]

Hi dmertz,

Thanks a lot for your response as well. You are exactly right on your statements. The question is how to capture the 7.5K in Turbo Tax to show that specific conversion, which is taxable indeed.

Kind regards,

Ozzie 

[dmertz]

It's all calculated on Form 8606.  All that's necessary is to make sure that you entered the $7,000 contribution  for 2020 properly on your 2020 tax return so that the $7,000 from line 14 of that form appears carries forward to line 2 of the 2021 Form 8606, that you've entered the $5,000 contribution for 2021 in 2021 TurboTax so that it appears on line 1 of the 2021 Form 8606, that you've entered the $19,500 Form 1099-R and that you've indicated the $0 year-end value in traditional IRAs.  From that information the calculations on 2021 Form 8606  are automatic, resulting in $19,500 on line 16, $12,000 on line 17 and $7,500 on line 18.

[OzzieX20]

Truly appreciate your response dmertz,

I ended up printing out Form 8606 for my wife, and manually calculated the lines this afternoon, so I can understand a bit better what I am dealing with as well. My manual calculations for lines 16, 17, and 18 are matching what you are showing below. Have different values in TurboTax (TT) as to the way I have all this setup though. That is part of my confusion as to how to get TT to calculate correctly.  I know that line 2 on the 8606 needs to show 7K (showing that actually in TurboTax) as there is a question that talks about basis. I used HR Block last year including form 8606 with that Line 14 showing 7K, but switched to TT as it more robust - using Premier version. 

Can you please provide what is the expectation on line 4b of the 1040 again? Will that be 7.5K, right?

I will scratch what I have now and delete some forms in TT and give this a new whirl first thing tomorrow morning. I will report back, but I am thinking that we should be getting closer.  This is the last piece that we need indeed.

Your advise and follow ups are great. Thanks a lot!

Best regards,

Ozzie

[OzzieX20]

Hello macuser_22,

After reading yours and dmertz responses, I started again and performed some other iterations. I am not doing this two separate 1099-Rs anymore that I mentioned on my response as TT is treating everything as conversion. For your recommendations under Trad IRA and Roth IRA, I only checked the Traditional IRA box, and checking both was getting me into situations where I was told that we owe money for excess contributions. Any thoughts?

Nonetheless, I was able to show 8606 for my wife with lines 16, 17, and 18 of 19.5K, 12K, and 7.5K respectively. 

Let me ask what would be the expectations for 1040 4a and 4b lines?

Once again, for myself I made two backdoors myself of 7K in April 2021 for 2020, and 2K in December 2021 for 2021.

For my wife, the trad IRA to Roth conversion between two institutions of 7.5 in March 2021, and then two backdoors of 7K in April 2021 for 2020, and 5K in December 2021 for 2021.

Many thanks!

Ozzie

[OzzieX20]

Hello again dmertz,

After reading yours and macuser_22 responses, I started again and performed some other iterations. I am not doing this two separate 1099-Rs anymore that I mentioned on my response to macuser_22 before as TT is treating everything as conversion (not a rollover). Under Deductions & Credits I am only checking the Traditional IRA boxes, as checking both Trad IRA and Roth IRA was getting into situations where I was told that we owe money for excess contributions. I have read that for TT back doors it is fine to select that Traditional IRA box only, as you tell the program that this was all converted to ROTH under Wages/Income - "IRA, 401K, Pension Plan Withdrawals (1099-R) section. Any thoughts?

Nonetheless, I was able to show 8606 for my wife with lines 16, 17, and 18 of 19.5K, 12K, and 7.5K respectively as mentioned before. So, we are moving in the right direction. 

Let me ask what would be the expectations for 1040 4a and 4b lines?

Once again, for myself I made two backdoors myself of 7K in April 2021 for 2020, and 2K in December 2021 for 2021.

For my wife, the trad IRA to Roth conversion between two institutions of 7.5 in March 2021, and then two backdoors of 7K in April 2021 for 2020, and 5K in December 2021 for 2021.

Many thanks!

Ozzie

[macuser_22]

When the 1099-R interview asks if you tracked your basis and you say yes then if asks for prior years basis (non-deductible contributions) and you enter the last filed 8606 line 14 amount for the 8606 line 2 amount.   Nothing goes into the IRA contribution interview unless  you made a 2021 non-deductible contribution for 2021 which would apper on line 1 of the 8606.

[OzzieX20]

Excellent macuser_22! I think I am in line with your latest statements.

Couple of questions - 

1. What would be the expectations for lines 4a & 4b on the 1040?

2. As for 2021, we didn't contribute in 2021 (from Jan-April) what is the expectation for line 14 for our 8606s? Should be zero, correct?

Thanks again,

Ozzie

[macuser_22]

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@OzzieX20 wrote:

Excellent macuser_22! I think I am in line with your latest statements.

Couple of questions - 

1. What would be the expectations for lines 4a & 4b on the 1040?

2. As for 2021, we didn't contribute in 2021 (from Jan-April) what is the expectation for line 14 for our 8606s? Should be zero, correct?

Thanks again,

Ozzie

---

Line 4b would transfer from the 8606 line 18  and if the IRA year end value was zero, line 14 should be zero.

[OzzieX20]

Much appreciated macuser_22! Everything seems to be falling in line here. 

I apologize, but forgot to ask - what is the expectation for line 4a as far as the amount? 

Best regards,
Ozzie

[macuser_22]

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@OzzieX20 wrote:

Much appreciated macuser_22! Everything seems to be falling in line here. 

I apologize, but forgot to ask - what is the expectation for line 4a as far as the amount? 

Best regards,
Ozzie

---

Line 4a should be the 1099-R box 1 amount.

[OzzieX20]

Thanks macuser_22 once again. Yes, line 40 shows the combination of both my wife's and mine's 1099-Rs box 1 amounts. 

One last question for you - for my wife all started back in 2018 when we moved from Fidelity 401K to Merrill trad IRA. Her Fidelity account had around 3K. Merrill needed at least 5.5K to allow for the transaction, so we put $2.5 from our "pockets". This amount grew up to 7.5K which is part of the transaction that I have mentioned from the beginning as to what came from trad IRA at Merrill to Roth at Vanguard. I have been stating that we should paid taxes for the whole 7.5K, but in all reality looking at this closer we should have to pay taxes on 7.5K - 2.5K = 5K, right?

By looking at my wife's Merrill old account I recently found a form 5498 for 2018. We didn't get this on the mail from my recollection, so I was just thinking to eat the tax, which I don't think is a good idea anymore. Form 5498 shows line for IRA contributions as $ 2.5K indeed. 

I never filled out form 8606 for 2018 taxes, but I do think I need to go back and do it now. I will also need to amend my wife's form 8606 for 2020 taxes as that was part of a backdoor. All in all I have done this manually. For 2018 form 8606 shows line 14 with the 2.5K. For 2020 form 8606 shows line 14 as 9,500. This will go in line 2 of form 8606 for 2021 taxes. This makes line 4b of 1040 show 5K which is this amount from where we should pay taxes on. 

The math is working in TT and I think this makes sense, but would appreciate your thoughts as always please.

We will have to pay to the Fed, and one of the two states. I am a bit worried on filing electronically as I would like to make sure that the IRS sees the corrected 8606 forms beforehand or at the same time. Any last suggestions here?

Kind regards,

Ozzie