TurboTax incorrectly showing penalty for my backdoor Roth IRA contribution

[liwei_datascientist]

I'm a high-income earner who completed a backdoor Roth IRA conversion in 2024, but TurboTax is incorrectly showing a penalty.

What I did:

1. Contributed $7,000 to a traditional IRA (non-deductible)
2. Promptly converted the full amount to my Roth IRA
3. Properly reported both transactions on my taxes

Note: Our househhode income this year is above 240K

The problem: TurboTax is displaying this error message:

You Currently Have a Penalty
Because *You* made an excess contribution of $7,000 to *You*'s Roth IRA, "You" will owe a 6% penalty ($420) each year that excess money remains in the IRA.

But don't worry. You can remove this penalty by taking action before April 15, 2025 (or October 15, 2025, if you're filing an extension). What can I do?
Enter any contribution that you withdrew before April 15, 2025 (or October 15, 2025, if you're filing an extension).
Note: You must pay the penalty every year until the situation is fixed.
Contribution Withdrawn Before Due Date of Your Return

[DanaB27]

Please make sure you did not enter a Roth IRA contribution or selected that you recharacterized the traditional IRA to Roth IRA (step 7). In the IRA contribution interview you only enter the traditional IRA contribution. The conversion part is entered in the retirement section when you enter your Form 1099-R.

To enter the nondeductible contribution to the traditional IRA for 2024:

1. Login to your TurboTax Account 
2. Click on "Search" on the top right and type “IRA contributions” 
3. Click on “Jump to IRA contributions"
4. Select “traditional IRA”
5. Answer “No” to “Is This a Repayment of a Retirement Distribution?”
6. Enter the amount you contributed
7. Answer “No” to the recharacterized question on the “Did You Change Your Mind?” screen
8. Answer the next questions until you get to “Any Nondeductible Contributions to Your IRA?” and select “Yes” if you had a nondeductible contribution before this tax year.
9. Enter your basis in the Traditional IRA from your 2023 Form 8606 line 14 (if you had a basis in the prior year)
10. On the “Choose Not to Deduct IRA Contributions” screen choose “Yes, make part of my IRA contribution nondeductible” and enter the amount (if you have a retirement plan at work and are over the income limit it will be nondeductible automatically and you only get a warning and then a screen saying $0 is deductible).

To enter the Form 1099-R conversion: 

1. Click on "Search" on the top right and type “1099-R”  
2. Click on “Jump to 1099-R”
3. Click "Continue" and enter the information from your 1099-R
4. Answer questions until you get to “Tell us if you moved the money through a rollover or conversion” and choose “I converted some or all of it to a Roth IRA”
5. On the "Review your 1099-R info" screen click "Continue"
6. Answer "Yes" to "Any nondeductible Contributions to your IRA?" if you had any nondeductible contributions in prior years.
7. Answer the questions about the basis from line 14 of your 2023 Form 8606 and the value of all traditional, SEP, and SIMPLE IRAs

[liwei_datascientist]

Great Answer!! I followed through the 1st half of the instruction and it is very clear.

Regarding the 2nd half of the instructions ("To enter the Form 1099-R conversion: "), I have two 1099-R forms (for myself), one for "2024-Traditional-IRA-*-Form-1099-R-&-Instructions" the other is "2024-ROTH-IRA-*-Form-1099-R-&-Instructions".

Should I put both 1099-R into this step? Regarding your steps, are they for the Traditional or Roth?

[VolvoGirl]

Why do you have a 1099R from the ROTH IRA?   You converted TO the ROTH, you didn’t take a distribution from it.  What codes are in box 7 on the 1099Rs?   @dmertz 

[dmertz]

Yes, we need to know the codes in box 7 of these two Forms 1099-R.

[liwei_datascientist]

The forms were given by Fidelity.

"National Financial Services LLC as agent for

FIDELITY INVESTMENTS P.O. Box 28019
Albuquerque, NM [removed]"

For Roth IRA, The Box 7 "Distribution code(s)" says "8J".  "IRA/SEP/SIMPLE" is blank

For Traditional IRA, the Box 7"Distribution code(s)" says "2". "IRA/SEP/SIMPLE" says "X"

After having 2 1099-R in turbotax, the TurboTax's income & expenses sections has this row:

"IRA, 401(k), Pension Plan Withdrawals (1099-R)

NATIONAL FINANCIAL SERVICES LLC, NATIONAL FINANCIAL SERVICES LLC"

$14,xxx.00

14K is from both 1099-R. 

It does not feel right.

[DanaB27]

You will enter the Form 1099-R with code 2 for conversion and indicate in the follow-up questions that it was convert as in the instructions mentioned above.

The Form 1099-R with code 8J indicates you had an excess Roth IRA contribution for 2024 plus earnings returned to you. Only the earnings listed in box 2a will be taxable. You will add this Form 1099-R when you see the "Review your 1099-R info" screen.  Please make sure you click continue after adding all Form 1099-Rs and enter the earnings from box 2a under "Corrective distributions made before the due date of the return" when you get the "Did you use your IRA to pay for any of these expenses?" screen at the end of the retirement interview.

To check you entries please check Form 1040 line 4.

To preview Form 1040:

1. Click on "Tax Tools" in the left menu
2. Click "Tools"
3. Click "View Tax Summary" in the Tool Center window
4. Click on "Preview my 1040" on the left

[dmertz]

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