Two TurboTax problems for backdoor IRA scenario?

[wishiwereataxwhiz]

I file married jointly and we are both under age 59. In 2020 and for 2021, I was above the income limit for contributions to an IRA. My spouse and I both had former traditional IRAs which we had contributed to prior to reaching the income limits. On Dec 10, 2020 my spouse converted all of her traditional IRA to her Roth IRA (distribution code 2). On Dec 24, 2020, I took a total distribution from my IRA (distribution code 1). (If I remember correctly, the reason I could not convert to a Roth is because I have a 401(k) also, but not 100% sure about that.) These were done in order to get our total traditional IRA balance to zero so that we could start doing backdoor Roth IRAs cleanly. Our 2020 1099-R shows these distributions. I paid an early withdrawal tax on the one which had the total distribution (code 1).

On Dec 17, 2020 my spouse contributed $6,000 to her traditional IRA as a non-deductible amount, then immediately converted it to her Roth IRA for the tax year 2020. In Feb 2021, I contributed $6,000 to my traditional IRAs as a non-deductible amount for the 2020 tax year, then immediately converted it to my Roth IRA. We both received 5498s in 2021 showing these contributions and only these contributions.

In April 2021, I contributed $6,000 to my traditional IRA as a non-deductible amount for the 2021 tax year, then immediately converted it to my Roth IRA. In Oct 2021 my spouse contributed $6,000 to her traditional IRA as a non-deductible amount for the 2021 tax year, then immediately converted it to her Roth IRA. My 2021 Form 1099-R shows an amount of $12,000 on both lines 1 and 2a, and my wife's shows $6,000 on those lines. Both of our 1099-Rs have distribution code 2 checked and the IRA/SEP/SIMPLE box checked.

For all the contributions mentioned above, we made them through our online brokers, which have controls built in to ensure that only amounts up to the maximum contributions ($6,000 each in our case) can be made per tax year.

Issue #1?

Upon recent review of my 2020 TurboTax-prepared return, I noticed that TurboTax did not generate a Form 8606 for me, even though it did generate one for my spouse (showing her $6,000 contribution). I raise this because I suspect it may be contributing to Issue #2, below.

Issue #2?

The 1099-R Summary worksheet in TurboTax for my 2021 return-in-progress shows (1) an amount of $12,000 on line 5 "Amount of line 2 not converted to a Roth IRA" and (2) an amount of $6,000 on line 8 "Taxable amount not converted to a Roth IRA". This has the effect of including the $6,000 as additionally taxed income even though it was a conversion to a Roth IRA from a non-deductible traditional IRA. I have answered all the questions in the online software as best as I can to interpret the facts stated above, and cannot figure out why the program is not treating these as backdoor Roth IRA conversions which should not incur any additional tax.

Any help would be much appreciated. I've provided as many facts as I can think of that are relevant, but can provide more if needed. Thank you, Community!

[DanaB27]

Issue 1: You stated that you made a nondeductible traditional IRA contribution for 2020 in 2021. Please make sure you had entered this on your 2020 tax return with these steps:

1. Click on "Search" on the top right and type “IRA contributions”
2. Click on “Jump to IRA contributions"
3. Select “traditional IRA”
4. Answer “No” to “Is This a Repayment of a Retirement Distribution?”
5. Enter the amount you contributed
6. Answer “No” to the recharacterized question on the “Did You Change Your Mind?” screen
7. On the “Choose Not to Deduct IRA Contributions” screen choose “Yes, make part of my IRA contribution nondeductible” and enter the amount (if your income is too high and you have a retirement plan at work then this question won't come up and TurboTax will make it automatically nondeductible). 

Issue 2:

You will enter the contributions for you and your spouse as above on your 2021 tax return.

Please follow these steps to enter the conversion (1099-R), please pay special attention to steps 7-9:

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. Add your spouse's 1099-R and repeat step 4.
6. On the "Your 1099-R Entries" screen click "continue"
7. Answer "yes" to "Any nondeductible Contributions to your IRA?" since you had any nondeductible contributions in prior years.
8. Answer the questions about the basis and value
9. Answer "no" to "Any nondeductible Contributions to your IRA?" for your spouse since your spouse did not have any nondeductible contributions left in the IRA from prior years.

If entered correctly then only earnings would be taxable on line 4b of 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

[wishiwereataxwhiz]

@DanaB27 thanks so much for your reply.

On Issue #1 -- I went back into my 2020 return on TurboTax online (via the "Amend my Return" option) and followed the steps you stated. There's another step that shows up after your #7, and that is it asks me to enter my total basis as of December 31, 2019. I have "0" entered right now. In the paragraph it says that if you "never filed a Form 8606, just enter 0". I did not file a Form 8606 for tax year 2019.  After this question it asks me "Is this a repayment of a retirement distribution" to which I answered No. Then the program directs me to enter my spouse's IRA contribution (same screens and flow). I wonder if it's the "basis" question that I'm misinterpreting?

Interestingly, the actual text of question #7 in TurboTax is this: "Let us know if [taxpayer] made and kept track of any nondeductible contributions to [taxpayer's] traditional IRA from 2019 or prior years. (This is not common.)" I suspect this is supposed to read "...from 2020 or prior years". I'm not sure if this makes a difference, but pointing it out in case it triggers any new thoughts.

On Issue #2 -- On your #8, TurboTax instructs to "Enter the total value of all [taxpayer's] traditional IRA, SEP, and SIMPLE IRA accounts on December 31, 2021. This information is sent by mail on Form 5498. Do not include ROTH IRAs." I received last year's Form 5498 in June of 2021, and haven't received one yet in 2022. I entered "0" to answer this question, because I have always immediately converted the traditional IRA balance to a Roth IRA.

On line 4b of the previewed 1040 I still show $6,000. Is it the basis question that's throwing this off, or, can you think of something else?

[DanaB27 · Accepted solution]

Issue 1: No, on your 2020 return it is correct that TurboTax asks "Let us know if [taxpayer] made and kept track of any nondeductible contributions to [taxpayer's] traditional IRA from 2019 or prior years." since any 2020 nondeductible contributions have to be entered in the contribution section. Here you only enter the basis amount if you had prior to 2020 nondeductible contributions and had filed Form 8606. If you did not have any nondeductible contributions in 2019 or prior then you will enter $0 as basis.

Issue 2:

Please make sure you entered your 2021 contributions and made them nondeductible:

1. Click on "Search" on the top right and type “IRA contributions”
2. Click on “Jump to IRA contributions"
3. Select “traditional IRA”
4. Answer “No” to “Is This a Repayment of a Retirement Distribution?”
5. Enter the amount you contributed
6. Answer “No” to the recharacterized question on the “Did You Change Your Mind?” screen
7. On the “Choose Not to Deduct IRA Contributions” screen choose “Yes, make part of my IRA contribution nondeductible” and enter the amount (if your income is too high and you have a retirement plan at work then this question won't come up and TurboTax will make it automatically nondeductible). 

Please make sure to enter your $6,000 basis from the 2020 contribution under step 8. Yes, the $0 for the total value is correct since you converted the balance to Roth right away in 2021.

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. Add your spouse's 1099-R and repeat step 4.
6. On the "Your 1099-R Entries" screen click "continue"
7. Answer "yes" to "Any nondeductible Contributions to your IRA?" since you had any nondeductible contributions in prior years.
8. Answer the questions about the basis and value
9. Answer "no" to "Any nondeductible Contributions to your IRA?" for your spouse since your spouse did not have any nondeductible contributions left in the IRA from prior years.

If this doesn't help you might have to delete your contributions and 1099-R entries and reenter it.

[wishiwereataxwhiz]

@DanaB27  That did the trick. It was the $6,000 basis from the contribution for the 2020 tax year that I was missing. Thank you so much! Very grateful for your help on this.