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Back Door Roth: Desktop TurboTax 2023 Indicates I owe Taxes on After Tax Traditional IRA even though Converted to Roth Same Day

Forum|Forum|2 years ago
March 2, 2024
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Married filing jointly, AGI exceeds limits for a Roth IRA. Age 62. I did a back-door Roth for 2023 on 23 Feb 2024. I opened a traditional IRA for $7500 and immediately performed a CONVERSION to a Roth IRA for $7500. The entire $7500 contribution to the Traditional IRA was made with already taxed income. I have never opened a traditional or Roth IRA in years prior to 2023 and there for have $0 basis from prior years. Turbo Tax 2023 is still telling me I owe taxes on the $7500 traditional IRA on form 1040 Line 4a ($7500) and 4b ($7500. What am I doing wrong?

Important background that may help: My credit union will not provide 1099-R as they say I received no distributions from the IRA since I immediately did a back door Roth. They say I will receive a fm 5498 in May, though it's not required for taxes. I have the receipts from the transaction. Therefore I did the 1099-R in TurboTax using my gathered knowledge of what should be in the boxes:

1 Gross Dist $7500

2a Taxable Amt $7500 (TurboTax Audit throws error if I enter $0 here!). <----If I enter ZERO here, my Fed Taxes reduce by ~$2020, but again, Turbo Tax throws Fed Audit Errors: 1)"Taxable amnt. should not be zero if there is no prior year excess traditional IRA contribution on line 4 of IRA Information Worksheet" 2) "Partial Roth conversion amount cannot be greater than the amount on line B1, the amount that potentially could be converted to a Roth IRA" and 3) Wants a fm 8606T Explanation for "Return of Prior Year Excess Traditional IRA Contributions" (which there were no prior IRA or Roth contribs, per above)

2b both boxes checked for taxable amt not determined & total distribution)

3 cap gain $0

4 Fed income tax withheld $0

5. empl contrib $0

6 Net unrealized apprec $0

7 Code: 2

IRA/ESP/SIMLE box is CHECKED.

Best answer by AnnetteB6

The ChatGPT response is mostly correct, but the section labeled Reporting is not accurate.

You need to verify with the IRA custodian (or your paperwork) for which tax year the Traditional IRA contribution was made -- was it a 2023 contribution or 2024 contribution. Whichever year it was designated to be, that is the tax return where it should be reported. Reporting the non-deductible Traditional IRA contribution should have no tax effect on your return. It is not deductible or taxable.

As long as you are under the contribution limit (and you are, based on your age), making a non-deductible contribution to a Traditional IRA does not cause you to owe additional taxes. There is nothing to remedy with this situation except to be certain whether you made a 2023 or 2024 contribution and report it on the correct tax year return.

Regardless of which tax year the Traditional IRA contribution was designated for, the Form 1099-R reporting the distribution and conversion to the Roth IRA will be reported on your 2024 tax return. Delete the Form 1099-R that you already entered into your 2023 tax return. The conversion did not take place in 2023 and should not be reported there. After you delete this Form 1099-R, there should be no additional tax on your return associated with these transactions.

@1csm

1

1csmAuthor

Out of curiosity, I posted same text to CHAT GPT & was somewhat amazed by the reply. Bottom line is the question is still not answered, but isn't the reply amazing?

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"It seems like you're encountering some confusion in handling the backdoor Roth IRA conversion in TurboTax. Let's break down the process and address the issues you're facing:

Entering the Traditional IRA contribution: You correctly entered the $7500 contribution to the Traditional IRA.
Performing the Roth conversion: You correctly converted the entire $7500 from the Traditional IRA to the Roth IRA.
Handling the tax implications: Since the contribution to the Traditional IRA was made with after-tax income and you converted it to a Roth IRA in the same tax year, there should be no tax owed on the conversion. This is because you're essentially moving money from a taxable account (Traditional IRA) to a tax-free account (Roth IRA).

Now, let's address the specific issues you're encountering:

TurboTax error regarding taxable amount: If TurboTax throws an error when you enter $0 as the taxable amount on line 2a of Form 1099-R, it might be due to the software expecting some value there. Since your contribution was made with after-tax income, the taxable amount should indeed be $0. However, TurboTax might not handle this situation perfectly.
Audit errors: The audit errors you're encountering seem to be a result of the discrepancy between the taxable amount and the conversion amount. TurboTax is expecting some taxable amount, but in your case, there shouldn't be any.
Missing Form 5498: Although the credit union says you'll receive Form 5498 in May, it's advisable to wait for it and ensure all the information is correctly reported in TurboTax once you receive it.

Given these issues, you might need to override TurboTax's suggestions in this specific scenario to accurately reflect that the entire amount was contributed with after-tax dollars and thus no tax is owed on the conversion. However, if you're uncomfortable doing this, it might be best to consult with a tax professional who can guide you through the process or consider using a different tax software that may handle this scenario more smoothly"

A

AnnetteB6

You will only be able to report half of the back door Roth steps on your 2023 tax return since the conversion actually took place in 2024, not 2023.

You are still allowed to contribute to your Traditional IRA for 2023 before the due date of the tax return. So, that will be reported on your 2023 return as a non-deductible contribution.

Delete the Form 1099-R that you created. If you were to receive one (which you should), it would be a 2024 Form 1099-R because the conversion happened in the 2024 calendar year. Whether or not you received the money in hand is irrelevant to whether you will receive a Form 1099-R. There was still a distribution made from the Traditional IRA and that should be reported on Form 1099-R, but for 2024.

If you need help with reporting the non-deductible Traditional IRA contribution, take a look at the steps shown in the following TurboTax help article:

How do I enter a backdoor Roth IRA conversion?

@1csm

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1

1csmAuthor

AnnetteB6, my sincere thanks. I hope I have not overstayed my welcome with my lengthy Q&A! I would be glad to bow-out after this volley and save your time for others you're helping 😉.

I've used TurboTax competently for many years and this is the first troublesome scenario I've encountered. I am so concerned now because I appear to have made a $2020 error that is potentially irrevocable.

We paid tax on the $7500 when I earned the money and now it appears we will have to pay taxes again in our 2023 taxes because of the $7500 Traditional IRA I temporarily established using after tax income --- essentially taxed twice on the same dollars. With that said, please see below for a potential remedy that may have been too obvious (?). If the path below doesn't work and, given it's not 15 April 2024 yet, is there any action I can take with my financial institution to undo my mistake?

As I mentioned above, is the following the remedy to my problem? ChatGPT (below) confirms the expertise in your answer regarding the timing of the traditional IRA Back Door Roth conversion with respect to the tax year(s). One quite significant item I see below could save the day...it may be the case that the Back Door...neither part of the transaction... is reportable for our 2023 claim since both transactions transpired in 2024. The entire transaction will be reportable in our 2024 taxes when I file them in 2025, including the 2023 Traditional IRA basis for the '2024' Back-Door Roth conversion. Could this be true? If so, seems like I would bypass the issue completely in my 2023 tax filing.

Sincerely, 1csm

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If you have time, here's the ChatGPT. Is this incorrect advice?

In your scenario, you made a contribution to a traditional IRA and converted it to a Roth IRA on February 23, 2024, but you designated the contribution for the 2023 tax year. Here are the timing and taxation factors:

Timing:
- The contribution to the traditional IRA and the conversion to the Roth IRA both occurred on February 23, 2024.
- However, you designated the contribution for the 2023 tax year.
Taxation:
- Since you used after-tax dollars to fund the traditional IRA contribution and immediately converted it to a Roth IRA, the conversion amount is considered non-taxable.
- There will be no tax owed on the conversion because you have already paid taxes on the $7500 contribution before contributing it to the traditional IRA.
- However, it's essential to ensure that you report the conversion accurately on your tax return for the year 2024.
Reporting:
- Although you designated the contribution for the 2023 tax year, the contribution and conversion will be reflected in your 2024 tax filing since they occurred in 2024.
- The contribution to the traditional IRA should be reported on your 2024 tax return. You may need to indicate that it is for the 2023 tax year, depending on how you handle the reporting.
- The conversion to the Roth IRA should also be reported on your 2024 tax return. You'll receive a Form 1099-R for the conversion, which you'll use to report it on your tax return. Since the contribution was made with after-tax dollars, the taxable amount of the conversion will be $0.

In summary, while you designated the contribution for the 2023 tax year, both the contribution and conversion will be reflected in your 2024 tax filing. The backdoor Roth IRA transaction will be treated as a non-taxable event due to the use of after-tax dollars for the contribution.

A

AnnetteB6Answer

The ChatGPT response is mostly correct, but the section labeled Reporting is not accurate.

You need to verify with the IRA custodian (or your paperwork) for which tax year the Traditional IRA contribution was made -- was it a 2023 contribution or 2024 contribution. Whichever year it was designated to be, that is the tax return where it should be reported. Reporting the non-deductible Traditional IRA contribution should have no tax effect on your return. It is not deductible or taxable.

As long as you are under the contribution limit (and you are, based on your age), making a non-deductible contribution to a Traditional IRA does not cause you to owe additional taxes. There is nothing to remedy with this situation except to be certain whether you made a 2023 or 2024 contribution and report it on the correct tax year return.

Regardless of which tax year the Traditional IRA contribution was designated for, the Form 1099-R reporting the distribution and conversion to the Roth IRA will be reported on your 2024 tax return. Delete the Form 1099-R that you already entered into your 2023 tax return. The conversion did not take place in 2023 and should not be reported there. After you delete this Form 1099-R, there should be no additional tax on your return associated with these transactions.

@1csm

**Say "Thanks" by clicking the thumb icon in a post**Mark the post that answers your question by clicking on "Mark as Best Answer"

M

majordamage01

There is a bug in Turbo Tax - I'm having the same problem. One fix is to note report the $7500 is box "2A taxable" amount. The bug in my TT is so bad that it remembers the $7500 that was in box 2A that was changed to $0 and still applies a tax. I can not fix it - I'm not going to report the Roth conversion