Confusion regarding taxability of Backdoor roth

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Confusion regarding taxability of Backdoor roth

Postby kxl19 » Wed Mar 13, 2013 1:50 am

Hi all,

Been following this forum for a while, but my first post here. I'm doing my taxes (Turbotax) for this year, and seemed to have run into an issue where Turbotax wants me to pay tax on a backdoor Roth. I'm doing the backdoor Roth because I didn't qualify due to the MAGI limits starting in 2011. Here's my situation with approximate numbers:

2011: $4k into traditional IRA - kept in this account and not converted. (non-deductible contribution for me, and never had a traditional IRA before)
early 2012 $5k into traditional IRA. Total balance now $9k
mid-2012: Converted the $9k (the $4k 2011 contribution and $5k 2012 contribution) from the traditional IRA to an existing Roth.

I have no other distributions during the year.

I've been following the instructions on the forum on reporting on a backdoor conversion, but my situation seems a bit different since I'm converting a 2011 and 2012 contribution, and it's not working out for me.

When calculating, Turbotax wants me to pay tax on the $5k difference. Is this correct? It doesn't seem right... since the $4k 2011 TradIRA contribution was already post-tax money and I never received a deduction for it. Does that also mean I should always convert in the same year as the contribution?

Thanks, would welcome the help.
kxl19
 
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Re: Confusion regarding taxability of Backdoor roth

Postby Epsilon Delta » Wed Mar 13, 2013 8:50 am

First, look at your 2011 return. It should include a form 8606 with your $4000 contribution on line 1, this should carry down to line 14. The $4000 on line 14 will carry forward to your 2012 return.
While your in 2011 you can also check that form your 2011 1040 line 32 (IRA deduction) is zero.

If you did not file a 8606 for tax year 2011 you need to do that now. Fill it out and mail it in according to the instructions. This does not affect your 2011 taxes and the worst that can happen is a $50 fine for filing the form late, although I have not heard of the IRS charging this penalty.

Now for 2012:
look for a 2012 8606.

Line 1 should be $5000 (your 2012 contribution)
Line 2 should be $4000 (carry forward from 2011)

Line 6 is what ever it is, but if you don't have any other traditional IRAs it will be zero.
Line 8 will be your conversion.

The rest is math and copying, but if this is a true backdoor Roth
Line 11 & Line 13 will be $9000
Line 14 will be zero
Line 15 will be small (it is the earnings while the money was in the traditional IRA)

In part II
Line 16 is the same as line 8 (your conversion)
Line 17 is your $9000 basis
Line 18 is the same as line 15 (the taxable amount)
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Re: Confusion regarding taxability of Backdoor roth

Postby kybourbon » Wed Mar 13, 2013 9:09 am

Although you may have already attempted to utilize this avenue, there is a great description from The Finance Buff that I just used last week to adequately enter my backdoor roth into TurboTax after experiencing similar difficulties. Hope this helps.
"Our favorite holding period is forever" (WB)
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Re: Confusion regarding taxability of Backdoor roth

Postby kxl19 » Sat Mar 16, 2013 12:46 pm

Thanks to both of you, with your help, I found the problem. Turns out I didn't file a Form 8606 last year, so I've corrected that, and now my $4k carry-forward works out, and I'm only taxable on the small earnings while in the traditional IRA.
kxl19
 
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