Lots of trouble with turbo tax and backdoor Roth

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills

Lots of trouble with turbo tax and backdoor Roth

Postby jerome99 » Wed Jan 16, 2013 9:09 am

Concerning a backdoor Roth for someone who has never had an IRA, it was my understanding there would only be a tax liability owed on any earnings that occurred between the IRA deposit and when the Roth conversion is performed. Is this accurate?

In January I put $5,000 in an IRA for 2011 and another $5,000 for 2012. I then moved it to a Roth doing the backdoor method.

I just received a "2012 Form 1099- R" with gross distributions of $10,035.59. When I put this amount into the Retirement and Social Security section of Turbo Tax, it increases my owed Federal Income Tax. Will this be reduced later in my tax preparations by something I input or is there an issue with how I performed the backdoor?
jerome99
 
Posts: 189
Joined: Tue Jan 10, 2012 9:38 am

Re: Lots of trouble with turbo tax and backdoor Roth

Postby The Wizard » Wed Jan 16, 2013 9:17 am

Depends on whether that IRA was funded with pre-tax or after-tax money.
Has to be somewhere you declare that.
So far, they're assuming it was all pre-tax money...
Attempted new signature...
The Wizard
 
Posts: 6491
Joined: Tue Mar 23, 2010 2:45 pm
Location: Reading, MA

Re: Lots of trouble with turbo tax and backdoor Roth

Postby jerome99 » Wed Jan 16, 2013 9:21 am

Thanks for the reply. It was funded with after tax money. Hopefully someone with turbo tax or similar experience will have some insight.
jerome99
 
Posts: 189
Joined: Tue Jan 10, 2012 9:38 am

Re: Lots of trouble with turbo tax and backdoor Roth

Postby livesoft » Wed Jan 16, 2013 9:26 am

A 1099R reports IRA withdrawals. How did you report the IRA contributions? You might read about Form 8606 and Form 5329.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
livesoft
 
Posts: 34224
Joined: Thu Mar 01, 2007 9:00 pm

Re: Lots of trouble with turbo tax and backdoor Roth

Postby jerome99 » Wed Jan 16, 2013 9:27 am

Thanks livesoft. Do you know if this is an automatic prompt by Turbo Tax?
jerome99
 
Posts: 189
Joined: Tue Jan 10, 2012 9:38 am

Re: Lots of trouble with turbo tax and backdoor Roth

Postby mhc » Wed Jan 16, 2013 10:19 am

I have not looked at this since last year, but there are boxes with codes on the 1099. TT Premier also has boxes to check. If you check the wrong one, you will pay too much in taxes.

The Finance Buff has a sample 8606 on his website:

http://thefinancebuff.com/the-backdoor- ... ow-to.html
User avatar
mhc
 
Posts: 2449
Joined: Mon Apr 04, 2011 11:18 pm
Location: NoCo

Re: Lots of trouble with turbo tax and backdoor Roth

Postby Penguin » Wed Jan 16, 2013 10:32 am

mhc wrote:I have not looked at this since last year, but there are boxes with codes on the 1099. TT Premier also has boxes to check. If you check the wrong one, you will pay too much in taxes.

The Finance Buff has a sample 8606 on his website:

http://thefinancebuff.com/the-backdoor- ... ow-to.html


I followed the advice of the finance buff and it made a confusing process on turbotax into a simple one. I recommend that you print out and copy his step by step instructions. They are perfect.
Jon
Penguin
 
Posts: 433
Joined: Sat Mar 03, 2007 2:52 pm

Re: Lots of trouble with turbo tax and backdoor Roth

Postby Default User BR » Wed Jan 16, 2013 11:49 am

jerome99 wrote:Thanks livesoft. Do you know if this is an automatic prompt by Turbo Tax?

You need to check the 2011 return to make sure 8606 was filed to record the non-deductible contribution. If not, then you will need to fill out one and send that in. Those can be filed on their own.


Brian
Default User BR
 
Posts: 7501
Joined: Mon Dec 17, 2007 8:32 pm

Re: Lots of trouble with turbo tax and backdoor Roth

Postby Viking65 » Wed Jan 16, 2013 11:59 am

Penguin wrote:
mhc wrote:I have not looked at this since last year, but there are boxes with codes on the 1099. TT Premier also has boxes to check. If you check the wrong one, you will pay too much in taxes.

The Finance Buff has a sample 8606 on his website:

http://thefinancebuff.com/the-backdoor- ... ow-to.html


I followed the advice of the finance buff and it made a confusing process on turbotax into a simple one. I recommend that you print out and copy his step by step instructions. They are perfect.


+1
Viking65
 
Posts: 19
Joined: Tue Apr 03, 2012 6:20 am

Re: Lots of trouble with turbo tax and backdoor Roth

Postby tfb » Wed Jan 16, 2013 12:17 pm

Just google "turbotax backdoor roth." :)
Harry Sit, taking a break from the forums.
User avatar
tfb
 
Posts: 6687
Joined: Mon Feb 19, 2007 6:46 pm

Re: Lots of trouble with turbo tax and backdoor Roth

Postby DAK » Wed Jan 16, 2013 1:10 pm

I think later into TT you can fill out the nondeductible IRA form...I have done this (backdoor roth and use TT) for a few years now, and every year I initially panic when I see the taxes go up...later when you fill everything out they go back down, along with my heart rate.
User avatar
DAK
 
Posts: 305
Joined: Fri Apr 22, 2011 10:05 am
Location: midwest

Re: Lots of trouble with turbo tax and backdoor Roth

Postby pshonore » Wed Jan 16, 2013 1:43 pm

I don't use the TT interview process (I usually fill out the forms directly or through form worksheets) but I'd be very surpised if the Interview did not ask you all the right questions and get it right (assuming you provided the right answers which isn't as easy as it sounds). It may even find preious year 8606, if applicable, if you used TT or other software where it can import previous year returns.
pshonore
 
Posts: 3085
Joined: Sun Jun 28, 2009 3:21 pm

Re: Lots of trouble with turbo tax and backdoor Roth

Postby SSSS » Wed Jan 16, 2013 1:57 pm

1099R's seem to be a hassle with all the major tax programs. I've sometimes had to brow-beat them into accepting that I don't owe tax on the entire amount.

Also:

jerome99 wrote:$10,035.59.


Next time, use a money market fund for few days that the money is in the traditional IRA. It'll make life a lot simpler if the balance doesn't fluctuate.
User avatar
SSSS
 
Posts: 1865
Joined: Fri Jun 18, 2010 12:50 pm

Re: Lots of trouble with turbo tax and backdoor Roth

Postby Epsilon Delta » Wed Jan 16, 2013 3:22 pm

SSSS wrote:Next time, use a money market fund for few days that the money is in the traditional IRA. It'll make life a lot simpler if the balance doesn't fluctuate.

It's only a simplification if you don't use tax software and your arithmetic is iffy. (You have to supply the same information and fill out the same lines of the same forms either way, its just with no growth you get to multiply by 1.000 instead of .996)
User avatar
Epsilon Delta
 
Posts: 3440
Joined: Thu Apr 28, 2011 8:00 pm

Re: Lots of trouble with turbo tax and backdoor Roth

Postby spefactor » Fri Feb 01, 2013 12:17 am

[deleted]
Last edited by spefactor on Fri Feb 01, 2013 4:17 pm, edited 1 time in total.
spefactor
 
Posts: 46
Joined: Tue May 12, 2009 7:44 pm

Re: Lots of trouble with turbo tax and backdoor Roth

Postby BudgetForWealth » Fri Feb 01, 2013 1:36 am

I ran into this problem the first time I did a "backdoor" contribution and I have to try to remember how to do it every year. Looking at my 2011 return, I think the key to to enter 0 as your total basis. Your taxable amount should only be on $35.59.
Long Pham
BudgetForWealth
 
Posts: 21
Joined: Sun Jan 13, 2013 1:03 am

Re: Lots of trouble with turbo tax and backdoor Roth

Postby steve r » Fri Feb 08, 2013 8:58 pm

Turbo Tax took some time to work for me.

Entering non deductible IRA was where my problem started.

My mistake (so others can learn) occurred on the screen:

Did You Switch Your Contribution?" ...

I (wrongly) said yes as I converted it to a Roth .... a switch does not mean a conversion. Things were problem free from there.
Maximize Diversification - Minimize Costs
steve r
 
Posts: 398
Joined: Mon Feb 13, 2012 9:34 pm

Re: Lots of trouble with turbo tax and backdoor Roth

Postby Woody999 » Mon Feb 11, 2013 1:29 pm

Like Jerome99, I still don't get how to fix this issue in Turbotax. My wife and I both bought Traditional IRAs and converted then to Roth IRAs by back dooring. TurboTax still has me paying taxes on those contributions. Not sure where I'm going wrong. :(
Woody999
 
Posts: 62
Joined: Sun Sep 16, 2012 9:37 pm

Re: Lots of trouble with turbo tax and backdoor Roth

Postby SSSS » Mon Feb 11, 2013 3:15 pm

Woody999 wrote:Like Jerome99, I still don't get how to fix this issue in Turbotax. My wife and I both bought Traditional IRAs and converted then to Roth IRAs by back dooring. TurboTax still has me paying taxes on those contributions. Not sure where I'm going wrong. :(


In the Income section, enter your 1099R exactly as it appears, especially box 7.

In the Deductions section (even though we're talking about non-deductible contributions), go into "Traditional and Roth IRA Contributions"

Select "Traditional IRA".

Answer "no" to "Repayment".

For "Enter the total amount you put into a traditional IRA for 2012, even if you later transferred some or all of it to a Roth IRA", do what it just told you to do.

"Did You Switch Your Contribution? "Switched" or "recharacterized" does not mean converted or rolled over." Answer NO! Apparently a common point of confusion, as "switch" isn't really a typical term, but it's specifically asking about recharacterization, not conversion.

Answer "no" to "Excess Contributions".

"Any Nondeductible Contributions to Your IRA?" This is asking about 2011 or prior. If you started 2012 with no money and no basis in any traditional IRAs, answer "no" here. Note that it's possible to have basis but no money -- I started 2012 with no money in traditional IRAs but an $11 basis due to a market loss during my 2011 backdoor Roth. If you have to answer "yes", just follow the prompts.

"Tell Us the Value of All Your Traditional IRA Accounts" -- enter $0 if you had no money in any traditional IRAs at the END of 2012.

You should see this: "Income Too High To Deduct an IRA Contribution - Your modified adjusted gross income (MAGI) is $<NOPE>, which puts you over the limit for IRA deductions. To deduct a contribution, you can't have a MAGI of over $68,000 while being covered by a retirement plan at work."

You should see this: "Your IRA Deduction Summary: Based on what you've entered you don't qualify for an IRA deduction. Your IRA Deduction $0" However, if you did everything correctly, it should no longer be marking your 1099-R income as taxable. If you're not above the deduction limit, then I'm not sure why you'd be doing a backdoor Roth, but the numbers should come out the same -- TurboTax may force you to take the deduction, but then your conversion would become taxable and everything would balance out.

Note: the different tax software services display things differently. TurboTax will always show the entire 1099R amount in the income summary, even if none of it is taxable. TaxAct will only show the taxable amount. This does not affect the calculations -- it's just a difference in how they display things. If you've already done your return in TurboTax, it shouldn't take more than 1-2 hours to re-do it in TaxAct to confirm TurboTax's calculations are correct. And once you've done that, you'd probably be better off using TaxAct to file, since it's a lot cheaper.
User avatar
SSSS
 
Posts: 1865
Joined: Fri Jun 18, 2010 12:50 pm


Return to Personal Finance (Not Investing)

Who is online

Users browsing this forum: Google [Bot], madbrain and 42 guests