Backdoor Roth help with Turbotax

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Topic Author
shashi
Posts: 87
Joined: Wed Sep 16, 2009 12:54 pm

Backdoor Roth help with Turbotax

Post by shashi »

Hi everyone,

Need some advice on my situation. Married filing jointly, spouse not working, i have 401k at work and maxed out there. This year (tax year 2014) I can't make Roth contribution due to income limit and i came to know I can make non-deductible Traditional IRA for both of us and then immediately convert to Roth (aka backdoor Roth). Adding to the problem, I have some Rollover IRA sitting at Vanguard but wife has only Roth. From my understanding Backdoor Roth, my wife can do it but I can't as I have Rollover (I can do but incur lots of taxes). The only option for me is to move the Rollover IRAs to my current 401k and then do backdoor Roth.

With this understanding, should I do a non-deductible IRA for 2014 now and file taxes in Turbotax (which is what I use for my taxes). After I file, can I do conversion to Roth (keeping money in MoneyMarket)? Before conversion, I will move all Rollover IRA to my 401k (luckily have VG broad market index funds there). If I do this I will file 8606 next year, correct?

thanks a bunch!!
DSInvestor
Posts: 11354
Joined: Sat Oct 04, 2008 11:42 am

Re: Backdoor Roth help with Turbotax

Post by DSInvestor »

If you each contribute to Traditional IRA for tax year 2014 and those contributions are non-deductible, your 2014 tax return needs to include form 8606 (one for each of you) to track your IRA basis. In turbotax, enter your Traditional IRA contribution and the software to examine your tax situation to determine if your contributions are deductible or non-deductible. Form 8606 will be automatically added if non-deductible. That should be it for the 2014 tax filing.

Your conversion to Roth will have happened in calendar 2015 and thus be handled by your 2015 tax return. Since you did not convert or withdraw from Traditional IRA in calendar 2014, the IRA basis from 2014 will carry forward into the 2015 form 8606. The rollover IRA assets can be transferred to your 401k anytime before Dec 31, 2015. The rollover does not have to happen before your conversion.

If you have sufficient cash for 2015 IRA contributions as well, you can each contribute $5500 for 2014, $5500 for 2015 and then each convert 11K to Roth IRA.
Your 2014 8606 form will add $5500 IRA basis which carries forward to 2015.
Your 2015 8606 will add another $5500 to the $5500 basis from prior years giving you a total basis of 11K. Your conversion of 11K will be 11K nontaxable assuming your TIRA, ROLLOVER IRA, SEP-IRA and SIMPLE-IRAs have ZERO balance on Dec 31, 2015.
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Topic Author
shashi
Posts: 87
Joined: Wed Sep 16, 2009 12:54 pm

Re: Backdoor Roth help with Turbotax

Post by shashi »

Thank you so much @DSInvestor! That was lightening fast reply and you covered all the points perfectly!
Topic Author
shashi
Posts: 87
Joined: Wed Sep 16, 2009 12:54 pm

Re: Backdoor Roth help with Turbotax

Post by shashi »

One small clarification. In 2015 tax return, in addition to filing 8606 do we have to show conversion to Roth or re-characterization to Roth for 11k + 11k?
DSInvestor
Posts: 11354
Joined: Sat Oct 04, 2008 11:42 am

Re: Backdoor Roth help with Turbotax

Post by DSInvestor »

shashi wrote:One small clarification. In 2015 tax return, in addition to filing 8606 do we have to show conversion to Roth or re-characterization to Roth for 11k + 11k?
Recharacterization is a feature to allow you to change your mind. There are two types of recharacterizations:
1. Recharacterization of contribution. Say you contributed 5.5K to Roth IRA and changed your mind. You want to contribute to Traditional IRA instead. Recharacterization of contribution makes this change for you. It can also change a Traditional IRA contribution into a Roth IRA contribution.

2. Recharacterization of conversion. Say you converted 50K to Roth and you find out that the tax cost is too high. You can undo the some or all of the conversion by recharacterizing the some or all of the conversion.

When you convert to Roth, form 8606 handles the calculation to figure out how much of the conversion is taxable and non-taxable, so it must know about the conversion.

Please take a closer look at form 8606 and follow lines 1-18.
Form 8606: http://www.irs.gov/pub/irs-pdf/f8606.pdf

For 2014, tell the software that you contributed to Traditional IRA for 2014. The tax software will determine whether the contribution is deductible or non-deductible. You didn't do a conversion in 2014, so that's it.

For 2015 tax return, tell the software that you contributed to Traditional IRA for 2015. The software will add the basis to the prior year basis to give you 11K basis. Also tell it that you did a Roth conversion. The software will see the 11k basis and then fill out the rest of 8606 to determine the taxable and non-taxable amounts of the conversion. Once that is figured out in form 8606, the taxable amount will show up in form 1040 line 15b.

Note that IRA are per individual. As such, your IRA contributions and your IRA conversions are handled separately from your spouse's contributions and conversions. Each of you will have your own 8606 forms.

If you recharacterize some of your conversion to undo some of the conversion, I believe form 8606 handles the net amount that you converted to Roth.
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Impromptu
Posts: 390
Joined: Mon Nov 03, 2014 10:09 pm

Re: Backdoor Roth help with Turbotax

Post by Impromptu »

I used TurboTax to report my roth conversions. I did both 2013 and 2014 in the same year for me and my non-working wife. I didn't have a pre-existing IRA, so I had fewer steps. . Do what you need to to make it a clean conversion and your numbers will be much easier.

When you contribute and convert for the previous year it is important to enter that into your TurboTax. It will generate a form 8606 for each of you. You can be more assured that it is entering it correctly for you because your amount of tax owed won't change.

The next year you will enter your 1099-R and you will use the amount on your previous year's forms 8606 as your basis. If for you and your spouse and you fully contribute for both years, that will be $22,000 contributed and a basis of $11,000. The finance buff's demonstration has a basis of $0, so there will be a step you do differently. If you don't enter in the $11,000 they will try and tax you on that $11,000 again, so take your time and do it right.

From then on contribute and convert in the same year to make the tax reporting process easier. It needs to be done meticulously and you won't find a ton of help online, so you should decide if you really want a roth IRA this year or not. Especially if you are currently higher income, maxing out your pre-tax investment, ie 401(k), is more important than the roth IRA.
I'll gladly pay you Tuesday for a hamburger today.
Topic Author
shashi
Posts: 87
Joined: Wed Sep 16, 2009 12:54 pm

Re: Backdoor Roth help with Turbotax

Post by shashi »

Thanks guys! very helpful info. I have maxed out 401k by the way.
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