Need guidance with botched up Roth IRA backdoor and 1098-Rs

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Topic Author
m7a8a6
Posts: 31
Joined: Mon Aug 17, 2020 8:25 pm

Need guidance with botched up Roth IRA backdoor and 1098-Rs

Post by m7a8a6 »

Hello fellow BHs. Looking for some high level guidance on how to tackle taxes this year regarding my botch up last year with backdoor conversion. See details with timeline below.

How did some of you that went through similar situation below handle the 1099-Rs? I’m pretty decent at figuring stuff out myself but if yall feel it’s best to hunt down a CPA to help, then I will begin looking.

I appreciate your guidance in advance.

Situation and Timeline

Dec 2022: Directly contributed $6k to Roth IRA by mistake ( I didn’t qualify for direct contribution)

Jan 2023: Recharacterized that Dec 2022 contribution back to my TIRA and then did a backdoor into Roth IRA for 2022. The amount I recharacterized was $6458 but by the time I converted it through backdoor was $6266.

See this post for more details as I had reached out to the community for guidance.
viewtopic.php?t=396530


Please also note that I didn’t show my $6266 contribution to Roth IRA in my 8606 because it was technically done in 2023.

Dec 2023: Contributed $6500 to Roth IRA through backdoor method for tax year 2023.

Jan 2024: Received two different 1099-Rs from Vanguard. One shows the $6258 amount. The second one shows $12769.

Problem: As soon as I import the two 1099-Rs in turbo tax, I get hit with owing about 4k+ taxes.
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FiveK
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Joined: Sun Mar 16, 2014 2:43 pm

Re: Need guidance with botched up Roth IRA backdoor and 1098-Rs

Post by FiveK »

m7a8a6 wrote: Sun Feb 11, 2024 10:49 pm Jan 2023: Recharacterized that Dec 2022 contribution back to my TIRA and then did a backdoor into Roth IRA for 2022. The amount I recharacterized was $6458 but by the time I converted it through backdoor was $6266.
The recharacterization makes it as if you had contributed to the tIRA in Dec. 2022, so that should have been reported on your 2022 Form 8606. The conversion occurred in 2023 so that gets reported in tax year 2023 (conversions are always reported for the tax year that is the same as the calendar year in which they occur).
Please also note that I didn’t show my $6266 contribution to Roth IRA in my 8606 because it was technically done in 2023.
See above (and the recharacterization wiki) for how a recharacterization works.
Dec 2023: Contributed $6500 to Roth IRA through backdoor method for tax year 2023.
Looks good!
Jan 2024: Received two different 1099-Rs from Vanguard. One shows the $6258 amount. The second one shows $12769.
What codes are in box 7 for each of those?
little_star
Posts: 673
Joined: Tue Jun 16, 2020 5:08 pm

Re: Need guidance with botched up Roth IRA backdoor and 1098-Rs

Post by little_star »

m7a8a6 wrote: Sun Feb 11, 2024 10:49 pm Hello fellow BHs. Looking for some high level guidance on how to tackle taxes this year regarding my botch up last year with backdoor conversion. See details with timeline below.

How did some of you that went through similar situation below handle the 1099-Rs? I’m pretty decent at figuring stuff out myself but if yall feel it’s best to hunt down a CPA to help, then I will begin looking.

I appreciate your guidance in advance.

Situation and Timeline

Dec 2022: Directly contributed $6k to Roth IRA by mistake ( I didn’t qualify for direct contribution)

Jan 2023: Recharacterized that Dec 2022 contribution back to my TIRA and then did a backdoor into Roth IRA for 2022. The amount I recharacterized was $6458 but by the time I converted it through backdoor was $6266.

See this post for more details as I had reached out to the community for guidance.
viewtopic.php?t=396530


Please also note that I didn’t show my $6266 contribution to Roth IRA in my 8606 because it was technically done in 2023.

Dec 2023: Contributed $6500 to Roth IRA through backdoor method for tax year 2023.

Jan 2024: Received two different 1099-Rs from Vanguard. One shows the $6258 amount. The second one shows $12769.

Problem: As soon as I import the two 1099-Rs in turbo tax, I get hit with owing about 4k+ taxes.
With this sequence of events, you should have filed IRS Form 8606 with your 2022 taxes, documenting the $6000 non-deductible contribution on lines 1, 3, and 14. You also should have included a statement along the lines of "I contributed $6000 to a Roth IRA on [Date1]. I recharacterized the entire contribution on [Date2] at a value of $6458."

For 2023, your IRS Form 8606 will include both the new contribution (on line 1) and the carryover basis (line 14 of your 2022 form flows to line 2 of your 2023 form) to sum to $12500 on line 3. When you fill out the remainder of the form documenting your Roth conversion, you will discover that you owe taxes on $269 of gains.

As noted by @FiveK, these different actions (recharacterization and Roth conversion) should be documented on the 1099-Rs based on the codes.
Topic Author
m7a8a6
Posts: 31
Joined: Mon Aug 17, 2020 8:25 pm

Re: Need guidance with botched up Roth IRA backdoor and 1098-Rs

Post by m7a8a6 »

Thank you for the guidance. Seems like the key lies with the codes in both 1099-R forms. Do these look correct?
What codes are in box 7 for each of those?
The box 7 for the $6458 amount 1099-R is R
The box 7 for the $12769 amount 1099-R is 2 with a IRA/SEP/SIMPLE box checked.
Topic Author
m7a8a6
Posts: 31
Joined: Mon Aug 17, 2020 8:25 pm

Re: Need guidance with botched up Roth IRA backdoor and 1098-Rs

Post by m7a8a6 »

Thank you for reviewing and guidance. The advice here is instilling some confidence that I might've actually followed instructions last year correctly. :)
With this sequence of events, you should have filed IRS Form 8606 with your 2022 taxes, documenting the $6000 non-deductible contribution on lines 1, 3, and 14. You also should have included a statement along the lines of "I contributed $6000 to a Roth IRA on [Date1]. I recharacterized the entire contribution on [Date2] at a value of $6458."


This is how it shows right now on my 2022 return's 8606.

For 2023, your IRS Form 8606 will include both the new contribution (on line 1) and the carryover basis (line 14 of your 2022 form flows to line 2 of your 2023 form) to sum to $12500 on line 3. When you fill out the remainder of the form documenting your Roth conversion, you will discover that you owe taxes on $269 of gains.
This is the end result I'm looking for. Perhaps I should go through finish filling out the return before getting anxious with amounts that get increased upon importing 1099-Rs.
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celia
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Location: SoCal

Re: Need guidance with botched up Roth IRA backdoor and 1098-Rs

Post by celia »

m7a8a6 wrote: Sun Feb 11, 2024 10:49 pm Problem: As soon as I import the two 1099-Rs in turbo tax, I get hit with owing about 4k+ taxes.
Start by deleting all of this IRA data so you can manually enter the transactions in the order they happened. Be sure to walk through all the interview questions properly. If you don't understand terminology or a question, stop and ask. With all that "new" tax owed, it looks like you never told the software the money going into the IRA was non-deductible, so that when it was converted, it was taxed again! And I assume you didn't have any other money in any Traditional IRAs.

First, you probably need to generate a correct Form 8606 for 2022 because some of the numbers carry over to 2023. Did you report the recharacterization of the 2022 contribution last year? I think that should have been entered last year, but I'm not sure and can't look it up right now. Does anyone else know???

For 2023, this is the order of data entry:
Recharacterization of the 2022 contribution (if not reported as part of 2022) along with answering a question that it was non-deductible.

Roth conversion of the amount that was converted. (This step shouldn't change the taxes except for that the growth is taxed).

You made a non-deducible contribution in 2023 for 2023. (The tax form for this will come in May and you can file it away with the 2023 tax return.)

You did another Roth conversion. (The two conversions should add up to $12,769.)
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FiveK
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Re: Need guidance with botched up Roth IRA backdoor and 1098-Rs

Post by FiveK »

m7a8a6 wrote: Mon Feb 12, 2024 9:50 pm The box 7 for the $6458 amount 1099-R is R
Not taxable. See IRA recharacterizations.
The box 7 for the $12769 amount 1099-R is 2 with a IRA/SEP/SIMPLE box checked.
Form 8606 line 18 should show $269 taxable if you answer the TT questions correctly. Check using "forms view". TT will either bring that amount to form 1040 or you may have to enter that amount in box 2a of the 1099-R input - don't recall which.
Topic Author
m7a8a6
Posts: 31
Joined: Mon Aug 17, 2020 8:25 pm

Re: Need guidance with botched up Roth IRA backdoor and 1098-Rs

Post by m7a8a6 »

Thank you @FiveK @ceila @little_star. I really really appreciate the guidance on this.

I believe I was able to follow your instructions and get through this.

First, I made sure that my 2022 tax return had the 8606 properly filled out with lines 1, 3 and 14 reflecting $6K contribution. I also made sure that I had a re-characterization statement included with the tax returns last year.

As recommended, I re-started fresh and also followed how the actual forms were being filled as I was carefully going through the questions.

For this year's return, here is how everything ended up being filled out...

Form 1040
Line 4a (IRA distributions) shows $12,770 and Line 4b (Taxable amount) shows $270

Form 8606
Line 1 shows $6,500
Line 2 shows $6,000
Line 3 shows $12,500
Line 5 shows $12,500
Line 13 shows $12,500
Line 16 shows $12,770
Line 17 shows $12,500
Line 18 shows $270

Now the tax return numbers seemed to return to normal. They did increase a little bit of $ amount but not drastic like $4K+ I was getting before.

Not sure if this is relevant, but my 1099-R summary worksheets also finally shows $270 of Taxable amount of Roth IRA conversions.

I feel good at this time, but I will walk away from the return for a week and come back to it with fresh eyes and mind to see if I did everything correctly.
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FiveK
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Re: Need guidance with botched up Roth IRA backdoor and 1099-Rs

Post by FiveK »

m7a8a6 wrote: Wed Feb 14, 2024 10:34 pm Form 8606
Line 1 shows $6,500
Line 2 shows $6,000
Line 3 shows $12,500
Line 5 shows $12,500
Line 13 shows $12,500
Line 16 shows $12,770
Line 17 shows $12,500
Line 18 shows $270
That matches what the Form8606 tab in the personal finance toolbox spreadsheet shows for the inputs you described, so it appears you navigated the TurboTax waters successfully - well done!
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