Need help with taxes on TurboTax with backdoor Roth IRA

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boglenerd
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Need help with taxes on TurboTax with backdoor Roth IRA

Post by boglenerd »

Hi all,

I would spare you the unnecessary details (but willing to give them if they will help you help me in a better way). I am 33 working, my wife is a stay home mom. I have 401(k) plan at work and she does not (because she does not work). I have been contributing to both of our Roth IRA accounts from 2010 onward. Since our income was less than the limit for Roth IRA income limit we were able to directly contribute to Roth IRAs without any issues. I always file taxes jointly.
In 2013, I knew my income is NOT going to allow me to contribute to our Roth IRAs directly so I opened traditional IRAs for both of us (to take advantage of the backdoor) and contributed 5,500 to each of them (with after tax money). Then I immediately converted that money to our Roth IRAs. No gain was made while the money was in the traditional IRAs. This year is the first time I am going to have to report to IRS (because of backdoor).
I understand that to report that in TurboTax, I will have to basically do it in 2 steps. First report the trad IRA contribution as nondeductible and then report 1099-R for the conversion to Roth. While I was doing the first step in TurboTax for my contribution, it told me that none of my contribution can be deducted because I have a 401(k) plan at work (which I max out anyways) and my income is too high (this is expected). When I was reporting my wife's contribution, TurboTax told because my wife does not have a 401(k) at work and our (my) MAGI falls between the range, some of my wife's 5,500 contribution can be deducted. This is precisely what it tells me.

"Wife" can deduct only $3,380 of her $5,500 contribution to a traditional IRA because "Husband" (me) is covered by a retirement plan at work and your modified adjusted gross income of $181,865 is between $178,000 and $188,000.

It then asks me to choose if I want to deduct $3,380 from our taxable income. This is where I am confused. If I deduct that contribution, I get more money as refund (because I guess my taxable income goes down) but does it complicate the overall tax situation in any way? Is it better for me to just have the whole $5,500 as a nondeductible contribution (wife's) to keep things simple? I know that in 2014, my income is not going to allow me to deduct any money from this year's trad IRA contribution for my wife also.

Can you please sugest what I should do? Thanks a lot for your help.
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retiredjg
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Re: Need help with taxes on TurboTax with backdoor Roth IRA

Post by retiredjg »

Your choice boils down to whether your wife's money goes into traditional IRA (deducted or pretax) or Roth IRA. The former will reduce your taxable income and therefore reduce this year's taxes.

Since you have already made the conversion of that IRA to Roth, you would have to "unconvert" (re-characterize) the money in her Roth back to deductible contributions in a traditional IRA. I don't see any point in doing that because it would get in the way of her future years' back door contributions to Roth IRA.

My suggestion is to leave her contribution in Roth, pay the little bit of extra tax, and go forward doing back door contributions each year.
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boglenerd
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Re: Need help with taxes on TurboTax with backdoor Roth IRA

Post by boglenerd »

Thank you very much for the prompt response, really appreciate this. So, I understand you are suggesting me to NOT take the deduction to keep it simple and that is what I'll do.

Out of curiosity though, can you please explain why taking this deduction makes things more complicated? I mean I funded a trad IRA with after tax money and immediately converted it to Roth IRA. There was no gain so there should be no tax or penalty on that. Why will I have to re-characterize the Roth IRA to trad IRA to be able to take the deduction and how that will affect future Roth IRA contribution? What am I missing?
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retiredjg
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Re: Need help with taxes on TurboTax with backdoor Roth IRA

Post by retiredjg »

boglenerd wrote:Out of curiosity though, can you please explain why taking this deduction makes things more complicated? I mean I funded a trad IRA with after tax money and immediately converted it to Roth IRA. There was no gain so there should be no tax or penalty on that.
You are correct that there is no tax because of the conversion. That is because the money was already taxed when you did not deduct it from your taxable income in the first place, while it was in the tIRA.

Why will I have to re-characterize the Roth IRA to trad IRA to be able to take the deduction...

For the purposes of this discussion, when you take a deduction, you are setting money aside to pay tax on later instead of now. Money in a Roth IRA is after tax (it is not deducted from your taxable income) no matter how it got there (either directly or through the back door).

So money can only be one or the other - deducted (pre-tax) or not deducted (after tax). In order to get the deduction now, you have to undo what you have done and make the money pre-tax (deductible) again.

and how that will affect future Roth IRA contribution? What am I missing?
If you re-characterized her Roth to deductible contributions in a tIRA, that money will be brought into the calculations in next year's back door contribution to Roth IRA. You can't just cherry pick what you want to convert. All of a person's tIRA money (as well as SEP IRA and SIMPLE IRA money) is included in the calculation.

I hope this didn't just confuse things further. :(
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tfb
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Re: Need help with taxes on TurboTax with backdoor Roth IRA

Post by tfb »

retiredjg wrote:So money can only be one or the other - deducted (pre-tax) or not deducted (after tax). In order to get the deduction now, you have to undo what you have done and make the money pre-tax (deductible) again.
It can be both. You take the deduction, and then pay tax when you convert. The OP doesn't have to undo the conversion.
boglenerd wrote:It then asks me to choose if I want to deduct $3,380 from our taxable income. This is where I am confused. If I deduct that contribution, I get more money as refund (because I guess my taxable income goes down) but does it complicate the overall tax situation in any way? Is it better for me to just have the whole $5,500 as a nondeductible contribution (wife's) to keep things simple?
You choice doesn't make any difference on your federal income tax. If you deduct, you pay more tax on the conversion, which creates a wash. If you don't deduct, you don't pay tax on the conversion. It may make a difference on your state income tax because some states exempt some income from IRA. Choose deduct. Worst case it's a wash. Best case you will save some state income tax.
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Epsilon Delta
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Re: Need help with taxes on TurboTax with backdoor Roth IRA

Post by Epsilon Delta »

boglenerd wrote: I understand that to report that in TurboTax, I will have to basically do it in 2 steps. First report the trad IRA contribution as nondeductible and then report 1099-R for the conversion to Roth. While I was doing the first step in TurboTax for my contribution, it told me that none of my contribution can be deducted because I have a 401(k) plan at work (which I max out anyways) and my income is too high (this is expected). When I was reporting my wife's contribution, TurboTax told because my wife does not have a 401(k) at work and our (my) MAGI falls between the range, some of my wife's 5,500 contribution can be deducted. This is precisely what it tells me.

"Wife" can deduct only $3,380 of her $5,500 contribution to a traditional IRA because "Husband" (me) is covered by a retirement plan at work and your modified adjusted gross income of $181,865 is between $178,000 and $188,000.

It then asks me to choose if I want to deduct $3,380 from our taxable income. This is where I am confused. If I deduct that contribution, I get more money as refund (because I guess my taxable income goes down) but does it complicate the overall tax situation in any way? Is it better for me to just have the whole $5,500 as a nondeductible contribution (wife's) to keep things simple? I know that in 2014, my income is not going to allow me to deduct any money from this year's trad IRA contribution for my wife also.

Can you please sugest what I should do? Thanks a lot for your help.
I suggest you not take the deduction, but also that it does not matter.

As you have noted there are two steps to the backdoor Roth. You are deciding to take the partial deduction or not but you are only halfway through. If you enter the conversion as well as the contribution you should find that changing the amount deducted has no effect on your refund. Whatever you choose to deduct on Form 1040 line 32 also shows up as income on form 8606 and form 1040 line 15b. These two changes usual cancel out leaving your refund unchanged.
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retiredjg
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Re: Need help with taxes on TurboTax with backdoor Roth IRA

Post by retiredjg »

tfb wrote:
retiredjg wrote:So money can only be one or the other - deducted (pre-tax) or not deducted (after tax). In order to get the deduction now, you have to undo what you have done and make the money pre-tax (deductible) again.
It can be both. You take the deduction, and then pay tax when you convert. The OP doesn't have to undo the conversion.
I think I see what you are saying. The poster can deduct the contribution and then convert to Roth and pay tax on the conversion rather than not deduct the contribution in the first place.

It would have been more accurate for me to say "in order to lower your federal taxes now (which is what I think the poster is asking), you would have to undo what you have done (the conversion) and make the money pre-tax again.


However, I was only thinking of federal income tax. You make a good point when you mention that state tax may be different. It is possible that the state tax might be less if the poster does what you are saying (call the tIRA contribution deductible as opposed to non-deductible).
Topic Author
boglenerd
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Re: Need help with taxes on TurboTax with backdoor Roth IRA

Post by boglenerd »

Thanks folks. So I decided to forego the deduction for my wife to keep my life simple. Federal filing looks good. When I am filing the state tax (in this case NJ), it looks like the distribution ($5,500 x 2 = $11,000 reported on 1099-R) is counted as taxable income for NJ and thus increases my tax liability. That does not sound right to me. Am I doing some mistake?

Edited to add: Though while checking for errors for NJ, it did give me an option to manually put how much of the $5,500 was previously taxed (for both) and I entered $5,500 which reduces my tax liability for NJ. Is that the right thing to do?
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grabiner
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Re: Need help with taxes on TurboTax with backdoor Roth IRA

Post by grabiner »

boglenerd wrote:Thanks folks. So I decided to forego the deduction for my wife to keep my life simple. Federal filing looks good. When I am filing the state tax (in this case NJ), it looks like the distribution ($5,500 x 2 = $11,000 reported on 1099-R) is counted as taxable income for NJ and thus increases my tax liability. That does not sound right to me. Am I doing some mistake?

Edited to add: Though while checking for errors for NJ, it did give me an option to manually put how much of the $5,500 was previously taxed (for both) and I entered $5,500 which reduces my tax liability for NJ. Is that the right thing to do?
NJ does not allow deductions for IRA contributions, so the entire contribution was previously taxed in NJ (even if it was deducted on your federal tax), and you can fill in the $5500 as previously taxed.

This is why NJ has to get a separate number; the NJ and federal previously-taxed amounts are likely to be different, and TurboTax is unlikely to have a record of all your previous deductible contributions.
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boglenerd
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Re: Need help with taxes on TurboTax with backdoor Roth IRA

Post by boglenerd »

Something does not seem right to me. After all the information are put in correctly (or at least I think so). Turbotax gives me this detailed info for federal taxes for 2013.

Total income:
Wages $181,847 (this number is coming from W2)
Interest & dividend $ 854
Income from Stock $ 187
IRA $ 11,000 (For some reason counted as income)*
NY refund (last yr) $ 1,918
-------------------------------------------
Total (A) $195,806

Deductions:
Mortgage interest $10,674
Property tax $ 8,901
Personal Exemption $11,700
State & local taxes $12,736
------------------------------------------
Total (B) $44,011

Taxable income (C) = A - B = $140,795
Taxes owed (D) on C = $26,972
Taxes already withheld (E) = $31,327
Federal Refund = E - D = $4,355

*So it looks like Turbotax is counting the Roth IRA contribution as a separate income (Even though that is after tax money and is already counted in my W2 income) but not counted in the deduction causing me to pay taxes on it again. Does that seem right? I feel like I am doing something wrong.

FYI, I followed the steps listed in http://thefinancebuff.com/how-to-report ... botax.html and I am guessing it added as the income because I added the 1099-R information about TIRA withdrawal, but I did specify that it was immediately converted to the Roth IRA (without any gain). I feel this is wrong because when I compare this with last year data (when I was directly able to contribute to Roth IRA without backdoor), it does not show any $10k as income or deduction. This year I was hoping to essentially get a similar result (even though I had to do a backdoor). Please help.
This seems wrong to me because when I compare it with last year data
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grabiner
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Re: Need help with taxes on TurboTax with backdoor Roth IRA

Post by grabiner »

boglenerd wrote:FYI, I followed the steps listed in http://thefinancebuff.com/how-to-report ... botax.html and I am guessing it added as the income because I added the 1099-R information about TIRA withdrawal, but I did specify that it was immediately converted to the Roth IRA (without any gain). I feel this is wrong because when I compare this with last year data (when I was directly able to contribute to Roth IRA without backdoor), it does not show any $10k as income or deduction. This year I was hoping to essentially get a similar result (even though I had to do a backdoor). Please help.
This seems wrong to me because when I compare it with last year data
What you are probably missing is the basis. Line 1 of your Form 8606 should show the amount you contributed to nondeductible IRAs for 2013, which is $5500 each. In Part II of the Form 8606, you will show how much you converted, and your basis of $5500 is copied from Line 1 and thus subtracted from the amount you converted.
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boglenerd
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Re: Need help with taxes on TurboTax with backdoor Roth IRA

Post by boglenerd »

grabiner wrote:
boglenerd wrote:FYI, I followed the steps listed in http://thefinancebuff.com/how-to-report ... botax.html and I am guessing it added as the income because I added the 1099-R information about TIRA withdrawal, but I did specify that it was immediately converted to the Roth IRA (without any gain). I feel this is wrong because when I compare this with last year data (when I was directly able to contribute to Roth IRA without backdoor), it does not show any $10k as income or deduction. This year I was hoping to essentially get a similar result (even though I had to do a backdoor). Please help.
This seems wrong to me because when I compare it with last year data
What you are probably missing is the basis. Line 1 of your Form 8606 should show the amount you contributed to nondeductible IRAs for 2013, which is $5500 each. In Part II of the Form 8606, you will show how much you converted, and your basis of $5500 is copied from Line 1 and thus subtracted from the amount you converted.
Unfortunately I cannot see the filled form 8606 until I file my taxes (or I pay them), so can't confirm that. But as far as I know I remember putting basis as 0 (as per the link mentioned above) because this is the first year I am doing a backdoor and I don't have any other TIRA (except for the one which I created for conversion and has 0 balance)
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grabiner
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Re: Need help with taxes on TurboTax with backdoor Roth IRA

Post by grabiner »

boglenerd wrote:
grabiner wrote:
boglenerd wrote:FYI, I followed the steps listed in http://thefinancebuff.com/how-to-report ... botax.html and I am guessing it added as the income because I added the 1099-R information about TIRA withdrawal, but I did specify that it was immediately converted to the Roth IRA (without any gain). I feel this is wrong because when I compare this with last year data (when I was directly able to contribute to Roth IRA without backdoor), it does not show any $10k as income or deduction. This year I was hoping to essentially get a similar result (even though I had to do a backdoor). Please help.
This seems wrong to me because when I compare it with last year data
What you are probably missing is the basis. Line 1 of your Form 8606 should show the amount you contributed to nondeductible IRAs for 2013, which is $5500 each. In Part II of the Form 8606, you will show how much you converted, and your basis of $5500 is copied from Line 1 and thus subtracted from the amount you converted.
Unfortunately I cannot see the filled form 8606 until I file my taxes (or I pay them), so can't confirm that. But as far as I know I remember putting basis as 0 (as per the link mentioned above) because this is the first year I am doing a backdoor and I don't have any other TIRA (except for the one which I created for conversion and has 0 balance)
Your basis is not 0; you should have a basis of $5500 from your contribution this year, or else enter the contribution as non-deductible somewhere. If you can't figure out how to do this, you need to ask TurboTax for help. In the desktop version, you can trace where a calculation comes from, and see where the error is.
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tfb
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Re: Need help with taxes on TurboTax with backdoor Roth IRA

Post by tfb »

boglenerd wrote:FYI, I followed the steps listed in http://thefinancebuff.com/how-to-report ... botax.html
What does Preview 1040 show? That's part of the steps you followed.
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Topic Author
boglenerd
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Re: Need help with taxes on TurboTax with backdoor Roth IRA

Post by boglenerd »

grabiner wrote:Your basis is not 0; you should have a basis of $5500 from your contribution this year, or else enter the contribution as non-deductible
somewhere.
I am making the whole contribution non-deductible, the link says my basis should be 0. Is that not correct?
grabiner wrote:What does Preview 1040 show?
Here is the info from 1040 preview
Box 7 $181,847
Box 8a $18
Box 9a $836
Box 10 $1918
Box 13 $187
Box 15a $11,000
Box 15b $0
Box 22 $184,806
Box 37 $184,806
Box 38 $184,806
Box 40 $32,311
Box 41 $152,495
Box 42 $11,700
Box 43 $140,795
Box 44 $26,972
Box 46 $26,972
Box 55 $26,972
Box 61 $26,972
Box 72 $31,327
Box 73 $4,355
Box 74a $4,355

All other boxes are basically blank. Thats probably lots of unnecessary details. The only thing I care about is to make sure I don't pay any more taxes than I have to. Thank you very much for taking time to look into this and responding
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grabiner
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Re: Need help with taxes on TurboTax with backdoor Roth IRA

Post by grabiner »

boglenerd wrote:Here is the info from 1040 preview
Box 15a $11,000
Box 15b $0
This is correct. You took $11,000 of IRA distributions (line 15a), but the taxable amount was $0 (line 15b); you aren't being taxed on the non-deductible conversion. The linked example shows the same thing, except that the example IRA grew from $5500 to $5520, so there was $20 to be taxed from the conversion.

I compared these with my own tax form from 2012; I contributed $5000 and converted it at $4912, so I owed no tax, and had an $88 loss which would have been deductible as a miscellaneous deduction if I were over the 2% limit.
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