Help avoid double tax for backdoor roth

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
SpacePanda
Posts: 5
Joined: Tue Jun 30, 2020 6:24 pm

Help avoid double tax for backdoor roth

Post by SpacePanda » Tue Jun 30, 2020 7:07 pm

Hello Bogleheads!

Long time reader and sharer of this website but first time posting. I'm running into some trouble filing my taxes with TurboTax with my Backdoor Roth. I know I didn't set this up ideally, much I thought it would be much easier to fix then it is proving to be.

Some background:
I do not use an employer IRA. All money put into these accounts have already been taxed and are coming out of my bank account.
Prior to 2019 I had been fully funding my Roth IRA. I had monthly contributions set through Vanguard. Entering 2019 I did the same, however during the year I became engaged and married and our combined income took me out of Roth IRA range. After our marriage in June 2019, I opened up a Traditional IRA through Vanguard and continued to make my monthly contributions to hit $6000 total for the year. I then started reading about the backdoor roth and decided to convert my tIRA. I did this conversion monthly (I know all at once is much cleaner :( ), and did not empty out the tIRA by the end of the year and the value of the account was $1118.18 (another dumb move).

My tIRA end of year statement shows:
2019 Contributions $2791.69
2019 Distributions $5382.09
2019 Rollovers $3712.63

My RothIRA end of year statement shows:
2019 contribution $3208.31
2019 distributions -$3712.64
Vanguard has two R-1099's for me
tIRA showing gross distribution of $5382.09
RothIRA showing gross distribution of $3712.64

So now TurboTax is saying I need to withdrawal an excess contribution of $3208 since after marriage we went above the income limits. Can I do this and then add that much into my tIRA for the 2019 year prior to July 15?

If I choose current tIRA $2791.69 contributions to be non-deductible, because I converted them to my RothIRA, my Form 8606 shows:
Line 1 2792
Line 2 0
Line 3 2792
Line 4 blank
Line 5 2792
Lines 6-12 are blank
Line 13 2311
Line 14 481
Line 15a 0
Line 15b 0
Line 15c 0
Line 16 5382
Line 17 2311
Line 18 3071
Line 19-25c are blank

My problem is that I'm paying taxes on $3071 that I've already paid taxes on. Any advice and help is much appreciated!

User avatar
Duckie
Posts: 7391
Joined: Thu Mar 08, 2007 2:55 pm

Re: Help avoid double tax for backdoor roth

Post by Duckie » Tue Jun 30, 2020 8:31 pm

SpacePanda, welcome to the forum.
SpacePanda wrote:Prior to 2019 I had been fully funding my Roth IRA. I had monthly contributions set through Vanguard. Entering 2019 I did the same, however during the year I became engaged and married and our combined income took me out of Roth IRA range.
Completely out of range or partly? You're leaving out a lot of information.
After our marriage in June 2019, I opened up a Traditional IRA through Vanguard and continued to make my monthly contributions to hit $6000 total for the year.
If completely out of range you should have (and still can) removed the un-allowed Roth IRA contributions either by having the excess amount returned to you or by recharacterizing the Roth IRA contributions as a TIRA contribution. Did you remove that amount from the Roth IRA? It appears so by the $3712.64 distribution. What did you do with it? Is that the $3712.63 Rollover in the TIRA? It looks like you recharacterized. Did you?
My tIRA end of year statement shows:
2019 Contributions $2791.69
2019 Distributions $5382.09
2019 Rollovers $3712.63

My RothIRA end of year statement shows:
2019 contribution $3208.31
2019 distributions -$3712.64
Vanguard has two R-1099's for me
tIRA showing gross distribution of $5382.09
RothIRA showing gross distribution of $3712.64
What were the amounts and codes in boxes 1 to 7 on the 1099-Rs for both TIRA and Roth IRA?
So now TurboTax is saying I need to withdrawal an excess contribution of $3208 since after marriage we went above the income limits.
What exactly did you do?
If I choose current tIRA $2791.69 contributions to be non-deductible, because I converted them to my RothIRA, my Form 8606 shows:
Line 1 2792
Line 2 0
Line 3 2792
Line 4 blank
Line 5 2792
Lines 6-12 are blank
Line 13 2311
Line 14 481
Line 15a 0
Line 15b 0
Line 15c 0
Line 16 5382
Line 17 2311
Line 18 3071
Line 19-25c are blank
Because of the missing lines 6-12 and not knowing exactly what you did I don't know where the error is, if there is one. Line 6 should be 1118, line 7 zero, and line 8 the total amount converted. What is the total amount you converted in 2019?

User avatar
MP123
Posts: 1505
Joined: Thu Feb 16, 2017 3:32 pm

Re: Help avoid double tax for backdoor roth

Post by MP123 » Tue Jun 30, 2020 8:45 pm

Duckie wrote:
Tue Jun 30, 2020 8:31 pm
If completely out of range you should have (and still can) removed the un-allowed Roth IRA contributions either by having the excess amount returned to you or by recharacterizing the Roth IRA contributions as a TIRA contribution. Did you remove that amount from the Roth IRA? It appears so by the $3712.64 distribution. What did you do with it? Is that the $3712.63 Rollover in the TIRA? It looks like you recharacterized. Did you?
I don't think one can do a Roth recharacterization anymore (after TC&JA).

But yes, what is that Roth distribution?

And welcome to the forum!

User avatar
Duckie
Posts: 7391
Joined: Thu Mar 08, 2007 2:55 pm

Re: Help avoid double tax for backdoor roth

Post by Duckie » Tue Jun 30, 2020 8:51 pm

MP123 wrote:I don't think one can do a Roth recharacterization anymore (after TC&JA).
You can no longer recharacterize a conversion but you can still recharacterize a contribution.

User avatar
MP123
Posts: 1505
Joined: Thu Feb 16, 2017 3:32 pm

Re: Help avoid double tax for backdoor roth

Post by MP123 » Tue Jun 30, 2020 8:58 pm

Duckie wrote:
Tue Jun 30, 2020 8:51 pm
MP123 wrote:I don't think one can do a Roth recharacterization anymore (after TC&JA).
You can no longer recharacterize a conversion but you can still recharacterize a contribution.
You're right, thanks for the clarification.

kaneohe
Posts: 6496
Joined: Mon Sep 22, 2008 12:38 pm

Re: Help avoid double tax for backdoor roth

Post by kaneohe » Tue Jun 30, 2020 9:30 pm

agree w/ Duckie that the events are somewhat uncertain as described. Best guess is that you recharacterized
Roth to TIRA (did total of Roth and TIRA contributions fall within the annual allowed limit?) If you did that ,then
all your contributions would be non-deductible, not just the TIRA. This would increase your TIRA basis and make the non-taxable amount of conversion larger and the taxable amount smaller.

Katietsu
Posts: 3495
Joined: Sun Sep 22, 2013 1:48 am

Re: Help avoid double tax for backdoor roth

Post by Katietsu » Tue Jun 30, 2020 9:49 pm

I think your 8606 is wrong because the amount recharacterized from the Roth to the traditional IRA needs to be added to line 1 of the Form 8606. I think when you entered the 1099-R from the Roth, you failed to answer some of the secondary questions. But as others have said, there are missing details needed to give a reliable answer.

Topic Author
SpacePanda
Posts: 5
Joined: Tue Jun 30, 2020 6:24 pm

Re: Help avoid double tax for backdoor roth

Post by SpacePanda » Tue Jun 30, 2020 11:04 pm

Thank you all for your help!

Let me try to answer as best that I can and please let me know what additional information you all need.

My taxable income in 2019 had I stayed "single" would have been around 97k. After marriage it went to ~211k

The money I put into my Roth IRA ($3208.31) prior to marriage has remained in my Roth IRA and I have not removed it. It went directly into a Vanguard target date fund. It seems I will need to remove this money now. What is the best way to do that and can it be rolled into a tIRA for the 2019 year still?
I frankly do not understand why the "distribution" is higher than the contribution and what distribution means in these sense.

1099's
tIRA
Box 1 5382.09
Box 2a 5382.09
Box 2b (both have X)
Box 4 0.00
Box 5 blank
Box 7 02
IRA/SEP/SIMPLE X
Box 12 0.00

RothIRA
Box 1 3712.64
Box 2a 0.00
Box 2b blank
Box 4 0.00
Box 5 blank
Box 7 N
IRA/SEP/SIMPLE blank
Box 12 0.00

Total Amount converted in 2019:
3712.64 went into original Roth and has remained there
2791.69 went into tIRA after marriage'
I converted 1673.51 of the tIRA to my existing Roth before the year ended because I forgot to convert the rest
1118.18 remained in the new tIRA at end of year (this was converted to the Roth in Jan or Feb 2020)

Thank you!

kaneohe
Posts: 6496
Joined: Mon Sep 22, 2008 12:38 pm

Re: Help avoid double tax for backdoor roth

Post by kaneohe » Tue Jun 30, 2020 11:54 pm

SpacePanda wrote:
Tue Jun 30, 2020 11:04 pm
.............................
The money I put into my Roth IRA ($3208.31) prior to marriage has remained in my Roth IRA and I have not removed it..........................................

RothIRA
Box 1 3712.64
Box 2a 0.00
Box 2b blank
Box 4 0.00
Box 5 blank
Box 7 N
IRA/SEP/SIMPLE blank
Box 12 0.00

Total Amount converted in 2019:
3712.64 went into original Roth and has remained there
.......................................................
I'm still confused. The 1099R for Roth suggests that 3712.64 was distributed from Roth as a recharacterization.
But you say that amount went into original Roth and is still there.

Miriam2
Posts: 3001
Joined: Fri Nov 14, 2014 11:51 am

Re: Help avoid double tax for backdoor roth

Post by Miriam2 » Wed Jul 01, 2020 12:09 am

SpacePanda wrote: Some background:
I do not use an employer IRA. All money put into these accounts have already been taxed and are coming out of my bank account.
Prior to 2019 I had been fully funding my Roth IRA. I had monthly contributions set through Vanguard. . . .
Curious - what do you mean by "employer IRA?" Do you mean employer 401k?

babystep
Posts: 131
Joined: Tue Apr 09, 2019 9:44 am

Re: Help avoid double tax for backdoor roth

Post by babystep » Wed Jul 01, 2020 12:47 am

SpacePanda wrote:
Tue Jun 30, 2020 7:07 pm
Hello Bogleheads!

Long time reader and sharer of this website but first time posting. I'm running into some trouble filing my taxes with TurboTax with my Backdoor Roth. I know I didn't set this up ideally, much I thought it would be much easier to fix then it is proving to be.

Some background:
I do not use an employer IRA. All money put into these accounts have already been taxed and are coming out of my bank account.
Prior to 2019 I had been fully funding my Roth IRA. I had monthly contributions set through Vanguard. Entering 2019 I did the same, however during the year I became engaged and married and our combined income took me out of Roth IRA range. After our marriage in June 2019, I opened up a Traditional IRA through Vanguard and continued to make my monthly contributions to hit $6000 total for the year. I then started reading about the backdoor roth and decided to convert my tIRA. I did this conversion monthly (I know all at once is much cleaner :( ), and did not empty out the tIRA by the end of the year and the value of the account was $1118.18 (another dumb move).

My tIRA end of year statement shows:
2019 Contributions $2791.69
2019 Distributions $5382.09
2019 Rollovers $3712.63

My RothIRA end of year statement shows:
2019 contribution $3208.31
2019 distributions -$3712.64
Vanguard has two R-1099's for me
tIRA showing gross distribution of $5382.09
RothIRA showing gross distribution of $3712.64

So now TurboTax is saying I need to withdrawal an excess contribution of $3208 since after marriage we went above the income limits. Can I do this and then add that much into my tIRA for the 2019 year prior to July 15?

If I choose current tIRA $2791.69 contributions to be non-deductible, because I converted them to my RothIRA, my Form 8606 shows:
Line 1 2792
Line 2 0
Line 3 2792
Line 4 blank
Line 5 2792
Lines 6-12 are blank
Line 13 2311
Line 14 481
Line 15a 0
Line 15b 0
Line 15c 0
Line 16 5382
Line 17 2311
Line 18 3071
Line 19-25c are blank

My problem is that I'm paying taxes on $3071 that I've already paid taxes on. Any advice and help is much appreciated!
My head is spinning reading your post. All this because of marriage :D. Sorry, I had to make a marital joke :wink:

Only a few things made sense to me.
tIRA contributions + Roth IRA contributions = 2791.69 + 3208.31 = 6,000
2791.69 + 3712.63 - 5382.09 = 1118.18 (left in tIRA)

if you are really above the limits for RothIra then you can't directly make Roth Contributions hence it is complaining about 3208.31 Roth Contributions.

maybe you can withdraw 3208.31 of Roth contributions? Someone expert will be able to tell whether it will be possible in this case.

Topic Author
SpacePanda
Posts: 5
Joined: Tue Jun 30, 2020 6:24 pm

Re: Help avoid double tax for backdoor roth

Post by SpacePanda » Wed Jul 01, 2020 9:15 am

I really do not understand the RothIRA distribution but on the vanguard tax forms the RothIRA includes this "**" with this explanation:
**Includes tax forms from your mutual fund accounts before your mutual fund assets were transferred into an upgraded brokerage account.

Could this explain that?

Sorry about the confusion of the "employer IRA." I was just trying to show that my employer does not take pretaxed money and place directly into an IRA, like they do with my 403b. I was just trying to make clear that I've paid taxes on this money already.

User avatar
Duckie
Posts: 7391
Joined: Thu Mar 08, 2007 2:55 pm

Re: Help avoid double tax for backdoor roth

Post by Duckie » Wed Jul 01, 2020 3:55 pm

SpacePanda wrote:The money I put into my Roth IRA ($3208.31) prior to marriage has remained in my Roth IRA and I have not removed it. It went directly into a Vanguard target date fund. It seems I will need to remove this money now. What is the best way to do that and can it be rolled into a tIRA for the 2019 year still?
The money you contributed to the Roth IRA for 2019 and left there is considered an excess contribution. You can contact Vanguard and have them "recharacterize" the 2019 Roth IRA contributions of $3208.31 plus any earnings (and they'll figure the earnings) to your TIRA. When you do your 2019 taxes you'll need to make sure TurboTax knows you contributed $3208.31 to your Roth IRA and recharacterized it plus earnings, and that it is all non-deductible. Since the recharacterization will happen in 2020 you only have to report that on your required statement. See page 4 of the IRA Form 8606 instructions:
  • You made a contribution to a Roth IRA and later recharacterized part or all of it in a trustee-to-trustee transfer to a traditional IRA. Report the nondeductible traditional IRA portion of the recharacterized contribution, if any, on Form 8606, Part I. Don’t report the Roth IRA contribution (whether or not you recharacterized all or part of it) on Form 8606. Attach a statement to your return explaining the recharacterization. If the recharacterization occurred in 2019, include the amount transferred from the Roth IRA on Form 1040 or 1040-SR, line 4a; or Form 1040-NR, line 16a. If the recharacterization occurred in 2020, report the amount transferred only in the attached statement, and not on your 2019 or 2020 tax return.
BUT it looks like you have already recharacterized. See below:
I frankly do not understand why the "distribution" is higher than the contribution and what distribution means in these sense.
If you contributed X and rolled in Y and converted X + Y = Z out, then Z would be more than X. The 1099-R only covers money going out (rollover, conversion, cash out), not the money going in.
1099's
tIRA
Box 1 5382.09
Box 2a 5382.09
Box 2b (both have X)
Box 4 0.00
Box 5 blank
Box 7 02
IRA/SEP/SIMPLE X
Box 12 0.00
According to Box 1 you withdrew money. According to Box 7 you have "2—Early distribution, exception applies (under age 59 1/2)." That is the code used when converting to a Roth IRA. (2019 1099-R)
RothIRA
Box 1 3712.64
Box 2a 0.00
Box 2b blank
Box 4 0.00
Box 5 blank
Box 7 N
IRA/SEP/SIMPLE blank
Box 12 0.00
According to Box 1 you withdrew money. According to Box 7 you recharacterized something. "N—Recharacterized IRA contribution made for 2019 and recharacterized in 2019." Take a look at your 2019 statements, not just the year-end statement. Find out when you took money out of your Roth IRA and when money was added to your TIRA.

If you shifted (poss recharacterized) your 2019 Roth IRA contributions and earnings ($3712.64) to your TIRA and converted some of that plus some of your TIRA contributions ($2791.69) leaving $1118.18 in the TIRA then that comes close to the amount in the TIRA 1099-R Box 1 ($5382.09).
3712.64 went into original Roth and has remained there
Just to be absolutely sure, look at your Roth IRA account and let us know the current total. Because if the ~$3712.64 is still there, your 1099-Rs are totally screwed up.
I really do not understand the RothIRA distribution but on the vanguard tax forms the RothIRA includes this "**" with this explanation:
**Includes tax forms from your mutual fund accounts before your mutual fund assets were transferred into an upgraded brokerage account.
Did you switch from the Vanguard mutual fund side to the brokerage side in 2019?

Topic Author
SpacePanda
Posts: 5
Joined: Tue Jun 30, 2020 6:24 pm

Re: Help avoid double tax for backdoor roth

Post by SpacePanda » Wed Jul 01, 2020 8:58 pm

Looking back at all of my statements and transactions for 2019 I did find that my account was "upgraded" on 7/25/19 from the mutual fund to the brokerage side. On 7/26 it appears $3712.64 was transferred from the mutual account into the new brokerage account which went through on 7/26 at a price of $3706.36.

Current Roth IRA total is 51k

And thank you for your advice on contacting vanguard to move the excess contribution. I should be able to so that tomorrow

User avatar
Duckie
Posts: 7391
Joined: Thu Mar 08, 2007 2:55 pm

Re: Help avoid double tax for backdoor roth

Post by Duckie » Thu Jul 02, 2020 3:13 pm

SpacePanda wrote:Looking back at all of my statements and transactions for 2019 I did find that my account was "upgraded" on 7/25/19 from the mutual fund to the brokerage side. On 7/26 it appears $3712.64 was transferred from the mutual account into the new brokerage account which went through on 7/26 at a price of $3706.36.
Make sure the total distributions on both the mutual fund side and the brokerage side year-end statements add up to the 1099-Rs Box 1 for both TIRA and Roth IRA. If they are the same then you can do your taxes after the recharacterization occurs.

The 1099-Rs Box 1 totals will go on your Form 1040 line 4a. The taxable amount will be figured on Form 8606 and end up on line 4b. Once recharacterized you will have made $6000 in non-deductible contributions for 2019 ($2792 to TIRA and $3208 originally to Roth IRA) so $6000 will end up on Form 8606 line 1.

2019 Form 8606
Some of these numbers are guesstimates because I don't know how much your recharacterized amount will be.

Part I
Line 1 -- 6000 (non-deductible contributions for 2019)
Line 2 -- 0 (previous basis)
Line 3 -- 6000
Line 4 -- 0 or blank
Line 5 -- 6000
Line 6 -- 4918 (amount in TIRA as of 12/31/19 including recharacterized amounts -- $1118 + hypothetical $3800)
Line 7 -- 0 or blank (conversions, recharacterizations, and mutual fund side to brokerage side switch do not count)
Line 8 -- 1674
Line 9 -- 6592
Line 10 -- 0.91019 (the more numbers the better)
Line 11 -- 1524
Line 12 -- 0 or blank
Line 13 -- 1524
Line 14 -- 4476 (basis, goes on line 2 next year)
Line 15a -- 0 or blank
Line 15b -- 0 or blank
Line 15c -- 0 or blank

Part II
Line 16 -- 1674
Line 17 -- 1524
Line 18 -- 150 (taxable amount)

TurboTax hides lines 6-12 but if you do it on paper and that matches the TT shown numbers then you're good to go.

Topic Author
SpacePanda
Posts: 5
Joined: Tue Jun 30, 2020 6:24 pm

Re: Help avoid double tax for backdoor roth

Post by SpacePanda » Mon Jul 06, 2020 6:20 pm

Thank you everyone for your help and suggestions. And a special thank you to Duckie for the amazing walk through post. That made it make so much more sense. I have contacted Vanguard to recharacterize the Roth excess contribution to the tIRA. And after they determine the gains/loses on that amount I should be able to take a stab at the Form 8606.

Post Reply