Welcome back! Ask questions, get answers, and join our large community of tax professionals.
cancel
Showing results for 
Search instead for 
Did you mean: 

How do I enter a Back-door Roth IRA Conversion so it will be non-taxable It comes up taxable when entering in 1099-R and making that all is eligible for conversion

pdlang55
Level 3

This is for 2018 - The worksheet that goes with the 1099-R for 2018 is not like the one for 2017

Labels (1)
0 Cheers
1 Solution

Accepted Solutions
rbynaker
Level 12

I had a few minutes this morning so I played around with this, it still works fine for me exactly as it has in the past.  Again, this is NOT a recharacterization, it's a conversion from traditional IRA (with basis) to Roth IRA.  You've been entering it wrong.

Screenshots attached.

View solution in original post

29 Comments 29
rbynaker
Level 12

I had a few minutes this morning so I played around with this, it still works fine for me exactly as it has in the past.  Again, this is NOT a recharacterization, it's a conversion from traditional IRA (with basis) to Roth IRA.  You've been entering it wrong.

Screenshots attached.

Terry53029
Level 13
Level 13
Rbynaker, you are under paid. Backdoor roths are still available for 2018, and I have a client next week that will use it, again many thanks to Rbynaker, as he saved me a lot of frustration  
poolcleaner
Level 8
Thanks to @rbynaker . @itonewbie , @pdlang55 .  I haven't had anyone do one of these since a client who already had over $1,000,000 in his IRA and had tried to do one of these (about 10 years ago).  We stopped the IRA contribution in time to prevent a mess!  
0 Cheers
pdlang55
Level 3
THank you Rbynaker --- this helps --- best regards ---
itonewbie
Level 15
This is the mechanics assuming the entire conversion is not taxable but there are limited circumstances as explained below where that might be the case.  Shouldn't we also address the tax rules on that?
---------------------------------------------------------------------------------
Still an AllStar
rbynaker
Level 12
YW.  The IRA stuff in ProSeries is pretty quirky.  I think there's probably a way they could streamline it some but I'm sure it's not a high priority.

Turns out I didn't need to enter the $0 ending FMV.  Personally, if I were programming it, that would be a requirement for any conversion with basis.  PS assumes $0 if you leave it blank, I agree with itonewbie, that's a really bad thing to assume.  If you do put a number in there (it's on the IRA Info Wks), it does correctly allocate basis.  But IMO, a non-entry should be an incomplete calculation.

Rick
TaxSkilz
Level 1

rbynaker - Can you please advise on how I can view your screenshots?

rbynaker
Level 12

Sorry, they didn't survive the "upgrade" to the new forum.

0 Cheers
reneetax
Level 1

I have a client that contributed in 2021 $7K to a traditional IRA and then converted in same year to a ROTH IRA(back door ROTH). The 1099-R had code 2.

The 1040 looks like this:

4a IRA distribution of $7,000 and 4b taxable amount $7,000. Also, there is a rollover of $30,322, but was not from a IRA/SEP/SIMPLE. She had a 401K from the past that she rolled over. Do I need to know if she rolled it over to her IRA or SEP?

Also, the Form 8606 has only Part II completed with line 16 for $7,000. The rest of the form is blank. 

I appreciate any help I can get!

0 Cheers
qbteachmt
Level 15

"She had a 401K from the past that she rolled over. Do I need to know if she rolled it over to her IRA or SEP?"

What you need to do first, to follow the retirement money, is to know what was post-tax or pre-tax. Then, from which type of account. Then, to which type of account.

That's how you know when things look right or wrong.

Especially when you have various Activities. It's not a Mix or a Net. They are tracked per how the IRS treats them for what happened, and in some cases the employer account(s) do get counted with personal (IRA, SEP) and in some cases, the employer account(s) are not taken into consideration with personal. Some cause restrictions or limitations and some do not.

Some SEP allow other types of contributions, rollovers and/or transfers, but most do not.

Many IRAs accept any other pre-tax rollovers or transfers, but some do not.

A "backdoor" Roth simply represents an amount put into an IRA post-tax, and immediately converted, avoiding any earnings that would be taxable.

And that will help you determine what needs to appear on the Form 8606 and what does not.

*******************************
"Level Up" is a gaming function, not a real life function.
0 Cheers
reneetax
Level 1

Thank you for your patience with this. Every situation is so different. I have spent the whole day reading Form 8606 instructions and reading about this trying to find the scenario I have for this client.

What if this is the first nondeductible IRA? So line 1 on Form 8606 would be in this case $7,000

Line 2: Enter your total basis in traditional IRAs. All of her IRAs were deductible in the past. So this is pretax money.  Only the 2021 IRA contribution of $7,000 is nondeductible so this is post tax. Do I need to ask the client for the basis in her traditional IRAs(pretax accounts) for this line?

Then line 6 value of all traditional SEP and IRAs(that's all she has) as of 12/31/21? All of this pretax contribtutions except the 2021 nondeductible IRA of $7,000?

Thank you for your patience on this. The communication with the client as well is not good. So trying to figure possible scenarios so I can be clear about what I might need to complete Form 8606 accurately.

If this is not clear enough, sorry. 

 

 

0 Cheers
qbteachmt
Level 15

"What if this is the first nondeductible IRA?"

That's not enough info. You stated this: "I have a client that contributed in 2021 $7K to a traditional IRA" and that there is SEP. Was there any other money in any Traditional IRA, including any earnings? The SEP? Was there Basis in any of these accounts? Because if Not, if a conversion (which is what a backdoor Roth functionally is accomplishing) includes account(s) with anything other than Basis, the conversion will be pro-rata.

You also stated: "and then converted in same year"

That's also not good enough to help. Was it right away or later? Later, as in, now there are sheltered earnings that create a pro rata conversion.

Remember this: "A "backdoor" Roth simply represents an amount put into an IRA post-tax, and immediately converted, avoiding any earnings that would be taxable."

"So line 1 on Form 8606 would be in this case $7,000

Line 2: Enter your total basis in traditional IRAs." <== Basis, because it is post-tax

"All of her IRAs were deductible in the past."

And here is your problem, then. Not Basis. Contributions not basis; earnings not basis.

"So this is pretax money." <== meaning Not Basis

"Only the 2021 IRA contribution of $7,000 is nondeductible so this is post tax." <== Basis

It is Pro rata (lines 10 and 11). And make sure to understand how Line 6 includes SEP, because you mentioned this person has SEP and not only IRA. I mentioned for some things, they are combined/included.

"Do I need to ask the client for the basis in her traditional IRAs(pretax accounts) for this line?"

Of course. But you already stated 0 prior to 2021. If it was All Basis, you would be fine. If there is any other Basis, add it to the $7.000 figure.

Perhaps we should review that Basis is the total of any "already taxed" monies. Any amount sitting in any IRA/SEP/SIMPLE for this person, for amounts never taxed (which would be pre-tax contributions and all earnings) will result in a pro rata condition for the Basis amount you want to show converted to Backdoor, because it is not selective. You can decide the Amount is $7,000, but not which $7,000 that will be. It's just a number.

Example:

I have put $20,000 pre-tax into IRA over the years, and I have $1,000 (sheltered) earnings. I now put $7,000 post-tax (to be Roth backdoor conversion) into a new IRA (which you don't have to do for Backdoor, but perhaps I want to work with a new broker for the Roth). Before I convert $7,000 that is the entire new account, then, I have to look at the big picture:

$20,000 + $1,000 + $7,000 = $28,000 in all of my IRA accounts

Now, let's convert $7,000 (which is computed as if it will be from any/each/all of my IRA accounts). That's the point; the IRS treats all of the IRA accounts as if they are one.

$7,000 out of $28,000 is Basis, or 25% of every $1 converted was already taxed (is Basis). The other 75% is taxable as income.

$7,000 (amount to convert) X .75 = $5,250 is taxable; $1,750 was from basis and reduces my Tracking of Basis. $7,000 (was my Basis) minus $1,750 basis converted = $5,250 of original basis still left in IRA.

Next year, if there will be conversion, the math is:

$5,250 divided by whatever is my new Total. If I decide to do another $7,000 backdoor Roth, then the Basis is $12,250 against the Total of my account(s) for the factor to use for the amount I am going to convert, which (by the way) does not have to be $7,000.

Remember that contribution limits are not applied to Conversions. She can put in $7,000 and the convert All of the IRA amounts, as long as she is prepared to pay the taxes on that larger amount. So, perhaps that is another confusing point for you? Contribution Limit vs Conversion Amount.

Whew. I think that covers all of this... I'll edit it if I spot a mistake. Good Luck.

*******************************
"Level Up" is a gaming function, not a real life function.
0 Cheers
poolcleaner
Level 8

Does your client have money in the IRA in addition to the amount you are converting?

0 Cheers
poolcleaner
Level 8
If that is the case, this is not necessarily a story with a happy ending.
0 Cheers
pdlang55
Level 3
No other IRA money  --- Made contribution to 2018 IRA, then immediately withdrew the money and converted the distribution to a Roth in 2018
pdlang55
Level 3
The Proseries in 2017 had a box that could be checked for Roth conversions - but in 2018 does not -
0 Cheers
poolcleaner
Level 8
Keep going down the page to see if B5 or B6 works.
0 Cheers
Coffeycpa
Level 1

This worked.  Helpful input.

0 Cheers
pdlang55
Level 3
Facts: 1099R for 2018 has 5500 in Box 1, 5500 in 2A, Distribution code is 2, scrolling down the page, 5500 appears in box B4, then check the box in B5 to show full amount in B4 converted to Roth, but this still shows up as fully taxable on 1040.  In 2017, there were boxes in C: Recharacterization, to indicate that the whole amount was recharacterized, however, there is no recharacterization section under a C category in 2018, the form goes from B to D
0 Cheers
poolcleaner
Level 8
I'm with you!  Everything I tried left the $5500 as taxable.  
0 Cheers
pdlang55
Level 3
I think I found the answer - There are no more re-characterizations of IRA Distributions in 2018 to a Roth.  The new Tax Act killed the "Back-door" Roth for any distribution from a IRA in 2018 and beyond that is converted into a Roth.  You must now treat any distribution that is converted as taxable income.
0 Cheers
itonewbie
Level 15

pdlang55, TCJA did not shut down back-door Roth IRA, only recharacterization (i.e. unwinding) of conversion (see §408A(d)(6)(B)(iii)).  Roth IRA conversion has always been taxable based on the normal rules except the 10% early distribution penalty does not apply (see §408A(d)(3)).

---------------------------------------------------------------------------------
Still an AllStar
rbynaker
Level 12
I agree with itonewbie.  I have one of these at the top of my stack that I'm going to work on Sunday.  Just shooting from the hip here, you have to enter the contribution as a non-deductible IRA, then enter $0 as FMV of IRAs on 12/31/18 (and the B5 that poolcleaner mentioned).  It should show in-and-out on the 8606, but I don't have the software in front of me.

I think your 8606s have probably been wrong the way you were doing it in the past.  Recharacterization and conversion are not the same thing.

Rick
pdlang55
Level 3
Even when you do that, the event shows up taxable.  Go back to the 2017 software and look how it is treated.  It is treated completely differently.  The 2018 software takes out a step.  
0 Cheers
itonewbie
Level 15
@pdlang55 There is nothing wrong with the technical response to your comment.  You shouldn't expect the distribution to be nontaxable.

Is Box 2b for "Taxable amount not determined" checked?  Or was it a total distribution?

Does the taxpayer have any basis in the IRA being converted?  If so, have you determined how much of the distribution is cost basis with the balance being taxable?
---------------------------------------------------------------------------------
Still an AllStar
0 Cheers
pdlang55
Level 3
In years prior to 2018, a taxpayer could make a contribution to an IRA, the next day take a distribution of that contribution, then roll it into a Roth IRA.  This has been called a "Back Door Roth" as it could only be done through Proseries when you checked a box at the bottom of the 1099-R that allowed the full distribution to be re-characterized.
However, that step (C-1 through C-3) is now missing from the 2018 software.  Take a look.
It appears that this ability to contribute to a Roth through the "Back-door" method previously allowed has disappeared with the new tax act.
The 1099-R in 2018 shows the distribution as a total distribution with the taxable status as undetermined.
I have tried every way to get the distribution to show up as non-taxable but I can't.  I have tried every way suggested by those on this community
0 Cheers
itonewbie
Level 15
There is no tax free conversion to Roth IRA.  The backdoor only lets taxpayers get around the AGI limitation.

Just about the only time when the distribution is nontaxable is if your client opened the one and only brand new traditional IRA and immediately convert that to Roth, assuming there is no gain or loss.

You may like to refer to §1.408A-4 Q-7, which refers to §408(d)(1) and (2) for the rules on income inclusion.
---------------------------------------------------------------------------------
Still an AllStar
rbynaker
Level 12
It's not that uncommon.  Especially now that a lot of 401(k) plans will allow you to roll IRA money into them.  Maybe it depends on your client base.  I think Google HR must teach a class on this stuff, a lot of my Googlers do this in addition to in-plan conversions from after-tax contributions to Roth.  It's a pretty big loophole for folks who know how to use it.
itonewbie
Level 15
Direct rollover of designated Roth to Roth IRA is excepted from income inclusion pursuant to §408A(d)(3)(B).  Rollover from 401(k) and 60-day rollover, on the other hand, will still be taxed for distributions that do not represent return of basis.

I think the problem is that it is not uncommon for the tax treatment of backdoor Roth IRA, in terms of the rules on prorata income inclusion and IRA aggregation, to be misunderstood.  When the 1099-R has the "Taxable amount not determined" box checked, it is easy to presume that the taxpayer can elect to convert only previously nondeductible contributions, when they really cannot.
---------------------------------------------------------------------------------
Still an AllStar