IRA Contribution Reducing Taxable Distribution

[tccpg289]

Taxpayer is contributing to a traditional IRA despite being over the income limits to deduct it.

The Taxpayer also has IRA distributions in the same year via 1099-R.

ProSeries is going through the calculations and successfully determining that the contribution is not tax-deductible.

However, it is reducing the taxable portion of the IRA distribution. I believe it was a Roth conversion - can someone explain if this treatment is correct or if I am forgetting to click something in ProSeries?

[Just-Lisa-Now-]

Sounds like a back door ROTH.....non deductible IRA contribution is offsetting the IRA distribution that was converted to a ROTH.

[tccpg289]

Yes - I believe that is what is happening here. 

How does the software "know" to reduce the taxable distribution from the Roth? Is this correct? Is it all based on the codes on the 1099-R?

[qbteachmt]

"How does the software "know" to reduce the taxable distribution from the Roth?"

Have you confirmed all the dates are right?

Any nondeductible Trad IRA contribution is Basis. When you distribute or convert anything from Trad IRA, if there also is Basis, the distribution or conversion is Prorated for tax purposes.

Make sure everything is assigned to the proper year.

[tccpg289]

It is indeed the proper year - the 5498 that lists the traditional IRA contribution is for the same year of the 1098-R with the conversion.

In other words, the creation of basis prevents all of the 1098-R distribution from being taxable? If so, that clarifies.

[qbteachmt]

"the creation of basis prevents all of the 1098-R distribution from being taxable?"

Any distribution or contribution from a tax-deferred account that also has basis will have the taxable amount prorated, because Basis = already taxed. This is why people do not understand why a Backdoor Roth is taxable, sometimes.

[tccpg289]

Thanks - it seems correct then. There is basis due to the contribution that is non-deductible, therefore the distribution is being prorated based on that basis.