Backdoor Roth adjustment

[ajp]

Client is making a backdoor Roth contribution.

The 1099-R form shows code 2 for the IRA -- 7500 distributed and 7500 taxable. 

However, my client never received a tax benefit for the 7500 when it went into the IRA originally. Is it possible to make an adjustment?

[rbynaker]

Have you entered the Traditional IRA contribution?

You might also need to enter IRA FMV on 12/31/24 of $0.

[ajp]

Entering the contribution does bring down the tax due, but not as much as if there was no IRA at all.  They have a plan at work so they don't qualify for the IRA deduction. The make contribution and roll it, almost immediately, into the Roth.

I am confused why it brought balance due down at all since their contributions aren't tax deductible. 

[qbteachmt]

The 1099-R is for money Out. The issuer doesn't know what all was done afterwards.

You, the tax preparer, use the software to account for what happened next.

As long as the person making the backdoor rollover has no other funds in any Trad IRA, SEP IRA and SIMPLE IRA, then there is no taxable event. They needed to end the year with $0 FMV.

"The make contribution and roll it, almost immediately, into the Roth."

The nondeducted contribution is Basis. On your worksheet, you will enter their Basis, only their post-tax contributions are Basis. If there is even a bit of earnings, that creates a pro rata taxable conversion.

[Jim-from-Ohio · Accepted solution]

here is how I do it and it works great for me

1. Enter the traditional IRA contribution on the IRA worksheet

2. If then flows naturally to form 8606

3. Enter 1099-R Worksheet, make sure IRA box is checked

4. Scroll down to B-5, check that box that rolled over to Roth

The End

[ajp]

Jim, 

When I did that, it didn't seem to ignore the income. Should I put "0" in the taxable box even though the form shows the full amount. 

[Jim-from-Ohio]

I've always done it that way and it always worked. are you checking the IRA box on the 1099-R worksheet?

[ajp]

Yes, the box is checked. 

I'll go check the other parts of this. The software definitely didn't want me to put 0 in the taxable amount box!

[ajp]

I cleared it all out and started over. It is fixed!

I don't know what I had wrong, but by starting over and following your instructions, I was able to fix it. 

Thank you!

[ajp]

Your explanation makes sense. Thank you!

[Accountant-Man]

Do they have any other Traditional IRA accounts? If yes, and if some of the contributions into those were deducted, then some of the rollover might have to be taxable.

[qbteachmt]

All of their amounts in Trad IRA, SEP IRA and SIMPLE IRA are aggregated together. If they have any of these funds still in any of these accounts at year end, that creates a pro rata conversion when they try to do Backdoor. That's because their nondeducted contribution is Basis (already taxed) and the other amount(s) in other account(s) which are not Basis are considered to have been proportionally converted. You can't select only specific dollars or even only one specific account for conversion. That's what "aggregated" means.