Converting a traditional IRA to a Roth

[Greta]

I always have a problem knowing what boxes to check. Code is either B or H? Is it an IRA box (it glowed red for me) And in the Rollover section, how do I get a value in line B4?

[athaureaux6]

I believe you need to wait until the taxpayer receive the 1099-R and the Form 5498. If the taxpayer is converting from Traditional to Roth, he or she may have to pay taxes if they got a deduction in previous years. They are going from a pre-tax account to an after tax account. It they took a deduction before, they have to give the deduction back. If it is a backdoor Roth conversion, the amount for the tax year is tax free because they never took a deduction for that amount. Be aware that if they rollover from a Traditional and never took a deduction, you have to find out the basis, otherwise they will be taxed for the amount rollovered. The basis is entered on Form 8606. Sometimes it is very difficult to figure the basis if they do not track all the contributions. Once you enter the information in the 1099-R worksheet, scroll down to B-5 and check it. Hope this helps. 

[Greta]

The client converted 10K from Traditional IRA to Roth. The basis is 10K. He simply had little income in 2024, so felt it was a good year to pay taxes on the 10K conversion.

I tried code B and code H, and several of the many boxes, and did get the correct result which I knew was needed. So I guess I'll keep it like that.

But do I check the box for IRA/SEP/Simple (Nope, it glowed red); so I checked the Roth box, even thought the money came from an IRA.

[athaureaux6 · Accepted solution]

How do you know the basis is 10,000. He never took a deduction?. Usually people contribute to a Traditional to get the deduction in the tax return, so there is no basis. I am just asking, not questioning anything. Usually Roth conversion show a code 2. Basis means non-deductible contributions, or amount he did not have a deduction for the contributions, aka after tax contributions. 

[Greta]

Yikes, I'm an idiot, meant just the opposite, it was fully taxable when converted to a Roth. He had taken full deductions each year. He converted 10K in 2024 precisely because he had little other income, so his tax bracket was low. I was just confused with the boxes and codes to check in order to arrive at the result I knew was correct.

[qbteachmt]

It's not a B or an H. 1 or 2 or 7 are more likely.

Take it one step at a time. The money Out, is a 1099-R with a code for the distribution. The brokerage nearly never knows what happened to that money. So, the 1099-R out code will simply explain the removal of the funds. You don't make up the code. It will be on the 1099-R from that brokerage for that tax year. It might be Regular distribution, or marked also as Early, no known exception. There might be an indication of taxable, if that brokerage was tracking Basis. In this scenario, Basis is not total contributions. It's total post-tax contributions, when we are reviewing Tradition IRA, 401(k) or anything non-Roth.

Then, the Form 5498 is your due diligence to show the money was in fact redeposited (if indirect) or transferred, for the Roth account. If they did indirect, it has to meet the rollover deadline.

The 1099-R worksheet entries are where the tax preparer uses the code to explain what happened to the money. That's where you put Conversion, and that makes some amount taxable. If there was never any post-tax basis in the Traditional IRA, then the entire conversion is taxable. If there was any post-tax basis, then the conversion is pro rated taxable. There is no picking and choosing for a conversion for only Basis, in other words. Only a Roth IRA has ordering rules. The Trad IRA, SEP IRA and SIMPLE IRA are all aggregated for purposes of the big bucket of funds that will be examined for basis or not, and total combined FMV is used for pro rata.

Hope that helps.