Basically, the best option for anyone filing their taxes MFS is the Backdoor Roth IRA process, i.e., an indirect Roth IRA contribution. The next option we will examine is a Roth contribution. Roth contributions are made with after-tax money. This means there isn’t a tax benefit now by making the contributions. Earnings on the Roth contributions are tax-free. Plus, once you take funds from the Roth account, you don’t pay any taxes on the funds if you meet certain rules.
What are the essentials of Backdoor Roth IRAs?
If you had a loss in the account between contribution and recharacterization, no big deal. It’s still as though you made a $7,000 contribution to a traditional IRA and THEN it lost money. If you were able to deduct the contribution (you probably can’t) you would get a $7,000 deduction. The IRA provider may also send you a Form 5498 (which has the recharacterized amount on line 4), but you don’t actually do anything with it when you file your taxes.
Spend or Save Your HSA Money?
You’re back on the Income Menu in Turbotax. If you scroll down to the Retirement Plan and Social Security section you’ll see $6,000 ($12,000 if you did a Backdoor Roth IRA for your spouse too) next to the IRA, 401(k), Pension Plans (1099-R) line. Next, it asks about non-deductible contributions. Note that you’ll see this question when you get to the contribution section too. You’ll eventually come back to the same page. Turbotax will ask you a few more questions.
Step 2 – Make a non-deductible contribution to a traditional IRA
Since you didn’t take the money out and buy a sailboat with it, click the first button. Since it was a Roth conversion, you click the second button in answer to the second question and hit continue. Here it’s asking about the carryover from the prior year. First click on “I moved …” then click on “I did a combination …” Enter the amount converted in the box.
Conversion Is Taxed
You can answer “No” here but answering “Yes” with a 0 has the same effect and it allows you to correct previous mistaken entries. It’s normal to see zero in Box 2a and blank in Box 2b on this 1099-R form. I needed to go to forms and then delete all IRA worksheets, 1099-R, etc. By the way I did do the contributaion first, and it wouldnt work I then had to delete the 1099-r and redo the contribution and then the 1099_R before it would work.. When you’re done examining the form, click on Step-by-Step on the top right to get back to the interview. When you come to the Retirement Income section, answer Yes because you received a 1099-R from your 401(k) plan.
- The easiest solution is to convert the entire IRA, SEP-IRA, or SIMPLE IRA that caused the pro-ration and is now composed of both pre-tax and after-tax money.
- Note that all this serves to do is report basis for the next year.
- For most families earning a typical physician’s income, it will be between 15% and 23.8% plus state and local income tax).
- To better organize these mistakes, we will break down the process into the six very clear steps used above and then will explain possible errors with each step and what to do about them.
If it is less than 50 cents, you just ignore it. If it’s more, you report it on your 8606 and pay taxes on it. Treat any recharacterized IRA contribution as though the amount of the contribution was originally contributed to the second IRA, not the first IRA.
If you take the distribution too early, there is a 10% premature distribution penalty. 24% is also a reasonable rate at which to make Roth conversions. You’ll likely have a large gap between your taxable income in retirement and the ceiling of the 24% tax bracket before it jumps to 32%.
You owe income tax on the other 6,110 you backdoored. For example, let’s say you have $93,500 in existing traditional IRAs that were funded with pre-tax dollars. And now you contribute $6,500 to a new traditional IRA with after-tax dollars, then immediately convert that $6,500 to a Roth via the backdoor Roth IRA strategy. If you’re otherwise locked out of a Roth IRA because your income is in the high six figures, this handy backdoor can let you reap the tax benefits of a Roth. But these conversions can get tricky—and costly.
As you can see, a Roth conversion of a non-deductible traditional IRA contribution without any gains is a taxable event; it’s just that the tax bill is zero for it. Done properly, there is NO tax on a Backdoor Roth IRA conversion. The taxable amount of your Traditional IRA to Roth IRA conversion is being affected by the ‘pro rata rule’. Part of this total was 2021 contributions made in early 2022 ($6K and $7K) and another $6K made in 2022 for 2022.
Contributing directly to a Roth IRA is restricted if your income is beyond certain limits, but there are no income limits for conversions. If you first contributed to a Roth IRA and then recharacterized it as a Traditional contribution in the following year, please jump over to the next example. Suppose your employer plan allows it and you executed a Mega Backdoor Roth.
If you didn’t recharacterize (the first example scenario), please skip this section and jump over to the conversion section. Michelle P. Scott is a New York attorney with extensive experience in tax, corporate, financial, and nonprofit law, and public policy. As General Counsel, private practitioner, backdoor roth turbotax and Congressional counsel, she has advised financial institutions, businesses, charities, individuals, and public officials, and written and lectured extensively. But after seeing the response from 2020hindsight, I went back and followed the original instructions from TurboTaxForrest.
However, this process has nothing to do with the Backdoor Roth IRA process we are discussing in this post. If you answered Yes to the previous question and you did your previous year’s return correctly also in TurboTax, your basis from the previous year will show up here. If you did your previous year’s tax return wrong, fix your previous return first. If you pull money from the HSA to cover costs as you go (and you have a taxable account), you’re essentially shifting money from a tax-free HSA account to a taxable investment account. The shifted money will suffer from a bit of tax drag.
The conversion step may take place at any time. It can take place the next day or even the same day as the contribution. I don’t recommend it, but you can wait months, years, or even decades between the contribution and the conversion step. If you need to perform a rollover or a conversion of a traditional, rollover, SEP, or SIMPLE IRA in order to avoid the pro-rata rule, you have until December 31 of the year you do the conversion step.
Even though you didn’t qualify to contribute to a Roth, you get to go in the back door anyway, no matter what your income. It’s simpler if you make your full contribution nondeductible and then your 2024 Roth conversion won’t be taxable. Enter the amount of your original contribution in the last box. You may not get this question if TurboTax sees that you’re covered by a retirement plan at work from Box 13 in your W-2. See One 1099-R Form for Two Rollovers in TurboTax and H&R Block. The easiest solution is to convert the entire IRA, SEP-IRA, or SIMPLE IRA that caused the pro-ration and is now composed of both pre-tax and after-tax money.
When your balances in those IRAs are small, the taxes you will have to pay when you convert them are also small. The earlier you start saving for your retirement, the more you’ll have to work with once you’ve removed yourself from the workforce. But this can be a complicated process, which is why people use software like TurboTax to help them to keep track of their contributions and tax breaks. Even given that, the backdoor Roth IRA strategy can have advantages—especially for high earners. Roth IRAs don’t have RMDs, so you can hold them forever and pass them on to your heirs. Another advantage is that a backdoor Roth contribution can mean significant tax savings over the decades because Roth IRA distributions, unlike traditional IRA distributions, are not taxable.
You will receive a 1099-R from the plan in the following year. You will need to account for it on your tax return. The tax preparer should NOT be filing Form 5439.
If you don’t have Schedule 1 available then that means you don’t have any entries on Schedule 1 (line 20 IRA deduction will be blank). Therefore, you successfully made the traditional IRA nondeductible. Incidentally, if you have screwed this up and you’re not getting what you want and you just want to start over, all you need to do is delete all the applicable forms in Forms mode.
They should both be a number very close to zero if the form is being completed correctly. Do yourself a favor and just empty the darn IRA by December https://turbo-tax.org/ 31. Keep in mind that this is usually not an instantaneous process, so don’t put it off until you’re on holiday break at the end of the year.
Thank you for helping our country fund its government. Perhaps most significantly, there are now two steps to getting money into your Roth IRA each year instead of just one. While I think the process is pretty darn simple, I am continually amazed at all of the unique ways that doctors manage to screw it up. Later in this article, I’ll show you how to fix all of those screwups. If your only Traditional IRA account had been the one that was subsequently converted to the Roth IRA, then everything would have worked as planned, with a non-taxable event on your return.
If your income is below a certain amount, you can just contribute directly to a Roth IRA. First, it is a MODIFIED Adjusted Gross Income (MAGI). That number is very similar to your Adjusted Gross Income (AGI). Any gains that occur before the final conversion are, of course, fully taxable at your ordinary income tax rate in the year of the final conversion.
You actually can do this for an extra six months after your tax filing date, but you will have to refile your return. Any earnings that the account had in between the contribution and the recharacterization just go over with the contribution. Bear in mind that starting in 2018, you can no longer do recharacterizations of Roth CONVERSIONS (not contributions). This eliminated the “Roth IRA Conversion Horserace” technique for tax reduction.
Page 1 (below) shows a “distribution” from your non-deductible IRA. Since the money was already taxed, the taxable amount on your distribution is zero. Line 1 is your non-deductible contribution.
The amount in the last box includes earnings. This is normally zero if this is the first time you contributed to a Traditional IRA. If you put in a number because you didn’t understand what it was asking, now is the chance to correct it.
Despite its name, you actually do a Mega Backdoor Roth IRA with a 401(k), not an IRA. It requires a 401(k) that accepts both after-tax (not Roth) employee contributions and allows for either in-service withdrawals (and thus conversions to a Roth IRA) or, more commonly, in-plan conversions. Using the Mega Backdoor Roth IRA process, one could put as much as $69,000 ($76,500 if 50+) [2024] per year into a Roth 401(k) (or possibly a Roth IRA in addition to your usual $7,000-$8.000 contribution).
The Backdoor Roth is an indirect way to contribute to a Roth IRA when you are not eligible to contribute directly due to high income. We answered this question before but TurboTax asks again. Answer Yes here to confirm that you contributed to a Traditional IRA. If TurboTax offers an upgrade, decline it and choose to continue in TurboTax Deluxe.
The value increased again to $6,700 when you converted it to Roth before December 31, 2023. You received two 1099-R forms, one for $6,600 and another for $6,700. Find “Form 8606-T” (and “Form 8606-S” for your spouse) in the list of forms in the left pane. You should see that only lines 1, 3, and 14 are filled in with your original contribution amount. After recharacterizing, it’s as if you contributed directly to a Traditional IRA in the first place. It’s important to see the number in Line 14.
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