TaxACT used to be a low-cost alternative to the big two tax prep software TurboTax and H&R Block. However, its pricing strategy changed lately. Now TaxACT is just as expensive or sometimes even more expensive than TurboTax and H&R Block. The good news is another low-cost alternative emerged. It’s called FreeTaxUSA.
FreeTaxUSA is purely online; there is no download option. It uses the freemium pricing model. Federal tax filing is free, regardless of the complexity of the return. After you are done with federal, if you need to file a state return, it costs $12.95. They also offer a deluxe upgrade for $6.99, which includes audit assist, priority support, and amended returns. All told, the total cost is under $20 and it includes e-filing for both federal and state.
Low cost is good and all, but how good is the software? I decided to test-drive it with a slightly complicated subject: reporting the Backdoor Roth. Over the years I created guides for how to report the Backdoor Roth in TurboTax, H&R Block, and TaxACT. A reader asked me to also create a guide for doing the same in FreeTaxUSA.
Just as a refresher, a Backdoor Roth involves making a non-deductible contribution to a Traditional IRA followed by converting from the Traditional IRA to a Roth IRA. Both the contribution and the conversion need to be reported in the tax software. For more information on Backdoor Roth, see Backdoor Roth: A Complete How-To.
What To Report
You report on the tax return your contribution to a Traditional IRA *for* that year and your converting to Roth *during* that year.
For example when you are doing your tax return for year X, you report the contribution you made *for* year X, whether you actually did it during year X or between January 1 and April 15 of the following year. You also report your converting to Roth *during* year X, whether the contribution was made for year X, the year before, or any previous years. Therefore a contribution made during the following year for year X goes on the tax return for year X. A conversion done during year Y after you made a contribution for year X goes on the tax return for year Y.
You do yourself a big favor and avoid a lot of confusion by doing your contribution for the current year and finish your conversion in the same year. Don’t wait until the following year to contribute for the previous year. Contribute for year X in year X and convert it during year X. Contribute for year Y in year Y and convert it during year Y. This way everything is clean and neat. If you are already off by one year, catch up. Contribute for both the previous year and the current year, then convert the sum during the same year. See Make Backdoor Roth Easy On Your Tax Return.
FreeTaxUSA
Here’s the scenario we will use as an example:
You contributed $5,500 to a traditional IRA in 2018 for 2018. Your income is too high to claim a deduction for the contribution. By the time you converted it to Roth IRA, also in 2018, the value grew to $5,560. You have no other traditional, SEP, or SIMPLE IRA after you converted your traditional IRA to Roth.
If your scenario is different, you will have to make some adjustments from the screens shown here.
Before we start, suppose this is what FreeTaxUSA shows:
We will compare the results after we enter the Backdoor Roth.
Convert From Traditional IRA to Roth
The tax software works on income items first. Even though the conversion happened after the contribution, we enter the conversion first.
When you convert from Traditional IRA to Roth, you will receive a 1099-R. Complete this section only if you converted *during* the year for which you are doing the tax return. If you only converted during the following year and you don’t have a 1099-R yet, skip this section and wait until the next year.
In our example, we assume by the time you converted, the money in the Traditional IRA had grown from $5,500 to $5,560.
Click on Yes when it asks you about the 1099-R.
It’s just a regular 1099-R.
Enter the 1099-R as printed. Pay attention to the code in Box 7 and the checkboxes. Our 1099-R had Box 2b checked, code 2 in Box 7, and the IRA/SEP/SIMPLE box also checked.
Right after you enter the 1099-R, you will see the refund meter drop. Here we went from $1,054 refund to owing $892, for a difference of nearly $2,000. Don’t panic. It’s normal and temporary.
It asks you about Roth conversion. Answer Yes to conversion and enter the converted amount. This whole 1099-R is the result of a Roth conversion.
You are done with this 1099-R. Enter another if you have more than one.
It asks you about basis carried over from previous years. In our simple example we don’t have any. If you do, get the number from line 14 of Form 8606 from your previous year’s tax return.
Not impacted by a disaster.
Another 1099-R summary.
Now continue with all other income items until you are done with income. Your refund meter is still lower than it should be, but it will change soon.
Traditional IRA Contribution
Right off the bat it asks you about your IRA contributions. Choose Yes and enter your contribution. In our example you contributed $5,500 to Traditional, nothing to Roth.
Immediately your refund meter goes up again. It was a refund of $1,054 before we entered the 1099-R. It went down to owing $892. Now it’s back to a refund of $1,032. The $22 difference is due to paying tax on the $60 earnings before we converted to Roth.
Withdrawal means pulling money out of a Traditional IRA back to your checking account. Converting to Roth is not a withdrawal. Answer ‘No’ here.
In our example we don’t have a SEP, SIMPLE, or other self-employed retirement plan.
In our example we don’t have any basis carried over from the previous years. We don’t have any money in traditional, SEP, or SIMPLE IRAs as of the end of the year (we already converted to Roth by then). Our contribution was made during the year in question, not in the following year.
It tells us we don’t get a deduction. We know. It’s because our income was too high. That’s why we did the Backdoor Roth to begin with.
That’s all. After all these entries, we are only paying tax on the earnings in the Traditional IRA before we converted to Roth. If you had no earnings, you would pay no extra tax.
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Cori says
It would be awesome if you could review this software compared to your experience with a more expensive program like TurboTax☺️
Harry Sit says
It appears it’s not able to import W-2s from payroll providers or 1099s from financial institutions. If you don’t mind typing in the numbers, I think the software works just fine.
Pramod says
Thank you very much for this post!
michael says
Thanks for the review! Based on your recommendation I just completed my taxes on FreeTaxUSA. It was very user friendly and saved me lots of money vs Turbotax in taxprep fees.
Sam says
I have run into a snafu where I didL
1. Contributed to Roth
2. recharacterized to traditional
3. backdoor roth from #2
The software can’t seem to comprehend this because I input 5500 into my roth ira contribution summary, NOT the traditional. Is there a work around?
Sam says
Adding on, could I just say I contributed to a Traditional IRA instead of a Roth, it fixes the issue if I do this because the software then realizes it is non deductible.
Harry Sit says
I don’t see an obvious way to enter the contribution as Roth and then say it was recharacterized to Traditional. Of course you still enter the 1099-R for the distribution from the Roth IRA for the recharacterization. Since a recharacterized contribution is as if you contributed to Traditional to begin with, I guess it’s OK to enter the contribution as Traditional. Please confirm with FreeTaxUSA support.
Chuck says
Thank you for this article. I got a little freaked out when I couldn’t figure out where everything goes, but this was clear and easy, and I ended up paying tax on $3.
Tim says
I notice you left Box 2a on the 1099-R blank?? Whereas on my 1099-R from Vanguard its shows $5500 in 2a (taxable amount). I contributed to my Traditional then recharacterized the next day, per the Backdoor Roth protocol.
Here’s my question, am I to leave the 2a BLANK in FreetaxUSA or follow my actual 1099-R and insert the $5500? Does either way affect the auto-generation of the 8606 form in the software?
Harry Sit says
You should enter your actual 1099-R. The protocol is to convert the money from the traditional IRA to a Roth IRA. I hope you actually converted, not recharacterized. They are different.
Ryan says
Tim, if your 1099-R has box 2b (“Taxable amount not determined”) checked, it’s fine that box 2a has a non-zero value.
If you look at the IRS instructions for form 1099-R [1], you will see this: “Box 2b. If the first box is checked, the payer was unable to determine the taxable amount, and box 2a should be blank, except for an IRA. It’s your responsibility to determine the taxable amount”
Assuming you actually did “convert” and not “recharacterize”, then this indicates the value of 2a is bogus and can be ignored.
See also: https://www.bogleheads.org/forum/viewtopic.php?t=88861
[1] https://www.irs.gov/pub/irs-pdf/f1099r.pdf
Tim says
Harry, Ryan, thanks for taking the time, that really helps!
Harry Sit says
I replaced the screenshot with box 2a filled in. It still works the same. Thank you for bringing it up.
Mike says
FreeTaxUSA workaround for inherited IRA minimum required distribution (MRD) with backdoor Roth (2018 tax year returns):
If you have an inherited traditional IRA with NO BASIS and an owned traditional IRA nondeductible contribution converted to a Roth IRA, FreeTaxUSA will not correctly generate form 8606. You can work around this by deliberately omitting the IRA/SEP/SIMPLE “X” in box 7 of your 1099-R, which I discovered by trial and error and an educated guess.
If you don’t do this, FreeTaxUSA incorrectly includes your MRD on form 8606, causing an incorrect prorated allocation of taxation between the MRD and Roth conversion. My total taxable distribution forwarded to form 1040 line 4b was correct as was my tax owed, but my form 8606 was incorrect, as data from inherited and owned IRAs should not be included on the same form 8606. MRD from an inherited IRA with NO BASIS gets added directly to form 1040 line 4b without generating a form 8606 of its own, and should not be co-mingled with a form 8606 for an owned traditional IRA to Roth conversion.
RothIRAGuy says
Lifesave man! I was going crazy … the backdoor ROTH had me paying thousands more. You just saved me $2k! 😉 Go you!
Nathan says
My backdoor Roth conversion for 2019 was a little more complicated because I had $3 in profit on the initial contribution from the money market account before I did the Roth conversion. My issue with FreeTaxUSA is how the software is filling out my Form 8606. It leaves lines 8-11 blank. Still gets to the correct total on line 13. It also is still doing 16-18 properly and showing $3 as the taxable amount (line 18). I’m wondering if I did something wrong or if there is a tax software issue. Will those lines being blank cause some sort of issue in an audit situation? White Coat Investor’s site is where I find that lines 8-11 should be filled in.
Harry Sit says
Lines 8-11 are interim steps. When you convert 100%, you are allowed to skip some interim steps.
Nathan says
Thanks so much for the quick response! Great tutorial.
Bob says
There’s a new screen for 2019.
In the deductions section, after the IRA Contributions screen
“2019 IRA Withdrawal Information”
“2019 Contributions Withdrawn from a Traditional IRA”
“Did X withdraw any traditional IRA contributions by the tax filing due date?”
“Enter any 2019 traditional IRA contributions X withdrew”:
Since I converted my entire Traditional IRA to a Roth IRA (which I indicated in the Income section) do I need to fill out info here?
Full help text below
What is a withdrawal of 2019 traditional IRA contributions?
If you made traditional IRA contributions in 2019, you can withdraw them tax free by the due date of your 2019 return (or, if you filed an extension, by the extended due date) as long as you didn’t take a deduction for the contribution and you withdraw any interest earned on that contribution.
Any withdrawn interest is considered taxable income and should not be treated as part of your contribution withdrawal.
Generally any contributions withdrawn after the due date (or extended due date) will be considered taxable distributions and will be reported to you on a 1099-R. If you haven’t reached age 59 1/2, the 10% additional tax on early distributions may apply.
Harry Sit says
You answer ‘No’ to that question. Converting to Roth is not a withdrawal. I added a screenshot to the post.
Bob says
Thank you!
JD Scott says
Extremely helpful article. Last two years I filed with different more expensive software that did not generate the 8606 form for the Roth backdoor. FreetaxUSA is the best and cheapest tax software I have used. Thanks for the info!!!
PanTaras says
Great Article!
However, I followed the instructions and checked the output of form 8606. FreetaxUSA vesrion left lines 6 -12 blank (no values at all). I compared it with other manual 8606 filling instruction https://www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/ – this example has values in lines 6-12.
Does anybody know if thats an issue?
Thanks!
Harry Sit says
It’s not an issue. Those lines are interim steps, which the software is allowed to skip when you converted 100%.