[Updated on January 16, 2023 with screenshots from FreeTaxUSA for 2022 tax filing.]
TurboTax and H&R Block are the two major tax software for filing personal tax returns. A low-cost alternative to TurboTax and H&R Block software is FreeTaxUSA. FreeTaxUSA isn’t only for simple returns. It can still handle more complex transactions, such as the Backdoor Roth.
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, please read 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 you report the conversion 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 the following year between January 1 and April 15. You also report the conversion 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 finishing your conversion in the same year. I called this a “planned” Backdoor Roth — you’re doing it deliberately. 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.
Here’s the scenario we’ll use as an example:
You contributed $6,000 to a traditional IRA in 2022 for 2022. Your income is too high to claim a deduction for the contribution. By the time you converted it to Roth IRA, also in 2022, the value grew to $6,200. You have no other traditional, SEP, or SIMPLE IRA after you converted your traditional IRA to Roth. You did not roll over any pre-tax money from a retirement plan to a traditional IRA after you completed the conversion.
If your scenario is different, you will have to make some adjustments to the screens shown here.
Before we start, suppose this is what FreeTaxUSA shows:
We’ll 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 to the next section: Traditional IRA Contribution. You’ll complete this section next year.
In our example, by the time you converted, the money in the Traditional IRA had grown from $6,000 to $6,200.
Click on “Add a 1099-R” when it asks you about the 1099-R.
It’s just a regular 1099-R.
Enter the 1099-R exactly as you have it. Pay attention to the code in Box 7 and the checkboxes. It’s normal to have the same amount as the taxable amount in Box 2a, when Box 2b is checked saying “taxable amount not determined.” Pay attention to the distribution code in Box 7. My 1099-R has code 2, and the IRA/SEP/SIMPLE box is also checked.
Right after you enter the 1099-R, you will see the refund number drop. Here we went from a $1,540 refund to $264. Don’t panic. It’s normal and temporary. The refund number will come up when we finish everything.
It’s not an inherited IRA.
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. Repeat if you have another 1099-R. If you’re married and both of you did a Backdoor Roth, pay attention to whose 1099-R it is when you enter the second one. You’ll have problems if you assign both 1099-R’s to the same person when they belong to each spouse.
It asks you about the basis carried over from previous years. If you did a clean “planned” backdoor Roth every year, although technically the answer is Yes, you have nothing to carry over from year to year. In our simple example, we don’t have any. If you do, answer Yes and get the number from line 14 of Form 8606 from your previous year’s tax return.
We didn’t take any disaster distribution.
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
Find the IRA Contributions section under the “Deductions / Credits” menu.
Answer Yes to the first question and enter your contribution. Leave the answer to “Did you recharacterize” at No. In our example, you contributed $6,000 directly to a Traditional IRA. If you originally contributed to a Roth IRA and then you recharacterized the contribution as traditional contributions, enter the amount in the Roth IRA box and choose Yes below when it asks you whether you recharacterized.
Your refund number goes up again! It was a refund of $1,540 before we started. It went down a lot and now it’s back to $1,496. The $44 difference is due to paying tax on the $200 earnings before we converted to Roth.
We didn’t contribute to a SEP, SIMPLE, or solo 401k plan in this example. Answer Yes if you did.
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 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.
If you only contributed *for* last year but you didn’t convert until the following year, remember to come back next year to finish the conversion part.
Taxable Income from Backdoor Roth
After going through all these, let’s confirm how you’re taxed on the Backdoor Roth. Click on “View 1040” on the right-hand side.
Look for Line 4 in Form 1040.
It shows $6,200 in IRA distributions in line 4a and only $200 is taxable in line 4b. If you are married filing jointly and both of you did a backdoor Roth, the numbers here will show double.
Tah-Dah! You got money into a Roth IRA through the backdoor when you aren’t eligible to contribute to it directly. You will pay tax on a small amount in earnings if you waited between contributions and conversion. That’s negligible relative to the benefit of having tax-free growth on your contributions for many years.
Troubleshooting
If you followed the steps and you are not getting the expected results, here are a few things to check.
W-2 Box 13
Make sure the “Retirement plan” box in Box 13 of the W-2 you entered into the software matches your actual W-2. If you are married and both of you have a W-2, make sure your entries for both W-2’s match the actual forms you received.
When you are not covered by a retirement plan at work, such as a 401k or 403b plan, your Traditional IRA contribution may be deductible, which also makes your Roth conversion taxable.
Self vs Spouse
If you are married, make sure you don’t have the 1099-R and the IRA contribution mixed up between yourself and your spouse. If you inadvertently assigned two 1099-Rs to one person instead of one for you and one for your spouse, the second 1099-R will not match up with a Traditional IRA contribution made by a spouse. If you entered a 1099-R for both yourself and your spouse but you only entered one Traditional IRA contribution, you will be taxed on one 1099-R.
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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%.
Matt says
Performed a spousal backdoor Roth in 2019; however, our AGI fell within the phaseout range ($193k-$203k) so now my spouse’s contribution is partially deductible. Is there a way to force the software to make this contribution non-deductible? I was able to do that in TurboTax, but have not been able to figure it out with FreeTaxUSA.
Harry Sit says
If you converted during 2019, it’s not necessary to force it. The partial deduction makes your conversion partially taxable, which is offset by the partial deduction. You get the same end result. If you converted in 2020, having a lower AGI in 2019 isn’t necessarily bad. It may qualify you for some stimulus money.
Derwin says
Great post! Saved me over $2k trying to figure this out!
Thank you
Hao says
Thank you so much for this article and many others. I use FreeTaxUSA to prepare our federal & CA state tax, so your instructions help.
Justin says
I use freetaxusa. I know you aren’t covering this situation, but should I be able to do the following…
My wife and I each contributed $6000 to Roth IRAs in 2019. Our income was too high so in early 2020 we recharacterized those contributions (and associated earnings – let’s say $7000 each by then) to traditional IRAs and then a month later (why brokerage made us wait a month I have no idea) converted to Roth IRAs again. Let’s say we converted $7200 each. The recharacterization we had to explain on our 2019 tax return. We have no other traditional IRAs (basis?). Now we have to capture the conversion on our 2020 tax return. Should I expect about $2400 taxable income from all that?
Harry Sit says
That’s correct. You will have $1,200 taxable income from each 1099-R. The $6,000 contributed for 2019 recharacterized in 2020 becomes your basis carried over from 2019. In the “IRA Basis and Value” screen, you enter $6,000 in the first box (repeat for each of you).
Jason says
Thanks so much for pointing me to Freetax USA. I can’t quite understand how to do this scenario in freetax: In 2020 I made a contribution of $8500 to an IRA. $2500 counted for 2019 (because I had only contributed $3500 in 2019) and $6000 counted for 2020. I convert these to a Roth immediately so there was no growth. Vanguard’s 1099-R has $8500 in box 1. I think I know how to enter this on 8606 if I do it by hand but I can’t get it right in Freetax. Can you help? I know the 8606 is filled out correctly for 2019 ($3500) but perhaps I need to resubmit 8606 for 2019 as well?
Harry Sit says
Assuming that both your $3,500 and $2,500 for 2019 were nondeductible, your 2019 Form 8606 should’ve shown $6,000 in contributions, including the $2,500 you contributed for 2019 in 2020. In that “IRA Basis and Value” screen, you should enter $2,500 in the first box as your basis carried over from 2019.
Jason says
thanks! They are both nondeductible. The 2019 8606 had $3500 in box 1 and that is what I reported because at the time when I filed that was all we had contributed. Only after filing 2019 taxes was the remaining $2500 put into the account, so it looks like the 8606 just needs to be resubmitted with an explanation. I’ll put 2500 as my basis as I don’t think that should bring up the pro rata issue since at the end of both 2019 and 2020 the amount in the IRA was $0
Ravinatha Reddy Buchupalli says
Hello,
Due to high income, I am not eligible for deductible/tax benefits towards IRA contribution.
On 1/20/2021 I created my first traditional IRA account and deposited after tax dollars of $6000 from my checking account.
12 days later – On 2/2/2021, I transferred those funds into Roth IRA. This is also referred as backdoor Roth IRA as mentioned in this article. I choose this contribution amount towards 2020 ( as per the rule to contribute until Apr 15 2021).
Do I need to report this in this year’s tax return? I do not have Form 1099-R yet. I tried the steps mentioned in the article. However Form 5329 is generated and shown as excess contribution. How do I generate form 8606?
Harry Sit says
You report the conversion part next year when you have the 1099-R but you do need to report the contribution part for 2020. Make sure you already entered your W-2, which shows you have compensation eligible for an IRA contribution.
Ravinatha reddy buchupalli says
Harry,, can you please clarify your below comment. Are you referring to form 8606 to report the contribution? Thanks in advance.
“Make sure you already entered your W-2, which shows you have compensation eligible for an IRA contribution.”
Harry Sit says
You need compensation income (W-2 or self-employment) to be eligible for a traditional IRA contribution. If you followed all the steps after the heading “Traditional IRA Contribution” but you didn’t enter any eligible compensation income before you entered the IRA contribution, the software would generate Form 5329 showing the contribution as excess contribution. That could be one reason you got a Form 5329 and not a Form 8606.
Backdoor Conversion Question says
I have a situation where there is literally enough small “interest” that accrued after my conversion was complete for the year.
As a result, my technical account balance is enough to round to $1 by the end of 2020 (the $1 was converted over in this year’s backdoor conversion)
From following this guide, it seems this makes the non-taxable portion $5999 instead of $6000.
Would you wait until 2021 taxes to show that $1 so that it’d keep te amount reported in line 13 equal to the contribution made for the year?
Harry Sit says
Whether your balance in the traditional IRA was $1 or $1,000 at the end of the year, you enter that balance in the second box in the “IRA Basis and Value” screen. If that results in $5,999 non-taxable and $1 taxable, so be it. You pay tax on $1. No big deal. You’ll have a value on your Form 8606 line 14. That’s your basis carried over to the following year. Next year you enter that basis value in the first box in the “IRA Basis and Value” screen. The software will take care of the necessary calculation.
Backdoor Conversion Question says
Hi Harry — thanks for the prompt reply. So if I’m following, what you mean is what I’m effectively doing is establishing my end of 2020 basis as $1 since I’m rounding up to the nearest dollar by the end of Dec 31, 2020.
That way, once adding my $6000 contribution for 2021, the conversion of the full account would be for $6001 in 2021 taxes since the full $6001 was converted to zero the account back out (which I recently just did for 2021)?
Harry Sit says
Your end of year balance is on your account statement. Your broker will also report it to the IRS on Form 5498. You can’t change that number. Just enter it from your account statement as a matter of fact. Your broker will report the conversion amount in 2021 to you and to the IRS on Form 1099-R next year. You can’t change that number either. Again just enter it as a matter of fact. You don’t have any other choice. The software will work out the calculation. If it makes you pay tax on $1 this year, you pay tax on $1. If it makes you pay tax on $1 again next year, you pay tax on $1. Just let the software do its job and follow along.
Alex says
I am using FreeTaxUSA for the first time, and I did a standard backdoor Roth in 2020. (In 2020, I made a nondeductible contribution of $6,000 to a traditional IRA, I converted the $6,000 to a Roth IRA, and I had $0 basis in traditional IRAs for prior years.) FreeTaxUSA produces Form 8606 with $6,000 on lines 1, 3, 5, 13, 16, and 17; $0 on line 21; and blanks everywhere else; AND on line 13 there is an asterisk (*) which states “*From Worksheet 1-1 in Publication 590 B.” I think the end result is correct, but the $0 on line 21 and the reference on line 13 is throwing me off. Does this seem ok?
Harry Sit says
That’s OK. Worksheet 1-1 is an alternative to working through lines 6-12. A $0 on line 21 will be treated as blank.
Steve says
I keep going through the steps as listed above but despite having an income that phases me out of IRA deductions, FreeTaxUSA keeps giving me a $6,000 IRA deduction. However, it also keeps 1040 line 4b as $6,000 so they cancel one another out and the final refund appears correct. Looking at form 8606, lines 1-15 are blank. Lines 16 and 18 read 6000.
While I know the math is right, I’d rather not have my return flagged for this… Any help would be greatly appreciated.
Harry Sit says
Double-check your W-2 box 13. If the software thinks you’re not covered by a workplace retirement plan and therefore there’s no income limit, it’s going to give you the deduction for your Traditional IRA contribution.
Steve says
That fixed it … except the problem is my W-2 box 13 is unchecked. I’m wondering if this is in error, because we in fact do have a self-directed 401k profit sharing program setup (which we fill to the ~57k max allowable). I’ll reach out to our accountant / payroll company about if we should correct our W-2 to reflect this (or if there’s a reason it’s unchecked…). Assuming it’s not an error, is there any problem with proceeding with filing with that box checked in the software even if it’s not in real life?
Your help is much appreciated, Harry. Thank you!
Harry Sit says
It sounds like an error on the W-2. I don’t think there’s any problem if you treat yourself as covered by a retirement plan even when you’re not.
Steve says
Update: The W-2 is incorrect (as suspected). Many thanks!
Sami says
Thank you very much for the walkthrough. I am running into an issue which is a result of my own mistake, but I’m hoping you can provide some guidance.
-discovered backdoor Roth IRA in December 2019
-contributed to traditional IRA (both for me and spouse) in December 2019
-funds did not settle immediately, so could not convert to Roth until January 2020. In addition, $2 interest was earned in the meantime.
-filed 2019 taxes with form 8606 which showed $6000 nondeductible traditional IRA contribution in 2019 with total basis of $6000
-did 2020 traditional IRA contribution followed by Roth conversion in 2020
Now, when trying to file with freetaxusa, I think I am doing something incorrectly.
-1099-R for both me and spouse shows gross distribution of $12002 each with taxable amount of $12002 (on each of our 1099-R forms). Taxable amount not determined is checked.
-I plugged in the 1099-R information into freetaxusa. It asks how much of the $12002 basis I converted to Roth. I converted both the 2019 contribution and 2020 contribution in 2020, so I put the whole $12002 (for each of us).
-Then it asks if I’ve ever had a nondeductible traditional IRA contribution on any prior year tax return. I entered yes because I made the original $6000 traditional IRA contribution for each of us in 2019 (although it couldn’t get converted till 2020 like I mentioned).
-Next screen asks for total basis, if any, in traditional IRAs for 2019 and earlier years. I entered $6000 here per form 8606 from 2019 return.
-Repeated this for spouse
-Then I went to IRA contributions under common deductions.
-Enter any traditional IRA contributions Sami made during 2020: I entered $6000 for each of us.
-Then it shows the screen where it says “IRA deduction summary”. Here it is showing IRA deduction of 12000. I was under the impression that this should be 0? And the refund appears to decrease during the process, and then partially increase but not back to the number it was before entering the IRA information.
I know not converting 2019’s contribution till 2020 made this messy, but do you know what I am messing up here? Thank you so much for your time.
Harry Sit says
It sounds like you entered them correctly. The software thinks your IRA contributions are deductible. Make sure you already entered your income that exceeds the income limit and double-check your W-2 box 13. See comments #23 and #25.
Sami says
Thank you very much for your reply. I checked retirement plan on one of the W2s and now the IRA contribution no longer shows as deductible. It seems correct now.
Ondrej B says
This is my first time doing anything IRA-related. I contributed to IRA and rolled over to ROTH in 2021 and now I’m confused about how to report it. (I know – should have done it in time..)
After going through all the steps (skipping 1099-R) I can see a $6000 IRA deduction but I don’t believe that is right. It never offers me the “IRA Basis and Value” screen. Is that because of the missing 1099-R?
Also, I’m over the income limit for the IRA to be deductible. However, W2 box 13 is unchecked (employer offers 401k but I did not contribute in 2020)
Am I really allowed to have this deduction?
Any help would be appreciated!
Harry Sit says
See what the IRS says about “covered by a retirement plan”:
https://www.irs.gov/retirement-plans/are-you-covered-by-an-employers-retirement-plan
If you didn’t contribute and your employer didn’t/won’t contribute to your account for 2020 either, your W-2 box 13 is correct. If you’re not covered by a retirement plan and you’re single or your spouse isn’t covered by a retirement plan either, your contribution to the IRA is always deductible. So you will take the deduction in 2020 and pay tax on the conversion in 2021.
Edwin says
I’m so glad I bookmarked this page when I found it in Q1 2020 while working on my 2019 tax. Thanks for updating it to reflect the 2020 tax year Harry!
Ted says
You are a hero. Thank you thank you thank you. I hope you have a warm feeling in your heart from helping so many strangers.
Ally says
Hi Harry,
Thanks for this informative article, it’s super helpful! This is also my first year with a mega backdoor in-plan conversion, is there a work around for Freetaxusa or should i switch over to turbo tax? I been using freetaxus for the past 5 years, i really hope i do not have switch over. Thanks in advance for your response!
Regards,
Ally
Harry Sit says
I just tried it. It’s quite straightforward. You don’t have to switch to TurboTax. Here’s the walkthrough:
https://thefinancebuff.com/mega-backdoor-roth-freetaxusa.html
Ally says
Thank you so much Harry! I followed your instructions and it worked perfectly! I really appreciate the effort.
Kaitlin says
THANK YOU, you are a life saver!
Would be forever grateful if you could help re: how to complete the state tax return in relation to the backdoor Roth (filing in Arkansas). For context, I did a planned Backdoor Roth of $6k.
In the State Pension & IRA Income section it says:
“Most pension and IRA distributions are eligible for a $6,000 exemption from the taxable amount. However, premature distributions from IRA accounts and certain annuities are not eligible. Annuity income is only eligible if it is from an employment-related pension plan.
Question 1: Do you have any nonqualified premature IRA distributions? YES or NO
Enter the amount of your pension and IRA distribution income, if any, that isn’t eligible for the Arkansas $6,000 exemption.
The amount of your taxable premature IRA distributions on your federal return is $0. Add any IRA distributions with a code 2 in Box 7 of your 1099-R unless they were due to death or disability. If you have any annuity income that isn’t from an employment-related pension plan, then add that amount to the number you enter below.
Question 2: Your Gross Ineligible Distributions
(Amount of gross distributions NOT eligible for the $6,000 exemption): $__
Question 3: Your Taxable Ineligible Distributions
(Amount of taxable distribution income NOT eligible for the $6,000 exemption): $__
Hoping for help re: whether to select yes or no and what numbers to put in Questions 2 and 3 if I select yes.
Harry Sit says
It looks to me 1. Yes 2. 6000 3. 0. The amount you converted is ineligible but it’s not taxable because it was after-tax money.
Kaitlin says
Thank you very much @Harry
Plicy P. says
Hi Harry,
Thanks so much for this post! It’s so helpful. I also just want to confirm I am doing this correctly.
I contributed $6000 to a traditional IRA in 2020 and immediately converted it to a Roth IRA. At the end of inputting all of my information as you advise, my taxable amount on form 1040 line 4b is “0”. I think this is correct since I made the contribution with non-deductible after tax dollars, but I just wanted to confirm.
Thanks!
Emy says
thank you so much for this article! it was extremely helpful.
i was following the steps provided. however, when i clicked on my 1040 form, it showed lines 4a and 4b (IRA distributions & taxable amount) as being the same. i’m not sure how to get it to deduct the $6000 in the taxable amount.
thank you so much!
Harry Sit says
Check your W-2 entries. Box 13 should be checked if you’re an active participant of a workplace retirement plan. See comments 23, 24, and 25.
KP says
Hello,
I could use some last minute assistance with figuring out how to help my SO properly report a late contribution for 2020 through freetaxusa. I convinced her to start doing a Backdoor Roth this year, so she made a contribution for 2020 in February 2021, and has since rolled it over into a Roth. I understand that she doesn’t have to report the rollover until next year, but I’m having trouble getting freetaxusa to generate the Form 8606 correctly to report her late contributions for 2020.
I only see two places to input this information. There is a space in the Income section, but that requires more info from a 1099 which she did not receive this year, since she didn’t make the 2020 contribution until February 2021. I found the IRA Contributions page under Deductions/Credits, and have input all of the information the same as in the guide above, with the exception that I input $6,000 where it asked “Enter the amount, if any, of your contributions to a traditional IRA for 2020 that were actually made from January 1, 2021 through May 17, 2021.” Despite doing this, the form 8606 which is generated as part of the Form 8606 in her federal tax return on the Summary page lists box 4, for contributions made in 2021, blank.
For the life of me I can’t figure out why that is happening, and am not sure if it would cause her a problem. Any help would be greatly appreciated!
Harry Sit says
The IRA Contributions page under Deductions/Credits is the right place. If her Form 8606 correctly lists her non-deductible contribution in line 1, read the instructions on line 3. When she answers No, she’s instructed to skip to line 14 and not complete lines 4-13.
Heidi says
Hi Harry,
Thank you for the detailed information! For the line 8 (Enter the net amount you converted from traditional, SEP, and SIMPLE IRAs to Roth IRAs) on the Form 8606, does this amount include only the contribution that’s converted? or also include earnings?
Harry Sit says
Also include earnings. As the example shows the converted amount was $6,200 from a contribution of $6,000.
Stephanie says
Hi Harry,
Thanks for this article very helpful. I’m noticing for 2022 there is a question under ‘Did you contribute to an IRA – Did XYZ recharacterize any IRA contributions’ – when I click yes and follow the prompts – it makes my refund go back down again. I’m not sure what I’m doing wrong? Do I not click this? Which then leaves me with my original refund amount? Any guidance would be great! Thanks!!
Blake says
I’m having the same issue as Stephanie. I’m wondering if the software has a glitch, as I’m following the above instructions to a T, and it’s considering it to be taxable income.
Harry Sit says
I just went through the 2021 edition. It’s pretty much the same as in 2020. The default answer to “Did you recharaterize any IRA contributions?” is No. Leave it as that. You converted, which you already entered in the income section. A conversion isn’t a recharacterization.
Blake says
I just figured that out earlier, and that did get the tax return back to where I started, so it worked.. thanks!!
Stephanie says
I figured out the same Blake! Thanks for the response Harry! Really this walk through is fantastic!
Chris K. says
I have an interesting scenario:
My wife and I were planning on filing married separately due to her being in a student loan forgiveness plan that was an income-driven repayment plan. Since her debt has been wiped out after completing 120 payments successfully (thank you forgiveness waiver), we will be filing jointly for 2021 tax year.
In 2021, I performed 2 separate transactions.
1. I converted a traditional IRA to Roth in the amount of $1,367. $800 of this amount was originally contributed in 2017 to a 401k plan from an internship. I rolled it into a Traditional IRA later on in 2017, and eventually invested this and it grew to $1,300. Fast forward to 2021, I converted this into a Roth IRA and I expect to pay taxes on the amount.
2. Due to expecting to file separately with my wife, I performed a Backdoor Roth for $1,000. I contributed $1,000 to a Traditional IRA and immediately converted it to a Roth IRA. Regardless of income limitations, I don’t believe I will have to pay taxes on that amount.
Total Roth Conversion for 2021: $2,366
Total IRA Contributions for 2021: $1,000
Currently on my 2021 1040, Form 8606 shows the $2,367 and lines 16 and 18. Page 1 shows the $2,376 on line 4a and 4b. I also currently show a $1,000 IRA deduction on Schedule 1 line 20. Net, my taxable amount is $2,367 1040 Page 1 Line 4b – $1,000 1040 Page 1 Line 10 (adjustments to income from IRA deduction) = $1,367.
I believe this is the correct preparation and presentation. I would love to hear other peoples feedback.
Harry Sit says
Double-check your W-2 entries and see if Box 13 should be checked for having participated in a workplace retirement plan. See comments 23-25 and 31.
Chris K. says
I input a fake w-2 and it course corrected. Also took a deep dive into Publication 590-B and Worksheet 1-1. I’m actually a CPA and this shit is confusing as hell.
My form 8606 is doing some weird stuff, Lines 6-12 are not populating, instead it is being calculated on Worksheet 1-1 from Pub 590-B and the amounts are input on lines 16 -18
Line 16 = 2367 -> flows to Page 1 4a
Line 17 = 1000
Line 18 = 1367 -> flows to Page 1 4b
Following the instructions, I believe this is the correct presentation. I’m happy with the end result. Thanks for bringing that up since it made a huge difference.
Michael says
Harry,
Is there a way to buy i bonds with refund using freetaxusa? I haven’t found a way to recieve a refund other than direct deposit.
Thanks for all of your tutorials they are very helpful.
Harry Sit says
Off topic, but other readers reported that FreeTaxUSA doesn’t support buying I Bonds with the tax refund. H&R Block does, and it isn’t that much more expensive ($10 without state, $20 with state) when you know how to get it.
https://thefinancebuff.com/overpay-taxes-buy-i-bonds-better-than-tips.html#comment-28260
ERdoc says
Hey Harry,
I need help with how to correctly input the information into free tax USA for the error i made in my first completed backdoor ROTH. I contributed every year $6k x2 (wife) into our ROTH IRAs, i realized only later in the year that my annual income MFJ would be too high and thus re-characterized the contributions into a traditional IRA in december (noting growth on the initial contribution, $6.9k , $7.1k). Unfortunately the ERROR i made was then converting the traditional IRA amount back into the Roth account after 2021, completed in early january 2022.
From other forums / help i’ve been told that i need to report the 2021 non-deductible contribution on form 8606, and then report the conversion for 2022 tax filing (both conversions as i plan to do the backdoor roth again – but correctly ).
My question is how do i do this in the FREETAXUSA software, deluxe, that i am using. Fidelity-who i have the accounts in- sent me a 1099-R and 2 separate 5498 form (for my wife and i separately). Trying to figure out how to form 8606 reporting correctly into the free tax usa software.
Appreciate your help always, read many of your posts!!
Harry Sit says
Enter the 1099-R’s as-is. Code R in box 7 tells the software it was for recharacterization. In the IRA contribution section, put $6,000 in the second box for Roth IRA. Answer “Yes” to “Did you characterize?” and say you recharacterized the full $6,000. Repeat for spouse but make sure both the 1099-R and the IRA contribution are attributed to the right person.
ERdoc says
thanks harry,
the 1099R from fidelity has a “N” value in box 7 currently, it gives me an error message when trying to put “R” into the tax software saying – “you would only enter a 2022 form 1099R with redistribution code R on your 2021 tax return.”
Also when you mention “put 6000 into second box for Roth IRA,” do you mean put that in box 2a? after the box 1 gross distribution is noted as $6900?
thanks!
Harry Sit says
My mistake. Code N is correct for same-year recharacterization. Don’t change anything to the 1099-R. By “second box” I meant this screenshot:
https://thefinancebuff.com/wordpress/wp-content/uploads/2022/01/11-contribution.jpg
I had $6,000 in the box for Traditional IRA and I answered no to the “Did you recharacterize?” question. Your $6,000 goes into the next box for Roth IRA and you answer yes.
Jason says
I’m thinking about using FreeTaxUSA for the 2021 tax filing season. I typically owe balances due on my Federal and State taxes, how does the software handle that? Do I just mail in a 1040-V with a check for Federal tax due, and the similar form and check for state? Thanks.
Harry Sit says
When you e-file you give a bank account for direct debit. Printing the forms and mailing with a 1040-V and a check also works but expect a long delay in processing.
Blue says
I have a question about the “Enter the value of all traditional, SEP, and SIMPLE IRAs as of December 31, 2021” question in the “IRA Basis and Value” screen. I have a SEP IRA plan going for a couple of years and it is non $0. So, even if the Traditional IRA total value is $0, the value in this box is non-$0 for me. If I put a non-$0 value for this question I get taxed for the $6,000 conversion.
Harry Sit says
That’s correct. You don’t have a clean backdoor Roth when you have a SEP-IRA. You get taxed on a [big] part of your conversion but a corresponding part of your SEP-IRA is now non-taxable. You pay less tax when you withdraw from your SEP-IRA in the future or when you convert your SEP-IRA to Roth. You’ll have to remember to carry this part in your SEP-IRA. You’ll pay tax twice if you forget.
Blue says
Thank you! How do I carry forward the tax I pay for this “dirty” backdoor Roth? On which form doe it get reported now and on which form I report it in the future?
Harry Sit says
Your non-taxable basis in the SEP-IRA is carried on Form 8606 line 14. When you withdraw from your IRA or convert to Roth again, remember to enter this number. Part of it will be used to offset the tax on the future withdrawal or conversion.
Blue says
One year forward, same situation, will I pay less taxes in the $6,000 Roth conversion because I was taxed last year?
Harry Sit says
If you still have your SEP-IRA, enter the balance as of 12/31 as you did last year and enter the basis from the previous year in the box above that using the number on line 14 of your last year’s Form 8606. The software will calculate how much of your conversion will be taxed. It should be less this year.
Susan says
I’ve used FreeTaxUSA for a few years. In March 2020 I made a $7000 contribution for 2020 to my Roth IRA (I’m currently 57).
Found out in March 2021 while doing taxes that this was ineligible due to good performance of my husband’s investments.
Called Vanguard and they walked me through taking out the contribution plus extra to cover earnings, plus I prepaid $200 in taxes.
Now I have a 1099R 2021 and need to amend my 2020 return to add it.
Question, line 7 shows codes JP. After that, the IRA/SEP/SIMPLE box is not checked, but FreeTaxUSA gives a message that I need to check it in order for them to figure my taxes. I looked on the IRS site under directions for 1099R and it says NOT to check the box for a Roth IRA. Help — should I check the box or not? I hate to check it when the IRS site specifically makes it sound like I shouldn’t.
FreeTaxUSA shows a $200 refund without it checked; $353 tax liability when unchecked.
Thank you! So glad I found this site; very helpful.
Harry Sit says
Your withdrawal from the Roth IRA isn’t the same as the one described in this post. You shouldn’t change anything on the 1099-R when you enter it. Don’t check any box if it isn’t checked on the actual form.
Alex P says
It appears that FreeTaxUSA still does not treat inherited IRAs correctly for the purposes of Form 8606, similar to the issue described in Post No. 8. I had a total distribution from an inherited IRA, and it got commingled into Form 8606 even though it should not have (as far as I understand). While the ultimate tax calculated was correct, the numbers on the generated Form 8606 did not make sense. As suggested in Post No. 8, omitting the X for box 7 appears to resolve the issue. Would this work-around cause any issues?
JC says
I agree this is still broken and it very much does not calculate the correct result for me (adding thousands in incorrect tax burden). I contacted them but they do not seem to be able to fix it for this year.
John says
I am unable to get to the IRA basis and value screen, despite selecting every option in line with your instructions. Line 4b treats the entire $6K contribution as taxable. It also allows me to deduct the traditional IRA, which is incorrect, because I am above the income limits. I ran my info through Turbotax and it correctly handled the roth conversion. I’d really like to avoid turbo tax. Any suggestions about what I’m doing wrong? I do have a second 1099-r, but it was a trustee-to-trustee rollover from a traditional IRA to a traditional 401k and unrelated to the conversion.
Harry Sit says
See the section on W-2 Box 13. It allows you to deduct the traditional IRA contribution when it doesn’t know you’re covered by a workplace retirement plan.
John says
Got it! Employer didn’t check the box. Thanks!
Kaila says
Hello, I did a simple backdoor conversion in the same year and followed the steps above. My 1040 appears correct with 4b blank, but was wondering how form 8606 should look. I though 15-18 should be blank. I have 6K on lines 16 and 17, and line 9 is blank.
Harry Sit says
Lines 16 and 17 should have numbers.
ERdoc says
Hey Harry,
Any idea how to force the software to report Traditional IRA contribution as non-deductible, when the software is forcing the deduction?
Briefly, I contributed to Roth early 2021 for wife and I as always, then later in 2021 was concerned we would be over the limits for contribution, so tried to do backdoor Roth for the first time ever (screwed up a bit).
$6000 (his), and $6000 (hers), recharacterized into Traditional IRA (~$6900 each respectively after gains) in December 2021. Then on 1/3/22 converted back to Roth, before learning that the T-IRA should be $0 on 12/31/21.
After all deductions, our income is under the limits actually, and then entering all of the information into the FREETAXUSA software, it gives me a $484.00 IRA deduction. My friend (CPA), briefly reviewed by return before filing and recommended that I just treat the traditional IRA contributions as non-deductible , to avoid future pro-rata since I plan to do backdoor Roth again..
I cant seem to figure out in the software how to make the T-IRA contributions as non-deductible? at least by not doing anything incorrectly. Any thoughts. The “support pro” had no clue.
Harry Sit says
You can’t force it in this software unless you want to print out the forms, retype them with your edits, and file by mail. The $484 deduction doesn’t trigger the pro-rata rule though. The pertinent date is 12/31 in the year you converted. That’s 12/31/2022, not 12/31/2021. You’re carrying basis into 2022 anyway because you didn’t convert within 2021. Instead of carrying $6,000 each, you’re carrying $5,758 each (assuming the $484 is a combined deduction evenly distributed between two IRAs).
The only downside of taking the deduction is that you may be taking a $484 deduction when your tax rate is low in 2021 and getting taxed on $484 when your tax rate is high in 2022. Because $484 is relatively small, this effect is also small (worth ~$100 if your tax rate in 2022 is 20 percentage points higher than in 2021).
Next time remember to finish all you moves within the same year. Contribute, recharacterize if necessary, convert, all in the same year. Keep it clean and don’t let any part spill into the following year.
Ondrej B says
Hi Harry,
Thank you for your help last year, I have a follow-up question regarding my comment #25:
In January 2021 I contributed $12k to IRA (6k for 2020, 6k for 2021) and immediately rolled to ROTH. I took a $6k deduction (W-2 Box 13 not checked) and no form 8606 was filed with the return.
For this tax year, W-2 Box 13 IS checked and I have received a 1099R for $12k which I put into FreeTaxUSA but I’m unsure if I’m doing that correctly. This is what I did:
In the Income/Retirement Income section:
– Entered 1099r: $12k
– “Did you convert part or all of this distribution from a traditional IRA to a Roth IRA?” Yes
– “Amount”: $12k
In the Deduction/IRA contributions sections:
– Entered $6k as traditional IRA contribution in 2021
– In “IRA Basis and Value” entered 0 as IRA basis for 2020
This results in an IRA deduction of $0 and Form 8606 with a taxable amount of $6k. Looks right to me but can you confirm?
Thank you!
Harry Sit says
That’s correct. Your basis from 2020 was zero because you took a deduction in 2020 when you weren’t covered by a retirement plan at work.
Sean says
Hi Harry, would you kindly elaborate on the implications of your statement: “When you are not covered by a retirement plan at work, such as a 401k or 403b plan, your Traditional IRA contribution may be deductible, which also makes your Roth conversion taxable.” My 4(a) and 4(b) are both showing 6000, and having read through the prior comments, I infer that the reason is that my W-2 box 13 is unchecked. The W-2 is correct, as I am not covered by a retirement plan for my W-2 income. (I do have a solo 401(k) for my self-employment income, but I believe that is irrelevant.) Anyway, where does this leave me? Should I not have done a backdoor Roth in my situation? Would be grateful for your thoughts.
Harry Sit says
The solo 401k is relevant. If you made a contribution to your solo 401k, you’re covered by a workplace retirement plan, and the income limit for deducting your Traditional IRA contribution is much lower. You will see the change when you tell the software you contributed to a solo 401k. Sometimes it’s referred to as a Keogh plan in the software.
Sean says
Thank you, Harry. I opened the solo 401k in 2021 and didn’t realize Keogh encompasses solo 401k, so thanks for bringing that to my attention. When I entered my contribution in the freetaxusa field for Keogh, it did indeed reduce my 1040 4(b) value from 6000 to 0. However, the wrinkle is that I contributed to my Roth solo 401k only; I did not make a pre-tax contribution. The software is deducting my contribution as though I had contributed to the regular solo 401k. So obviously that’s not correct — I’m assuming I should remove the Keogh contribution entry. However, that will bring me back to where I was before on the backdoor Roth. So I’m still confused.
Harry Sit says
If you only contributed to Roth solo 401k, you answer Yes to “Do you have a SEP, SIMPLE, or other self-employed qualified retirement plan?” and leave the amount blank. The amount is for pre-tax contributions.
Sean says
Problem solved! 4(b) value is at zero, and no incorrect deduction for the Roth 401k contribution. Many thanks, Harry. Hopefully this exchange will be of some use to others who have a solo 401k instead of W-2 workplace plan.
Ted S says
Hi guys, I do the clean “planned” backdoor Roth every year (as defined in this blog), but I wonder if my accountant (who isn’t working for me anymore) messed up in the form 8606 in prior years. He reported the cumulative sum of all my prior backdoor conversions on line 24 of this form (Part III “Distributions From Roth IRAs”). However, when I follow the steps in this blog, that line is zero. Was he not supposed to fill in that line? Many thanks in advance!
Harry Sit says
If only that line is filled out in Part III, it does no harm, and it’s not required either. It can serve as a friendly reminder that you have this cumulative basis in your Roth IRA from previous conversions. When you eventually take a distribution from your Roth IRA, this data point is right there on your prior year’s tax return, versus tracking it elsewhere off the tax return.
Tom says
Hi! First, the instructions above are very clear and the guidance provided in the comments section helpful as well. I didn’t learn about “backdoor” IRAs until this calendar year (2022) but for the tax year 2021. Through Vanguard I was able to easily and successfully convert $6,000 from traditional to Roth. I understand that during this tax filing year, I enter $6000 in the section “Enter the amount, if any, of your contributions to a traditional IRA for 2021 that were actually made from January 1, 2022 through April 18, 2022.” By filling in $6,000, I went from having a refund to owing the IRS for Federal taxes. I found that if I left the box empty, I would receive a refund.
Two questions I wasn’t able to decipher above:
1. Had I done the conversion prior to January 1, why would this matter in terms of going from refund to owing funds?
2. When filing my 2022 taxes, do I lower my tax burden because I filled that box in? And how does FreeTaxUSA track that?
Thanks in advance!
Harry Sit says
If you contributed for 2021 in 2022, and by definition you converted during 2022, you don’t enter the conversion in the “Convert From Traditional IRA to Roth” section. You do that next year when you have the 1099-R. If you already entered a conversion there without the 1099-R, delete it.
You must enter the contribution in that “January 1, 2022 through April 18, 2022” box because that’s what you actually did. I’m guessing your displayed refund changes because you had entered a conversion (maybe erroneously, maybe unrelated to this backdoor Roth). At first the software thinks you made the contribution in 2021, which it uses to reduce your taxable income from the 2021 conversion. After it learns you contributed in 2022, it can’t use it anymore.
Next year, you’ll have to remember to enter $6,000 in “your total basis in Traditional IRAs for 2021 and earlier years.” That will offset the conversion in 2022.
To get you out of this confusion in the years to come, do your 2022 contribution and conversion in 2022. Don’t do it after the fact in 2023. Make it a clean “planned” backdoor Roth.
Tom says
Harry – just wanted to thank you for the comprehensive answer to my back door Roth question from earlier. It was really helpful.
Jon says
Hi Harry, massive thanks for this resource. I have a question as I’m filling out my taxes on FreeTaxUSA this year for a Roth IRA to Traditional IRA recharacterization. I followed the instructions for the 1099-R, in my case I have $6,307 as a gross distribution/taxable amount. So $307 to pay taxes on.
However, I’m a bit confused as I come to the field “Enter the reason for the recharacterization” — should I just describe that I had a larger income mid-2021? Not sure if this field really matters, but it says it is necessary.
I have another question about this field ” Enter the total amount transferred in your Roth to traditional IRA recharacterization. This includes the amount recharacterized plus any related earnings and less any losses.”
Should I enter $6,307 which is the “Conversion (incoming)” number in my Vanguard IRA and also on my 1099-R, or $6,408 which is “Recharacterization (outgoing)” in my Vanguard account? My assumption is the former—$6,307.
Thanks!
Harry Sit says
I’m not familiar with the Vanguard description labels. It’s not clear to me why your outgoing is different than your incoming. Shouldn’t the amount be the same when you move money from one pocket to another?
I’m assuming you originally contributed $6,000 to your Roth IRA, and you recharacterized the full $6,000 when you realized you were going to exceed the income limit. If by that time the $6,000 had grown to $6,307, and therefore $6,307 went from your Roth IRA to your Traditional IRA, then your total amount transferred is $6,307. Your reason for the recharacterization is “Exceeded income limit for contribution” (or something to that effect).
Jon says
” Shouldn’t the amount be the same when you move money from one pocket to another?”
I looked in my account, and the trade date (05/07/2021) and settlement date (05/10/2021) for “Recharacterization (outgoing)” are different than the trade date (05/11/2021) and settlement date (05/11/2021) for “Conversion (incoming).” Do you suppose that would account for the discrepancy?
My 1099-R says $6,307 — should I just use that? as opposed to the $6,408 which is “Recharacterization (outgoing)” in my Vanguard account on 5/10.
Jon says
Thanks again Harry for the help. One more question — for my MA state return, I’m prompted with this on FreeTaxUSA:
“The potential Massachusetts taxable amount of IRA distributions from your federal return is $6,307. From this amount, subtract any IRA contributions that haven’t already been used to reduce any prior year IRA distributions. This reduced amount is the taxable Massachusetts IRA distribution you need to enter below.”
My assumption is I should put $0 in this field, as I’ve already used IRA contributions on my federal worksheet to reduce any prior year IRA distributions. Is this correct?
Many thanks! – Jon
Harry Sit says
I’m not a Massachusetts resident. It sounds like you should enter $6,000 or whatever your contribution was.
Jon says
Thanks for the reply, Harry. You’re awesome for helping everyone on here.
It may actually be $307 I should enter in this field, right? $6307 – $6000 = $307
“The potential Massachusetts taxable amount of IRA distributions from your federal return is $6,307. From this amount, subtract any IRA contributions that haven’t already been used to reduce any prior year IRA distributions. This reduced amount is the taxable Massachusetts IRA distribution you need to enter below.”
Per the language from that prompt, I haven’t used the $6000 original contribution to reduce any prior year IRA distributions. It would also make sense that I need to pay taxes on the $307 difference in MA, as well as federal, right?
Per FreeTaxUSA:
“How much of my IRA distributions are taxable for Massachusetts?
The amount of taxable IRA distributions for your Massachusetts tax return is the amount of conventional IRA distributions you received during 2021 minus any IRA plan contributions you made to the account, unless those IRA contributions have already reduced the amount of taxable IRA distributions on a previous tax return, and minus any qualified charitable IRA distributions you received in 2021 that are included in the distribution.”
They also recommend using Schedule X Line 2 worksheet: https://www.freetaxusa.com/taxes2021/formdownload?sid=5&form=ma_ira_wkst.pdf
Harry Sit says
The amount to be subtracted should be $6,000. If it’s asking for the result after the subtraction, then it should be $307. Do whatever that makes you pay taxes on $307.
Jon says
Thanks. Then I believe the correct figure to put is $307 — putting that increases my state tax in the FreeTaxUSA calculator by like $20. Putting $6000 in that field increases my taxes owed by almost $400 which seems wrong.
Mike says
Thank you for the article. I read the previous comments about form 8606 not filling correctly unless retirement plan is checked on the W2. I was not eligible for a retirement plan for 2021 so I leave those blank and only lines 16 and 18 populate on form 8606. My refund amount stays the same. I am wondering if it is okay to submit like this or if I should go ahead and check retirement plan on my W2s so the form fills out correctly.
Harry Sit says
When you’re not covered by a workplace retirement plan, the W-2 is correct to have the box unchecked and the 8606 is also correct. The previous comments were about the user not checking the box in the software when their actual W-2 has it checked or the employer not checking the box on the W-2 when the employee is actually covered by a retirement plan.
MT says
Hi – thank you for this article. For the first 3 years that I used freetaxusa is helped me fix the Roth conversion issue that I was having. In 2021 I opened a Self Employed 401K and contributed the max amount. My husband and I also each contributed to a traditional IRA which we immediately rolled over to a Roth IRA. I can’t figure out where to input my Self employed 401K contributions in the software. It’s a 401K plan so my contributions should be pre-tax and I should be able to do the roth conversion without getting taxed pro-rata. Do you have any suggestions?
Harry Sit says
Click on “Deductions / Credits” at the top and then “SEP Contributions” in the left column close to the bottom. Answer yes and enter your pre-tax contribution in the second box.
Willa says
Thank you so much! You made this far easier and less stressful than I was anticipating — I followed the screenshots and it was a breeze.
Andrew says
This was great, thank you! Made recording my first backdoor contribution easier. I love freetaxusa, wish they added a warning that the IRA contributions recorded later will impact the live refund total.
David says
Thank you first time using FreeTaxUSA (from H&R) and guide was simple to follow!
Question on the example; “By the time you converted it to Roth IRA, also in 2022, the value grew to $6,200” after you convert to Roth and only purchase $6k Roth IRA can you pull out the $200 before April 2022 and not get taxed on it? Thanks!
Harry Sit says
Only if you’re already 59-1/2 and you had your first Roth IRA at least five years ago.
Amy says
We made a non-deductible contribution of $6000 for 2022 (broker cashed the check & deposited the in 2023) and we converted $30,000 to a Roth IRA. Our carry forward basis was $9000 and the FMV on 12/31/xx was $45,000. I’m receiving this question: “Because XXX had a contribution to and distribution from one or more IRA accounts this year and your income is high enough, you’ll need to use Worksheet 1-1 from Publication 590-B to calculate the taxable portion of XXX’s IRA distribution. Y/N: Would you like to use the worksheet to calculate Peter’s taxable IRA distribution? (Recommended)”
8606 method (lines 6-12) results in $3544 nontaxable distribution reported on 8606, line 13. 590-B worksheet 1-1 method results in $6000 non-taxable distribution. 590-B includes the $6000 contribution in the percentage calculation even though that $6000 is not yet reflected in the “balance as of 12/31/xx” amount. Is the 590-B worksheet method optional or required? Why is there a discrepancy between the two methods? Advantages of one over the other?
Julie says
Hi, Thank you so much for this. I rolled over 5.9K from traditional to Roth IRA, but I’m seeing the 7K when I checked the Form 1040.
This 7K is the sum from my two 1099-R forms (I put this information in when the website prompted for the Retirement Income section). My first 1099-R form has an amount of 1K, which refers to a recharacterization in my traditional Roth (tbh, I don’t remember why or what the thought process was behind that earlier this year.) My second 1099-R form has an amount of 5.9K which eventually got converted to the Roth IRA. I’m comparing the amounts to my transaction activity in Vanguard, and I believe the 5.9K includes the 1K which later dropped in value.
I guess what I am trying to figure out is if reporting 1099-R in the (retirement income) section is correct? It makes it look like I contributed 7k? When I think I rolled over just 5.9K.
Harry Sit says
It’s not a problem if you only see the $7k on Line 4a but Line 4b shows zero. Depending on the timing of the recharacterization, you can be required to include it on Line 4a but it’s not taxable.
Julie says
In line 4b, it says 990. I think this is the 1K recharacterization that later dropped in value when I converted it over to Roth IRA. How do I fix this so it is not taxable?
Harry Sit says
You should sort out the facts first using account statements and transaction history. It’ll be impossible if you aren’t clear about the history behind these two 1099-R forms.
With regard to the $1k recharacterization:
– Which IRA did you originally contribute to, for which year, in which year, what amount?
– Which IRA did you recharacterize the contribution to?
With regard to the $5.9k conversion:
– Which IRA did you contribute to, for which year, in which year, at what amount?
Then you delete the two 1099-R forms and start over one at a time by the order of history. Enter one 1099-R and the associated contribution. Look at the 1040 form to verify it makes sense. Enter the second 1099-R and the associated contribution. Look at the 1040 form to verify it still makes sense.
Joob says
Hi, thanks for the guide. So I goofed up my 2022 contributions by contributing over my income limit for Roth IRA. This is my plan going forward:
– 2022, contributed $6000 to Roth for 2022
– 2023, recharacterize 2022 Roth to traditional and backdoor to Roth. Will also contribute $6500 to traditional and backdoor in 2023 to do clean backdoors from now on.
How would my 2022 return look like because of this? I’d report the recharacterization for 2022, but would I enter anything for IRA Basis and Value? Does the recharacterization count as a “contribution to a traditional IRA for 2022 that were actually made from January 1, 2023 through April 18, 2023”?
And for 2023’s return I’m guessing I’d report the traditional contribution for 2023 as well as the combined backdoor for both 2022 and 2023? And in addition, I’d have to report the “IRA Basis and Value” for the 2022 recharacterization as well as “Taxpayer Prior Year IRA contributions”?
Harry Sit says
You report your $6,000 contribution to Roth. Answer “Yes” to “Did you recharacterize …?” and say you recharacterized $6,000. This creates a basis to carry over in 2023. You don’t enter anything for IRA Basis and Value for 2022. The recharacterization doesn’t count as a “contribution to a traditional IRA for 2022 that were actually made from January 1, 2023 through April 18, 2023.”
When you do your 2023 return next year, you’ll do everything shown here except that (1) your conversion amount is ~2x higher; and (2) you enter $6,000 in “your total basis in traditional IRAs for 20xx and earlier years.”
Steve says
Tim, thank you so much for your walkthrough with screenshots. This is so helpful.
I have a question. When I get to the “IRA Deduction Summary”, for some reason I don’t get the $0 amount that you did. I get $6,000. I’m not sure what I did wrong. I went back and triple checked that I followed your instructions, but I can’t seem to figure out why mine is incorrect. Would you be able to help me figure out what I did incorrect?
Thanks so much
Harry Sit says
See comments 23, 24, 31, 36, and 45. You get a deduction when you didn’t tell the software that you were covered by a workplace retirement plan. If you really weren’t covered by a workplace retirement plan, the deduction is correct.
Steve says
Harry, (not Tim. Apologies!) thank you for your kindness to respond so quickly! Just to follow up, my wife is covered by a workplace retirement plan (which I marked in the W-2 section of FreeTaxUSA). I am not working so I did not receive a W-2. Because I am not working, does that mean the stated $6,000 deduction (on the “IRA Deduction Summary” page) would technically be correct? And if my Traditional IRA contribution is deductible, then my Roth conversion could be taxable (as noted in your Troubleshooting section)?
FreeTaxUSA also provided an IRA Deduction Worksheet on “IRA Deduction Summary” page. Going through the IRA Deduction Worksheet, the Publication 590-B Worksheet for me, states on Line 8 “Nontaxable portion of the distribution” is $6,000. My understanding is that this worksheet is clarifying that the conversion is not taxable.
Hopefully this makes sense. I just want to double check and be through.
Thank you for any further clarification you can provide.
Harry Sit says
When you’re not working you have a higher income limit for taking a deduction on your Traditional IRA contribution. The deduction that the software gives to you is correct when your income falls under that higher limit. If the worksheet says your “Nontaxable portion of the distribution” is $6,000, you may have entered $6,000 as your basis carried over from the previous year under “IRA Basis and Value.” This is not correct unless you have a basis carryover on Line 14 of your previous year’s Form 8606.
Dave says
We’ve had a hard time entering our backdoor ROTH conversions in TurboTax and Taxslayer as they don’t properly fill out the 1040 form or the taxable amount. FreeTaxUSA seems to calculate the tax correctly but we’re not sure how to record the recharacterization on form 1040 since our recharacterization is a little complicated.
My spouse and I fully fund our ROTHs in January and did so in Jan 2021 and 2022. When we did our taxes in March 2022 we realized we exceeded the income limit for 2021 ROTH contributions. So, in April 2022 we fully recharacterized our 2021 ROTHs to traditional IRAs and a few days later backdoor converted the tIRAs to ROTHs. Then, in September 2022 we recharacterized our 2022 ROTHs to traditional IRAs and a few days later backdoor converted the tIRAs to ROTHs.
In 2023, our IRA custodian sent out 3 1099-R forms for me and 3 for my spouse.
1. 2021 ROTH recharacterization to tIRA: line1=$6800 (gained value), line2=$0, line7=R
2. 2022 ROTH recharacterization to tIRA: line1=$4800 (lost value), line2=$0, line7=N
3. 2022 total tIRA contributions: line1=$11400, line2=$11400, line7=2
1. 2021 ROTH recharacterization to tIRA: line1=$7900 (gained value), line2=$0, line7=R
2. 2022 ROTH recharacterization to tIRA: line1=$5600 (lost value), line2=$0, line7=N
3. 2022 total tIRA contributions: line1=$13300, line2=$13300, line7=2
My expectation is that the recharacterization doesn’t affect our 2022 taxes ($0 taxable because the IRA lost money before conversion) but for 2021 we’ll owe money on the 1040-X because the IRA grew in size. Is that right?
For our 2022 form 1040 (MFJ) line 4a, do we report just the total 2022 recharacterized ($4800+$5600=$10400) and report the total 2021 recharacterized ($6800+$7900=$14700) on our 2021 1040-X or do we report on our 2022 1040 the total tIRA contributions ($11400+$13300=$24700)?
Harry Sit says
A recharacterization isn’t taxable. You don’t need to file a 1040-X. Report the four 1099-R forms for your recharacterizations with the corresponding codes in Box 7 separately from your backdoor Roth. The software will prompt you for the relevant information and eventually produce the necessary statement to explain the recharacterizations.
For your backdoor Roth, follow everything in this post except (a) Enter your $6,000 contribution to a Roth IRA instead of a Traditional IRA (because that’s what you originally did) and then say you recharacterized $6,000; and (b) Enter $6,000 in the first box under “IRA Basis and Value” (this was your contribution for 2021 recharacterized to Traditional).
The software will determine which amount to include on Line 4a and which amount to exclude. Ultimately you should be taxed on $1,300 on Line 4b ($13,300 conversion minus $12,000 contribution for two years).
Alex says
Hi Harry. Thank you for this guide. I did everything as you described in the post. The only concern I have regarding Form 5498. It say:
IRA contributions (other than amounts in boxes 2-4, 8-10, 13a and 14a)……….$6,000.00
Rollover contributions…………………………………………………$22,185.74
Fair market value of account………………………………………………..$0.00
IRA Type……………………………………………………………………IRA
$22,185.74 is what I rolled over from my traditional 401k (pre tax money), and $6,000 is what I put on traditional IRA (after tax money) and converted to roth IRA.
My question is the following. On the screen with “Did you contribute to an IRA?” should I put $6,000.00 or do I need to put $22,185.74 + $6,000.00?
Harry Sit says
$6,000. The contribution in that question doesn’t include rollover contributions.
Alex says
Thanks for answer. I still confused little bit about it. Let me explain why I have concern about those $22,185.74.
I had pre-tax funds ($22,185.74) in my traditional 401k that I transferred to a traditional IRA and then to a solo 401k. For some reason, FreeTaxUsa put $22,186 in both field 4a and field 5a.
1099-R forms are near identical.
For trad 401k to trad IRA it looks like:
1 Gross distribution: $22,185.74
Total distribution: X
7 Distribution Code: G
All other filed are empty
And for trad IRA to Solo 401k 1099-R looks like:
1 Gross distribution: $22,185.74
Total distribution: X
7 Distribution Code: G
IRA/SEP/SIMPLE: X
All other filed are empty
Did FreeTaxUsa put those rollovers in the correct places? I thought Box 5a of Form 1040 reports the taxable amount of your distributions but in my case those funds are pre tax.
Harry Sit says
Boxes 4a and 5a report gross distributions. Taxable amounts are in Boxes 4b and 5b.
TP says
Harry, thank you so much for walking us through the screenshots – the references helped immensely.
I’m troubleshooting some issueS with my clean backdoor ROTH IRA conversion for 2022 and was wondering if you could help please? When I get to the “IRA Deduction Summary”, I don’t get the $0 amount that you did, I get $1,880 and a statement below it saying “Your IRA Deduction is limited because you are covered by a retirement plan at work and your MAGI of $74,876 is too high.” I’m not sure what I did wrong. I’ve double-checked to make sure I followed all your instructions, including clicking on “covered by workplace retirement plan” in my W-2.
I’m trying to understand how to interpret this. Am I double-dipping for deductions or am I paying partial taxes twice, or something else? All this while, I was under the impression there is neither any additional tax nor deduction involved with backdoor ROTH conversion wherein I put in post-tax money into a traditional IRA and immediately converted to ROTH. I probably didn’t make enough to need a backdoor conversion for 2022 anyway?
Thank you for any insight you can provide.
TP
Harry Sit says
When your AGI is low enough, you will get a deduction (or a partial deduction) and a corresponding part of your conversion becomes taxable. The taxable amount and the deduction offset. The end result is the same as no deduction and not taxed on the conversion. This is normal.
TP says
Ah, I didn’t realize they offset each other in the end. Just noticed it via lines 4b and 10 in the 1040 form. Thank you for the clarification, this helps a lot.
MT says
Thank you for this super helpful write up. I have a related question as I use Freetaxusa for my 2022 taxes. Basically, I made $1000 in net earnings my freelance business and my husband made $9000 as a W2 for the entire year. We then have investment income around $50,000 to report. My question is, I contributed my entire $1000 to my solo 401K. Husband contributed his entire $9000 to his Corporate 401k. Then I also contributed $4000 to my Roth IRA and husband contributed $6000 to his Roth IRA. Freetax USA is saying I have approx $900 in excess Roth contributions. So it looks like it’s allowing my entire freelance earnings to be in my solo 401K but essentially limiting my Roth contributions although between me and my husband we made at least $10000 in earned income and over $60000 including investment income. Is Freetaxusa limiting me because I clicked the wrong button somewhere?
Harry Sit says
Your questions aren’t related to the subject of this post because you didn’t do a backdoor Roth. Just so we don’t confuse others receiving notification of comments on backdoor Roth in FreeTaxUSA, I’ll email you separately.
Heidi says
Hi Harry,
Thank you for your super helpful explanation. I have a related question and was hoping you could help.
My husband had $7,848 cash sitting in a traditional IRA account that he contributed prior to 2021 at brokerage A. In 2022, he transferred that to a traditional IRA account at brokerage B and then converted to Roth IRA at brokerage B, along with backdoor Roth conversion of 2021 and 2022 non deductible contribution of total $12k. We converted 12k immediately so there was no earning on it before the backdoor Roth and we didn’t include $7,848 as a 2022 contribution amount in Freetax usa software.
In his 1099R from 2022, we see
Line 1 and 2a = 19,848
2b checked
7 = 2
IRA/SEP/SIMPLE = Checked
I think he reported $7,800 on tax return in prior years as deductible. In Form 1040, we see the $7,848 for 4b taxable amount. Wanted to double check that it is correct $7,848 should be taxable in 2022?
Harry Sit says
Yes, $7,848 should be taxable if he took a deduction on the prior contribution.
Ume says
Thank you for helping us Harry. I did a backdoor conversion with Fidelity because I was anticipating to be above MAGI but that did not happen in 2022.
My W-2 salary for reference is $62,000. I followed all of your steps but at the end “IRA Deduction Summary” comes out at $6000. 1040 4a shows $6000 and 8086 shows only Box 16 $6000, Box 18 $6000, Box 21 $0. Rest of the boxes on 8086 are empty. This is similar issue to few people above and I did double check that I was supposed to click on the W2 box 13. I suppose same at comment 71 it cancels out and I dont need to worry about it but I am worried that a lot of data on Form 8086 is not filled for me.
Harry Sit says
TP in comment #71 gets a partial deduction. You get a full deduction because your income is lower. The deduction offsets the taxable conversion. Your Form 8606 is correct.