By request from a reader, I give a walkthrough for how to report backdoor Roth in TaxACT.
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 last year, you report the contribution you made *for* last year, whether you actually did it last year or between January 1 and April 15 this year. You also report your converting to Roth *during* last year, whether the contribution was made for last year, the year before last, or any previous years. Therefore a contribution made in last year for the year before goes on the year before’s tax return. A conversion done during this year after you made a contribution for last year goes on this year’s tax return, which you will do next year.
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. Contribute for this year and convert it before December 31. This way everything is clean and neat. See Make Backdoor Roth Easy On Your Tax Return.
The screenshots below are taken from TaxACT desktop software. If you use TaxACT Online, the screens may be similar. Here’s the scenario used in the example:
You contributed $5,500 to a traditional IRA last year for last year. Your income is too high to claim a deduction for the contribution. By the time you converted it to Roth IRA, also during last year, the value grew to $5,550. 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. The screenshots were taken for doing a 2014 return in 2015. In a different year you just advance the year. Wherever the screenshot says 2014, think last year. Wherever it says 2015, think this year.
Before we start, suppose this is what TaxACT shows:
We will compare the results after we enter the backdoor Roth.
Non-Deductible Contribution to Traditional IRA
First we enter the non-deductible contribution to the Traditional IRA *for* last year. Complete this part whether you contributed for last year before the end of last year or you did it or are planning to do it this year before April 15. If your contribution last year was for the year before, make sure you entered it on your previous year’s tax return. If not, fix your return for the previous year first.
Under Federal Q&A, look for IRA Contributions in the right column and then click on Yourself Nondeductible traditional IRA contributions.
Enter your contribution amount for last year.
Enter your prior years basis from line 14 of Form 8606 in your previous year’s tax return or check the box for no basis.
You get this quick summary. Repeat for spouse if applicable.
Convert Traditional IRA to Roth
Now we enter the Roth conversion.
Go back to Federal Q&A. Look for Retirement Plan Income in the left column and then click on IRA, 401(k), and pension plan distributions (Form 1099-R).
Click on Add to add a 1099-R.
Click on Quick Entry.
Fill out the 1099-R as you received it. Pay attention to box 2b, box 7, and the IRA/SEP/SIMPLE checkbox.
Scroll down. Fill in your conversion amount. Leave the Prior Year Nondeductible Contributions box blank if you don’t have any carryover basis. Check it and enter the amount if you do.
You are done with one 1099-R. Repeat if you have another one. Click on Continue when you are done.
Just some general info about Form 8606.
It asks about your prior years basis again. Enter it or check the box.
Enter how much you contributed for last year between January 1 and April 15 this year. In our example it’s zero because we contributed before December 31 last year.
The balance of all of our traditioal, SEP, and SIMPLE IRAs was zero as of December 31 last year.
We didn’t recharacterize our conversion.
Confirm the basis for our conversion.
That’s it. Our refund came down a little due to the earnings in our conversion.
Taxable Income from Backdoor Roth
After going through all these, let’s confirm how you are taxed on the backdoor Roth.
Click on Forms on the top and open Form 1040.
Scroll down on the right hand side to find line 15. It shows $5,550 in Roth conversion, $50 of which is taxable.
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 of 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.
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