Next, Turbotax will ask you the same three questions about basis and amount in the IRA at the end of the previous year that it asked at the end of the conversion section. Then, if married, Turbotax will take you back through all the same questions about your spouse from the “repayment of a retirement distribution” on down. The IRS assumes all converted amounts are taxable without proper documentation.
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The 2025 income limits prevent direct Roth IRA contributions if you earn more than $165,000 as a single filer or $246,000 as a married couple filing jointly. This strategy gives high-income earners a legal way to get Roth benefits despite these limits. This strategy works differently than a standard Roth conversion too. Standard conversions usually involve tax-deductible traditional IRA funds, which means paying taxes during conversion.
- The current guide, at the link you gave above and linked here, has all of the steps to enter the conversion.
- This creates a path to tax-free growth and tax-free withdrawals during retirement.
- The taxable amount of your Traditional IRA to Roth IRA conversion is being affected by the ‘pro rata rule’.
- When you file your taxes, you report your conversion on Part II of Form 8606.
- If this number isn’t $0, you’re going to have your conversion pro-rated.
You do not have to open a new Roth account to do so. In direct contribution Roth IRAs, you may not make qualified withdrawals from your Roth IRA until five years after your first contribution. In Roth conversions, each conversion has its own five-year clock. Distributions before the five years have elapsed are subject to a 10% early withdrawal penalty, even if you’re over 59½.
Action Steps
Hopefully a CPA/Expert will respond here to provide guidance. Try searching on here for various threads on excess IRA or Roth contributions/conversions but every situation could be a little different, also you should talk to your broker. So some taxpayers going through this section will see the additional question while others will not. Okay, you’re now done with entering the conversion step into Turbotax.
To cite an instance, imagine you have combined traditional IRAs worth $50,000. If these consist of 10% non-deductible and 90% deductible contributions, 90% of any amount you convert would face taxation. Understanding how a backdoor Roth IRA works becomes significant if you have maxed out your 401(k) contributions or want more tax-advantaged retirement options. Let’s explore this strategy’s benefits and see who can make the most of it. Each backdoor Roth IRA conversion triggers a new five-year waiting period before withdrawals.
- If you want to make changes or add a document to a tax return that has already been filed and accepted by the taxing agency, you should follow these guidelines.
- There should be no additional tax due from contributing to an IRA indirectly via the Backdoor Roth IRA process.
- Hopefully a CPA/Expert will respond here to provide guidance.
- Most people choose the backdoor Roth strategy because they earn too much for direct contributions.
- Your traditional Roth IRA contributions might not be possible if you earn more than $165,000 as a single filer or $246,000 as a married couple in 2025.
- Don’t amend your 2023 return to record your basis.
Questions are answered within a few hours on average. Seems like there are differences in guides but old one is still online. We’ll help you get started or pick up where you left off.
A backdoor Roth IRA isn’t just a retirement account—it’s a legal loophole that lets high-income earners contribute to a Roth IRA despite IRS income limits. Instead of contributing directly to a Roth, high-income earners contribute to a traditional IRA and later convert it to a Roth. The current guide, at the link you gave above and linked here, has all of the steps to enter the conversion. Plus, it has those additional steps (to ensure you entered everything correctly) you listed above.
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Remember that if you have any earnings on your traditional IRA before the conversion, those earnings are subject to tax at your ordinary income rate. In this step, you should also open a Roth IRA if you don’t already have one, so there is a place for the funds to go after conversion. Be sure that you do not enter anything for a Roth IRA contribution since the money was placed in the Roth IRA through a conversion, not a contribution. Yes, this is where you would enter your non-deductible Traditional IRA contributions for both you and your spouse. To receive guidance from our tax experts and community.
Five-Year Rule
When utilizing the backdoor Roth IRA strategy, you must account for the nondeductible traditional IRA contribution and the Roth conversion on Form 8606. By accurately reporting this, you can ensure you’re not taxed on the same money twice by incorrectly reporting your non-deductible basis. You don’t have to convert your contributions right away, but converting them before you accrue any income saves you a tax headache in the future. If your traditional IRA earns income before the conversion, you’ll owe taxes at your ordinary tax rate on that growth when you convert to a Roth. Converting quickly before your contributions grow ensures that all future growth happens tax-free in the Roth to maximize your long-term tax savings. You can’t do a backdoor Roth IRA conversion if you don’t have earned income.
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At the end, you want to look at the Form(s) 8606 that Turbotax generates, just like you would check up on one filled out by an accountant. The backdoor Roth approach really shines if you want tax-free growth and withdrawals in retirement. Your qualified Roth distributions stay completely tax-free once you’re at least 59½ years old and have held the account for five years or more. The backdoor strategy lets you skip past income restrictions completely since Roth conversions don’t have income limits. This gives high earners a way to get Roth benefits regardless of how much they make. The timing and process also set these approaches apart.
A backdoor Roth IRA is a strategy that allows high-income earners to contribute to a Roth IRA despite income restrictions. It involves making a non-deductible contribution to a traditional IRA and then converting it to a Roth IRA. This method is beneficial for those who exceed the income limits for direct Roth IRA contributions but still want to enjoy tax-free growth and withdrawals in retirement. High-income earners can sidestep the Roth IRA’s income restrictions through this strategy. The process involves making non-deductible contributions to a traditional IRA first and then converting those funds to a Roth IRA. This creates a path to tax-free growth and tax-free withdrawals during retirement.
You’ll get a Form turbotax backdoor roth 1099-R the year you make the conversion. The backdoor Roth IRA process might look simple, but several pitfalls can make this strategy more complex than expected. You’ll want to understand these common errors to ensure a smooth conversion and avoid any unwanted tax issues.
No need to be stuck in a loop for ever looking up what this or that means when trying to input the info correctly. If this is for the consumer to have an easier filing process then help us out. Some of us don’t have a simple tax return with just a couple of tax forms and done. And some of us don’t want to have to pay all the extra money for a tax pro to use TurboTax and then charge us countless dollars when we could do it ourselves. As these laws change and and continue in one direction or another, there is one thing we want to count on. That is TurboTax making the who process for every customer easier.
Once there, you can click on your Form(s) 8606 to make sure you did it right. This question is asking about recharacterizations, discussed above. If you’re doing your Backdoor Roth IRA correctly, you’ll answer this one “no” to go to the next page. First, let’s go to the Deductions and Credits menu by clicking on Deductions and Credits at the top. Then click on “I’ll choose what I want to work on.” You’re now on the Deductions and Credits Menu. Discover how to make your savings last a lifetime—sign up for our free webinar today.
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And yes, it doesn’t change anything using the 7 code for box 7, to reflect our actual 1099-Rs. But is there any other reason to look into whether that’s actually correct? TurboTax seems convinced that it shouldn’t be a 7. If you did not have a basis or track any IRAs, you won’t have an amount on Line 14 Form 8606 from last year, but you should see the form this year. If you have a question about the Backdoor Roth IRA and not Turbotax specifically, you should FIRST read this very in-depth Backdoor Roth IRA Tutorial before asking your question in the comments below.
But this can be a complicated process, which is why people use software like TurboTax to help them to keep track of their contributions and tax breaks. If your only Traditional IRA account had been the one that was subsequently converted to the Roth IRA, then everything would have worked as planned, with a non-taxable event on your return. The taxable amount of your Traditional IRA to Roth IRA conversion is being affected by the ‘pro rata rule’. This is an important box to get right, and it’s important to make it zero too! If this number isn’t $0, you’re going to have your conversion pro-rated. A backdoor Roth IRA allows you to get around income limits by converting a traditional IRA into a Roth IRA.