Ok – Turbotax 2017 has a problem with its entry ordering when handling backdoor Roth IRA’s. If you just follow the normal wizards, you’ll end up with the incorrect information for your IRA contributions either: pay too much tax or be informed you have to pay a penalty for having gone over the IRA contribution limits.
The solution comes in several parts to get the wizard to figure out the right data. Here’s 3 major pitfalls I hit:
- If you do automated imports of statements from your financial institute, or you simply enter your IRA contributions/transfers to Roth IRA on page 1/’Wages & Income’ section of your federal taxes BEFORE you enter the ‘Traditional and Roth IRA Contributions’ section on the ‘Deductions & Credits’ page 2, then it often calculates your backdoor Roth IRA incorrectly.
- Double-entry and confusion around the word ‘contributed’. You only ‘contributed’ to a traditional IRA. You didn’t contribute to your Roth IRA, you transferred money to it. This can lead to overpayment.
- Confusion about conversions and recharacterizations. They seem interchangeable, but are very different tax terms that result in massively different calculations and even severe penalties if done wrong.
Solutions and information:
There are number of write-ups on this topic, but here’s the ones that helped:
- Forum entry that describes the entry ordering problem and how to get Turbotax to calculate things correctly
- Bottom line, you have to first tell Turbotax you contributed to your traditional IRA (it will tell you it’s non deductible), then import the 1099-R and tell Turbotax you converted to a Roth.
- How to report backdoor Roth IRA’s in Turbotax
- Master page for how-to’s in TaxAct, H&R Block and Turbotax
- Federal site on the 8606 form that might prove helpful with some of the definitions between conversions and recharacterizations.
- Turbotax’s response, that is sort of helpful
Checking your 8606 form
Once you’ve done the steps above, you should verify the generated 8606 form is correct. Have Turbotax generate a PDF with the worksheets and find the 8606 form. Here’s a site that has a great, and complete, description of backdoor Roth IRA handling shows you what your 1040 and generated 8606 forms should look like.