How can I mark Traditional IRA contribution as non-deductible?

Question

Hi,

I contributed to a traditional IRA after the submitting my tax return. Later this year (eg May) I plan to convert my Traditional IRA to a Roth IRA through a backdoor conversion.

I went back to amend my tax return and I included my contributions to my Traditional IRA. I added them, and noticed that my refund now increased, because FreeTaxUSA is treating my contributions as deductible. I want to avoid making my contributions appear as tax deductible, as this will complicate my future Backdoor Roth IRA conversion.

How can I mark these contributions as nondeductible? If I can't do that, what should I do instead?

I saw in one post that I can click a checkbox that says that I am covered by a retirement plan at work, but this is not the case for me.

https://community.freetaxusa.com/discussion/725/traditional-to-roth-ira-conversion

https://community.freetaxusa.com/discussion/843/backdoor-roth-how-to-tell-freetaxusa-that-i-want-traditional-ira-contribution-to-be-nondeductible

Henry · Accepted Answer

Hi carmex, our software is set up to determine whether or not you qualify for the IRA deduction based on the information you provide. If you qualify for the deduction, it will automatically be applied to your tax return.

The IRS does allow you to treat your traditional IRA contribution as non-deductible and not take the IRA deduction, however, our software does not currently support that option. I am afraid that we do not have a way for you to indicate that the contributions were non-deductible if all other qualifications for taking the IRA deduction are met. If you want to report that, then you will need to find another way to amend your tax return.

We are always looking for ways to improve our software and support more situations. Hopefully opting to make a non-deductible contribution will be a possibility in the near future.

In the meantime, please note that whether or not you have made nondeductible contributions to a traditional IRA, you can generally convert those funds to a Roth. The difference is that when you make a nondeductible contribution, you are taxed on the money that gets contributed, so when the funds get converted to the Roth you do not have to pay any additional taxes on the contributed funds. You would only pay tax on earnings you received during the period in which the funds were in the traditional IRA.

On the other hand, if you make deductible contributions to a traditional IRA, then the IRA deduction that you claim on your tax return makes it as if you have contributed pre-tax money to the IRA. Thus, when the funds get converted to the Roth, you do need to pay tax on the contributed funds at that time.

In both scenarios you are paying tax on the money. With nondeductible contributions, you pay tax at the time of the contribution (in 2023). With deductible contributions, you pay tax at the time of the conversion (in 2024).