The basic reporting of a backdoor Roth involves the following scenario:
1. You contribute to a Traditional IRA before the end of the tax year (December 31st). You make too much money for the contribution to be deducted from your taxes, so it is considered a “nondeductible contribution.”
2. Also, before the end of the tax year, you complete the strategy by converting the Traditional IRA contributions to a Roth IRA.
Here are the steps for entering this in the software:
First: Add the 1099-R
1. Follow this menu path: Income > Retirement Income (Form 1099-R) > “Add a 1099-R” to enter the 1099-R you received. The 1099-R will show the total amount of money that was converted from Traditional to Roth. Enter the information exactly as you see it on your Form 1099-R. Your 1099-R most likely shows an amount in Box 1, an amount in Box 2a, a code in Box 7, and the IRA/SEP/SIMPLE box will be checked. Click “Save and Continue” to go to the next screen.
2. The next page asks if you inherited this IRA. For most people, this answer will be “No”. Save and Continue.
3. Next, you’ll be asked “Is this a Roth conversion?” (conversion from a Traditional IRA to a Roth IRA). Yes, that is exactly what it is! You’ll enter the amount of money that you converted. In most cases of a backdoor Roth, this will be the entire amount from Box 1 of the 1099-R, as all of it (the contribution plus any earnings) becomes Roth money. Save and Continue.
4. Next, you’ll be back at the main page where you can enter more 1099-R’s. Click “No, Continue” if the one you just entered was your only one. Otherwise, enter others that you have.
5. The next page asks about Prior Year IRA Contributions. Answer that according to your situation. If you’re not sure if you had nondeductible IRA contributions in the past, check last year’s tax return to see if it includes Form 8606. If you have it, line 14 of this form would show any prior nondeductible contributions. If this year is the first time you’re contributing to an IRA, this would be “No”.
6. On the next page you’ll be asked about disaster distributions. Answer again according to your situation, but for most people this will be “No”.
7. You are now done entering the 1099-R! Note that at this point, your tax return will probably be showing the total distribution as taxable. That’s fine. There are more steps we need to complete and it will be fixed as we go.
Next: Enter the IRA Contribution
1. Follow this menu path: Deductions/Credits > Common Deductions/Credits > IRA Contributions (if the Deductions/Credits tab is gray and can’t be clicked, that means you need to finish up the screens in the Income tab first before you can get access the Deductions/Credits tab). Answer “Yes” to the question, “Did you make any Traditional or Roth IRA contributions during the year?” Answer for both you and your spouse, if applicable.
2. Next, enter the amount of your original IRA contributions for the year. Enter the amount in the box for the type of IRA you originally contributed to, even if the money is no longer in that type of account. In our case, our first contributions were to a Traditional IRA. Then we converted them to a Roth. So we’ll enter the original contribution in the box for traditional contributions.
3. Answer the remaining questions on that same page. Unless you had something special, these will probably all be “No”. If you recharacterized your IRA contributions before doing the Backdoor Roth, you’ll want to see our article for Reporting a Backdoor Roth Plus a Recharacterization. Save and Continue.
4. The next page asks if you withdrew any contributions. Answer according to your situation. If all you did was the Backdoor Roth strategy (contributed to a Traditional IRA and then converted that to a Roth), this would be “No”. Withdrawing is removing the contribution and treating it as though it was never made, which is not the same as converting. Save and Continue.
5. On the IRA Basis and Value page, you’ll enter any basis information you have in your IRA from prior tax years. If this is your first year contributing to a Roth, that will be $0. If you do have IRA basis from prior years (probably from contributions to a Traditional IRA that you couldn’t deduct), you’ll get that information from Form 8606 from your prior year tax returns, and enter it here. You’ll also need to fill out the other boxes on the screen according to your situation. Save and Continue.
6. The next page is your IRA Deduction Summary. If you’re employing this backdoor Roth strategy, that is probably $0 as well.
And that’s it!
Now let’s look at the forms to make sure this turned out like it should have. On almost any screen in FreeTaxUSA, click on the 3 buttons at the top right, then choose “Preview Return” from the drop-down menu.
The first page you’ll see is the Form 1040, the main tax form. Take a look at line 4a. This will show the total amount of distributions from your Roth IRA ($6,523 in this example). Next, look at line 4b. This will show only the portion that is taxable. If some time passed between when you contributed to the Traditional IRA and when you converted to the Roth IRA, there were probably some earnings in the account. In our example, there was $23 of earnings between those dates. So $23 is taxable, which makes sense.
Next, find Form 8606 within the tax return. This form shows your nondeductible IRA contributions on Line 1 ($6,500 in this example). This becomes your “basis”, or the amount that counts against your $6,523 distribution and makes $6,500 of it non taxable. Finally, look at Part II of the Form 8606 (second page). This shows your total conversion ($6,523), the basis ($6,500), and the taxable amount of earnings ($23).
