Why is conversion (regular to roth) taxable?

[Treasur2]

68-year female client. 2016 1040 issue. Not filed yet.

$245k AGI. Has qualified (401K) retirement plan thru employer. Thus can't deduct IRA contribution. Or contribute to Roth directly.

I advised the client on "backdoor" strategy.

The client contributed $13,000 to non-deductible IRA on 4/4/16. Did online via investment company website. Withdrew money from checking bank account. Coded 50% for 2015 50% 2016. Then "converted" $6,500 to a Roth for 2015 and 2016 witin 30 days

The client has received 1099-R with box 7 coded as "7", with $13,002 ($2 interest) box 2a as "fully taxable", box 2b with an "X" (taxable amount not determined). Upon researching back of 1099-R I see there is no code specifically for a "conversion" to a Roth

Shouldn't I be entering this as $2 of a taxable IRA distribution, not $13,002?

[Rapid Robert]

The client has received 1099-R with box 7 coded as "7", with $13,002 ($2 interest) box 2a as "fully taxable", box 2b with an "X" (taxable amount not determined). Upon researching back of 1099-R I see there is no code specifically for a "conversion" to a Roth

Shouldn't I be entering this as $2 of a taxable IRA distribution, not $13,002?

You should properly fill out Form 8606 to determine the taxable amount. It is not the responsibility of the issuer of the 1099-R to track basis or taxable amount, since for thing they can't. You have to look at the total basis in ALL IRA accounts to determine how much of the conversion is taxable, not just the account the money came out of.

In general, a Roth conversion is not treated any differently from any other normal IRA distribution or Roth contribution, except for Roth you often need to track contribution basis separately from conversion basis (and of course regular taxable IRA distributions before age 59.5 incur a penalty, while a conversion does not).

[TaxGuyBill]

Your software should have some sort of worksheet or line item that you would enter the Basis (the non-deductible part, see Form 8606) of the IRA. Once you do that, the program should figure out that it is not taxable.

If you can't find where to do in in your program, tell us what program you use and somebody may be able to point you in the right direction.


As a side note, the client didn't have previous Traditional IRA accounts that were deductible, did they? If so, the conversion is prorated, so some of it will be taxable (depending on the total amount of IRAs).

[ATSMAN]

>> I advised the client on "backdoor" strategy.

If you advised this strategy, you must have completed a 8606 to figure out the taxable portion right?

[JON]

You need the value of all the IRAs to calculate what portion of the conversion is taxable. You cannot identify certain amounts as not deductible, if you ever made contributions or transfers into to the IRA that were deductible.