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I am new to this, and just started contributing to IRA. I do have a 401k from my employer to which I max out, but I want to try to save more, so I started to look into Roth IRA.

In February 2020 I made $6000 in contributions to Traditional IRA for Tax Year 2019, and then moved that 6000 to Roth IRA (backdoor IRA). Later I made another contribution of $3000 to Traditional IRA for Tax Year 2020, and then moved that 3000 to Roth IRA (backdoor IRA). In the Roth IRA account, I did some investments, and as a result the total amount in the Roth IRA account is $9200, and total in the Traditional IRA is $0.

When I was filing my taxes through TurboTax, it said that I had an excess contribution to the Roth IRA by $4050 i.e. Basically I could contribute only $1950 to the Roth IRA for the last year due to income limits. And that I would be charged a 6% penalty until I have that excess amount int he Roth IRA. So I am a bit confused now.

What are my options now?

  1. Do I just move the $4050 back to the Traditional IRA?
  2. What happens to the profit of $200 I made in the Roth IRA?
  3. So in the above scenario, what is the benefit of the backdoor IRA?
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    To clarify the numbers you contributed $9000 to a traditional IRA for 2019? Are you single or married? Is the retirement plan box on your W-2 checked? If married, is the box checked on the W-2 for your spouse? – mhoran_psprep Jun 8 '20 at 10:12
  • Sorry, that was a copy paste error, corrected! 6k for 2019 and 3k for 2020 were the contributions. I don’t see a retirement box. I do have a 401k from my employer. – Ufder Jun 8 '20 at 16:06
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Based on your description, you did not make an "excess contribution" to Roth IRA -- in fact, you did not make any "contribution" to Roth IRA during those 2 years at all.

What happened is you must have answered TurboTax's questions incorrectly. The questions are designed for the normal situation, and so it may be tricky to answer them for the backdoor case. You must answer all the questions literally, exactly as asked, even if it seems counterintuitive (e.g. value of Traditional IRA at the beginning of 2019 is $0, and the value of Traditional IRA at the end of 2019 is also $0, even though you contributed during 2019). Review all the questions you answered.

Another thing is that in TurboTax, the information about the backdoor must be entered in two places, once in "income", and once in "deductions". When you enter it in the first place, your taxes will go up, and when you enter it in the second place, your taxes will go back down to the original amount. Do not be alarmed by it going up the first time.

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  • Thank you! I looked at the income section, though I did not get a 1099-R, so where do I input this in the "income" section? What does it mean? The contribution was for tax year 2019. Since I contributed this amount just this year (in 2020), is this something that I have to handle while filing taxes for year 2020 i.e. next year? – Ufder Jun 8 '20 at 18:07
  • @Ufder: Oh right, since the conversion is in 2020, the conversion will be reported in your 2020 tax return (and it will be tax-free given the basis from your non-deductible Traditional IRA contribution from 2019). On your 2019 tax return, there should only be the non-deductible Traditional IRA contribution. Again, there should be no excess contribution -- you did not contribute to Roth IRA. Make sure you answered No to questions about whether you contributed to Roth IRA or recharacterized a Traditional IRA contribution to Roth IRA contribution, because you did neither. – user102008 Jun 8 '20 at 18:31
  • Got it. So basically my contribution to traditional IRA was $6000 for 2019 (which I did in 2020), and I do need to report it in 2019 taxes. Though that same $6000 were transferred to Roth IRA in 2020, so I will have to report this recharacterization in 2020 taxes, and not in 2019 taxes right now. So if this is right, then is it okay for me to convert the whole 9k (and if possible, 3k more, i.e. total 12k) to Roth in 2020, and still be not violating anything? And then I'll report it in the 2020 taxes. Right? – Ufder Jun 8 '20 at 18:41
  • @Ufder: No, you never did a "recharacterization". You did a "conversion". Recharacterization would mean that you pretend "as if" your Traditional IRA contribution had instead been made as a Roth IRA contribution in the first place, and it would be treated as a Roth IRA contribution at the time your Traditional IRA contribution was made, but that is very bad as you cannot contribute that much to Roth IRA. So hopefully you did not do any "recharacterizations". You should have (and hopefully did) "converted" that amount of money from Traditional IRA to Roth IRA. – user102008 Jun 8 '20 at 18:46
  • Ah okay. Yes, Conversion, not Recharacterization. With that, is the rest of the understanding right, i.e. I report the $6k to traditional IRA in 2019 taxes. And then next year i.e. in 2020 taxes, I will report whatever I contribute to the traditional IRA, and then list the whole amount that I converted to Roth IRA. – Ufder Jun 8 '20 at 18:52

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