If I contribute $5500 to a traditional IRA, do not deduct the funds on my tax return, file form 8606, and then convert the contributions plus earnings in the IRA, say $6000 ($500 in earnings), to a Roth, shouldn't I only owe taxes on the earnings when filing my tax return?

In this scenario, the broker has noted a taxable amount of $6000, the total distribution during the Roth conversion, on a 1099-R, but also checked 2b "taxable amount not determined." Shouldn't the taxable amount be $500? Do I correct this when filing or request a corrected 1099-R from the broker?


You got it right. The broker doesn't know you didn't deduct the deposit, so you'll indicate that on your return and only have tax on the $500.

Note - the above is correct absent any other IRA funds. But, as Dilip noted, I should have clarified, if you had any prior year IRA deposits which were pre-tax, this conversion would need to take that into account. For example, you had deducted last year's deposit, also $5500, and with rates so low, let's skip the interest. Now, with $11000 in the account, when you convert any amount to Roth, since 5500/11000 was pretax, 1/2 the conversion avoids tax, and the remaining half is taxed. Important to note, all traditional IRA money is included in this calculation. You can't open separate accounts and treat that new deposit on its own.

  • Thanks. What's got me confused though, is that even when I enter the correct taxable amount in TurboTax, it adds about $1500 (!) to my tax liability. (I know this isn't a TurboTax forum, I'm just mentioning it.) – ybakos Apr 30 '16 at 23:56
  • You need to go in and specify that the $5500 was not deducted. I believe Form 8606 is where this gets entered. – JTP - Apologise to Monica May 1 '16 at 0:07
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    @ybakos: It's often complicated to do backdoor Roth IRA contributions with tax software. With TurboTax, I remember that you will have to enter it in two different places, and once you enter it in the second place, it will go back down again. – user102008 May 1 '16 at 4:18
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    Actually, there is another issue that this answer does not touch on. Does the OP have any other Traditional IRA accounts? If so, the taxability of the amount withdrawn for the purpose of conversion to a Roth IRA depends on the total balance in all the Traditional IRA accounts as well as on whether the Traditional IRA has a basis (previous post-tax, that is, nondeductible, contributions to the Traditional IRA. – Dilip Sarwate May 1 '16 at 19:50
  • Yes, Dilip, I blew it. Even though TT software should take it into account, I should have included the warning of prorated tax on any existing pretax money. I may edit later tonight – JTP - Apologise to Monica May 1 '16 at 20:32

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