Among the purposes of Form 8606 is reporting a "backdoor Roth IRA" conversion, the non-IRS term for converting funds from a traditional IRA or 401(k) plan into a Roth IRA. The money rolled into the Roth IRA is taxable to the extent it hasn't already been taxed, including the earnings on the money until it is converted to a Roth IRA.
Funds contributed to a Roth IRA are taxable on the date of contribution, however earnings will not be taxable if the Roth IRA account is held for at least 5 years. If taxpayer is rolling a contribution from a nondeductible traditional IRA to a Roth IRA, the contribution was already taxed and thus there is no taxable event unless earnings were also converted to the Roth.
If the funds being rolled over from a traditional IRA represent a deferment of income, i.e. the contribution reduced taxable income at time of contribution into the Traditional IRA, then Form 1099-R should be issued by the plan administrator.
A taxpayer who has completed a backdoor Roth IRA conversion will receive Form 1099-R for the distribution from their traditional IRA, and in TaxSlayer Pro it will be entered in the tax return in the usual way. The distribution will be taxable income, and there will be no adjustment or deduction for the amount contributed to the Roth IRA.
To report a backdoor Roth IRA conversion, from the Main Menu of the tax return (Form 1040) select:
- Adjustments
- Nondeductible IRAs - If filing MFJ, select Taxpayer or Spouse.
- Traditional IRAs
- Net Amount of Traditional IRAs Converted to Roth IRAs - Enter the amount converted.
Note: This is a guide on entering a backdoor Roth IRA into the TaxSlayer Pro program. It is not intended as tax advice.
Additional Information:
IIRS: Topic No. 451 Individual Retirement Arrangements (IRAs)
IRS: Topic 413, Rollovers from Retirement Plans
IRS: Instructions for Form 8606, Non-Deductible IRAs
IRS: Publication 590-A, Individual Retirement Arrangements (IRAs) 2020 - need to update for 2021