How to Report a Backdoor Roth IRA Contribution in TurboTax Online

Quick answer

• You’ll report your backdoor Roth IRA contribution as a non-deductible contribution to a Traditional IRA.
• TurboTax will guide you through the process using Form 8606, “Nondeductible IRAs.”
• You’ll need to track the conversion from Traditional to Roth.
• Ensure you’re accurately reporting both the initial contribution and the subsequent conversion.
• Failing to report correctly can lead to taxes and penalties on your Roth IRA distributions.

What to check first (before you invest)

Time Horizon

Your investment timeline is crucial. Are you saving for retirement decades away, or a goal in five years? A longer time horizon generally allows for more aggressive investment choices, as you have more time to recover from market downturns. Shorter horizons might call for more conservative strategies.

Risk Tolerance

How comfortable are you with the possibility of losing money in exchange for potentially higher returns? Your risk tolerance impacts the types of investments suitable for you. Understanding this helps you choose assets that align with your emotional and financial capacity to handle market fluctuations.

Emergency Fund

Before investing, ensure you have a solid emergency fund. This is typically 3-6 months of living expenses saved in an easily accessible account like a high-yield savings account. This fund prevents you from having to withdraw from investments during unexpected events, potentially at a loss.

Fees and Tax Impact

Investment fees, such as expense ratios and advisory fees, can eat into your returns over time. Similarly, understanding the tax implications of different investment accounts and strategies is vital. For example, capital gains taxes apply to profits in taxable brokerage accounts.

Account Type (401(k), IRA, Brokerage)

The type of account you use matters for tax advantages and contribution limits. A 401(k) is an employer-sponsored plan, while IRAs (Traditional and Roth) are individual retirement accounts. Taxable brokerage accounts offer flexibility but lack tax benefits. Choosing the right account type aligns with your financial goals and tax situation.

Step-by-step (simple workflow)

Step 1: Make Your Non-Deductible Traditional IRA Contribution

What to do: Contribute funds to a Traditional IRA. Crucially, do not deduct this contribution on your tax return. You will mark this contribution as “non-deductible.”
What “good” looks like: You have made a contribution to a Traditional IRA, and you have documentation confirming the contribution amount and the fact that it is non-deductible.
A common mistake and how to avoid it: Deducting the contribution when it’s intended to be non-deductible. Avoid this by carefully selecting the “non-deductible” option when making the contribution with your IRA provider and by remembering this choice when you file your taxes.

Step 2: Track the Contribution

What to do: Keep records of the exact amount contributed and the date of the contribution.
What “good” looks like: You have a clear record of the dollar amount and timing of your non-deductible Traditional IRA contribution.
A common mistake and how to avoid it: Losing track of the exact amount. This can lead to errors when filling out Form 8606. Keep your bank statements or brokerage confirmations readily available.

Step 3: Convert the Traditional IRA Funds to a Roth IRA

What to do: Initiate a conversion from your Traditional IRA to your Roth IRA. This moves the money from the Traditional account to your Roth account.
What “good” looks like: The funds have successfully moved from your Traditional IRA to your Roth IRA, and you have confirmation from your IRA provider.
A common mistake and how to avoid it: Forgetting to initiate the conversion or delaying it significantly. This can complicate tax reporting and potentially expose the funds to market fluctuations in the Traditional IRA before conversion. Complete the conversion in a timely manner, ideally within the same tax year as the contribution.

Step 4: Obtain Form 5498

What to do: Your IRA custodian will send you Form 5498, “IRA Contribution Information,” by May 31st of the year following your contribution. This form reports your total contributions to your IRA.
What “good” looks like: You have received Form 5498 from your IRA custodian, which accurately reflects your non-deductible contribution to the Traditional IRA.
A common mistake and how to avoid it: Not receiving or misplacing Form 5498. This form is essential for accurately reporting your non-deductible IRA basis. Contact your custodian if you don’t receive it by the deadline.

Step 5: Gather Tax Documents

What to do: Collect all relevant tax forms, including your Form 5498, any statements showing the Traditional to Roth conversion, and potentially Form 1099-R if your custodian issues one for the conversion.
What “good” looks like: You have all necessary documents to accurately report the backdoor Roth contribution and conversion.
A common mistake and how to avoid it: Missing a key document, like the conversion statement. This can lead to underreporting or incorrect reporting on your tax return. Organize your tax documents as they arrive.

Step 6: Access TurboTax Online

What to do: Log in to your TurboTax Online account or start a new return.
What “good” looks like: You are logged into the TurboTax platform and ready to enter your tax information.
A common mistake and how to avoid it: Using an outdated version of TurboTax. Ensure you are using the current tax year’s software to access the correct forms and rules.

Step 7: Navigate to IRA Contributions

What to do: In TurboTax, navigate to the section for retirement and IRA contributions. This is usually found by searching for “IRA” or by following the prompts for income and deductions.
What “good” looks like: You have found the correct section within TurboTax to input your IRA contribution details.
A common mistake and how to avoid it: Entering the contribution in the wrong section, such as under deductible contributions. Carefully read the on-screen instructions to ensure you are in the correct area for non-deductible contributions.

Step 8: Report the Non-Deductible Traditional IRA Contribution

What to do: Enter the amount of your non-deductible Traditional IRA contribution. TurboTax will prompt you to indicate that this contribution is not deductible.
What “good” looks like: The non-deductible contribution amount is accurately entered, and TurboTax recognizes it as such.
A common mistake and how to avoid it: Accidentally marking the contribution as deductible. Double-check your entries to ensure the non-deductible status is correctly selected.

Step 9: Complete Form 8605

What to do: TurboTax will automatically generate and guide you through completing Form 8605, “Nondeductible IRAs.” You will input the details of your non-deductible contributions and any conversions.
What “good” looks like: Form 8605 is correctly filled out with all the necessary information about your non-deductible contributions and conversions.
A common mistake and how to avoid it: Skipping or incorrectly filling out Form 8605. This form is critical for tracking your basis in non-deductible contributions, which prevents you from being taxed again on that money when you withdraw it from your Roth IRA later.

Step 10: Report the Roth IRA Conversion

What to do: TurboTax will prompt you to report the conversion from your Traditional IRA to your Roth IRA. You will enter the amount converted.
What “good” looks like: The conversion amount is accurately entered, and TurboTax correctly reflects that this amount was moved from a Traditional IRA to a Roth IRA.
A common mistake and how to avoid it: Failing to report the conversion or reporting it as taxable income. Since the original contribution was non-deductible, the conversion itself is typically not a taxable event. TurboTax should handle this correctly if Form 8605 is properly completed.

Step 11: Review Your Tax Return

What to do: Thoroughly review your entire tax return, paying special attention to the sections related to IRA contributions, deductions, and any generated forms like 8605.
What “good” looks like: Your tax return accurately reflects your backdoor Roth IRA contribution and conversion without errors.
A common mistake and how to avoid it: Overlooking a small error that could have significant tax consequences. Take your time during the review process. If you are unsure, consider having a tax professional review your return.

Reporting Backdoor Roth IRA Contributions in TurboTax

Understanding the Process

A backdoor Roth IRA involves making a non-deductible contribution to a Traditional IRA and then converting those funds to a Roth IRA. This strategy allows individuals who exceed income limits for direct Roth IRA contributions to still contribute to a Roth. TurboTax is designed to handle this process, but it requires careful input to ensure accuracy.

Key Forms Involved

The primary IRS form you’ll interact with, even indirectly through TurboTax, is Form 8605, Nondeductible IRAs. This form tracks your basis in non-deductible contributions. When you convert these funds to a Roth IRA, Form 8605 ensures that you don’t pay taxes again on the money you’ve already paid taxes on (the non-deductible contribution). TurboTax will generate and help you file this form.

TurboTax Workflow

When you enter your IRA information into TurboTax, you’ll first indicate that you made a contribution to a Traditional IRA. It’s crucial here to specify that this contribution was non-deductible. TurboTax will then guide you through the conversion process, asking for the amounts converted and the dates. By correctly inputting these details, TurboTax will populate Form 8605 and ensure the conversion is treated appropriately, meaning the converted amount itself is generally not taxed again.

Risk and diversification (plain language)

• Diversification Spreads Risk: Imagine putting all your eggs in one basket. If that basket drops, all your eggs break. Diversification means spreading your investments across different types of assets (stocks, bonds, real estate, etc.) so that if one investment performs poorly, others might do well, cushioning the impact.
• Asset Classes Matter: Different asset classes (like stocks, bonds, and cash) tend to perform differently in various economic conditions. For example, stocks might do well when the economy is booming, while bonds might be more stable during downturns.
• Don’t Put All Your Money in One Stock: Even within stocks, don’t invest all your money in a single company. A company’s fortunes can change quickly due to competition, management issues, or market shifts. Investing in multiple companies across different industries reduces this specific risk.
• Geographic Diversification: Investing in companies located in different countries can also be beneficial. Different economies move at different paces and are affected by different global events.
• Time Diversification (Dollar-Cost Averaging): This involves investing a fixed amount of money at regular intervals, regardless of market conditions. For example, investing $100 every month. This means you buy more shares when prices are low and fewer shares when prices are high, potentially lowering your average cost per share over time.
• Risk and Return Trade-off: Generally, investments with the potential for higher returns also come with higher risk. For instance, a volatile growth stock might offer high potential gains but could also lose significant value quickly. A stable bond might offer lower returns but with less risk.
• Your Age and Time Horizon: Younger investors with many years until retirement can typically afford to take on more risk because they have time to recover from market losses. Older investors closer to retirement may opt for less risky investments to preserve their capital.

During market drops, it’s natural to feel anxious. The key is to stick to your long-term plan. Avoid panic selling, which locks in your losses. Remember that market downturns are a normal part of investing. If you have cash available, a market drop can be an opportunity to buy assets at lower prices, especially if you’re dollar-cost averaging.

Common mistakes (and what happens if you ignore them)

| Mistake | What it causes