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Split-Year Backdoor Roth IRA in FreeTaxUSA, 2nd Year

The previous post Split-Year Backdoor Roth IRA in FreeTaxUSA, 1st Year dealt with contributing to a Traditional IRA for the previous year and recharacterizing a previous year’s Roth IRA contribution as a Traditional IRA contribution. This post handles the conversion part in FreeTaxUSA.

We cover two example scenarios in this post. Here’s the first:

You contributed $6,000 to a Traditional IRA for 2022 in 2023. The value increased to $6,200 when you converted it to Roth in 2023. You received a 1099-R form listing this $6,200 Roth conversion.

You should’ve already reported the contribution part on your 2022 tax return by following Split-Year Backdoor Roth IRA in FreeTaxUSA, 1st Year. The IRA custodian sent you a 1099-R form for the conversion in 2023. This post shows you how to put it into FreeTaxUSA.

Here’s the second example scenario:

You contributed $6,000 to a Roth IRA for 2022 in 2022. You realized that your income was too high when you did your 2022 taxes in 2023. You recharacterized the Roth contribution for 2022 as a Traditional contribution before April 15, 2023. The IRA custodian moved $6,100 from your Roth IRA to your Traditional IRA because your original $6,000 contribution had some earnings. The value increased again to $6,200 when you converted it to Roth in 2023. You received two 1099-R forms, one for $6,100 and another for $6,200.

You should’ve already reported the recharacterized contribution on your 2022 tax return by following Split-Year Backdoor Roth IRA in FreeTaxUSA, 1st Year. The IRA custodian sent you two 1099-R forms, one for the recharacterization, and the other for the conversion. This post shows you how to put both of them into FreeTaxUSA.

If you contributed for 2023 in 2024 or if you recharacterized a 2023 contribution in 2024, you’re still in the first year of this journey. Please follow Split-Year Backdoor Roth IRA in FreeTaxUSA, 1st Year. If you recharacterized your 2023 contribution in 2023 and converted in 2023, please use a different follow-up post.

If neither of these example scenarios fits you, please consult our guide for a normal “clean” backdoor Roth: How to Report Backdoor Roth In FreeTaxUSA (Updated).

If you’re married and both you and your spouse did the same thing, you should follow the steps below for both yourself and your spouse.

Table of Contents1099-R for Recharacterization1099-R for ConversionClean Backdoor Roth On TopTaxable IncomeTroubleshootingConversion Is TaxedSelf vs Spouse1099-R for Recharacterization

This section only applies to the second example scenario. If you contributed directly to a Traditional IRA for the previous year and didn’t recharacterize (the first example scenario), please skip this section and jump over to the conversion section.

We handle the 1099-R form for recharacterization first. This 1099-R form has a code “R” in Box 7.

Find “Retirement Income (1099-R)” under the Income menu.

Click on the “Add a 1099-R” button.

It’s just a regular 1099-R.

Enter the 1099-R for the recharacterization exactly as you have it. Box 1 shows the amount that was transferred from the Roth IRA to the Traditional IRA when you recharacterized your 2022 contribution. Box 2a shows that the recharacterization isn’t taxable. Box 2b “taxable amount not determined” isn’t checked. The code in Box 7 is “R.” The “IRA / SEP / SIMPLE” box isn’t checked.

Your 1099-R shows 2023 but FreeTaxUSA says you should’ve reported it on your 2022 tax return. The problem is you didn’t have it back then. You couldn’t have reported something you didn’t have. Select the correct year and continue anyway.

The recharacterization wasn’t a rollover.

FreeTaxUSA shows some alerts. The zero taxable income on the 1099-R is correct. Code “R” in Box 7 is also correct. Although you didn’t include this 1099-R last year because you didn’t have it at that time, you don’t need to amend last year’s tax return if you reported the recharacterization in a different way when you followed Split-Year Backdoor Roth IRA in FreeTaxUSA, 1st Year. You may need to amend last year’s return only if you didn’t report the recharacterization last year at all.

You’re done with the 1099-R form for the recharacterization. Click on the “Add a 1099-R” button to add the other 1099-R for the conversion.

1099-R for Conversion

The 1099-R for conversion has a code “2” in Box 7 if you’re under age 59-1/2 or a code “7” if you’re 59-1/2 or older.

It’s also a regular 1099-R.

Box 1 shows the amount converted to Roth. If you contributed to a Traditional IRA for 2023 in 2023 and converted in 2023 (a “clean” backdoor Roth) on top of converting the 2022 contribution in 2023, the amount on the 1099-R includes two years’ worth of contributions. It’s normal to have the same amount as the taxable amount in Box 2a when Box 2b is checked saying “taxable amount not determined.” Make sure to choose the correct code in Box 7 to match your 1099-R. The “IRA / SEP / SIMPLE” box is checked.

Your refund number drops after you enter the 1099-R. Don’t panic. It’s normal and temporary. The refund number will come up when we finish everything.

It’s not an inherited IRA.

It’s a Roth conversion. 100% of the amount on the 1099-R was converted from a Traditional IRA to a Roth IRA.

You are done with this 1099-R for the conversion. Repeat if you have another 1099-R. If you’re married and both of you converted to Roth, pay attention to whose 1099-R it is when you enter the second one. You’ll have problems if you assign both 1099-R forms to the same person when they belong to each spouse. Click on “No, Continue” when you have entered all the 1099-R forms.

Answer “Yes” here because you had a Traditional IRA contribution from last year.

Get the value for the first box from last year’s Form 8606 Line 14 (assuming that you did last year correctly). If you didn’t have a Form 8606 last year because you didn’t do it correctly, your basis is the amount of your 2022 Traditional IRA contribution minus any deduction you took on last year’s Schedule 1 Line 20. The total basis is $6,000 in our example.

The second box should be zero when you emptied all your Traditional IRAs after converting them to Roth and you don’t have any SEP or SIMPLE IRAs. If you had a few dollars of earnings posted in the Traditional IRA after you converted and you left them in the account, get the value from your year-end statement and put it in the second box. The software will apply the pro-rata rule.

The third box should also be zero when you made your 2023 contribution in 2023.

We didn’t take any disaster distribution.

Now continue with all other income items until you are done with income.

Clean Backdoor Roth On Top

If you did a “clean” backdoor Roth on top of converting the 2022 contribution in 2023 (contributed to a Traditional IRA for 2023 in 2023 and converted in 2023), the conversion part of the clean backdoor Roth is already included in the 1099-R form we just completed. Now we do the contribution part.

Find the “IRA Contributions” section under the “Deductions / Credits” menu.

Answer “Yes” to the first question and enter your contribution to your Traditional IRA. Leave the answer to “Did you recharacterize” at No. We contributed $6,500 in our example.

Your refund number goes up again after you enter the contribution.

We didn’t contribute to a SEP, SIMPLE, or solo 401k plan in this example. Answer Yes if you did.

“Withdraw” means pulling money out of a Traditional IRA back to your checking account. Converting to Roth is not a withdrawal. Answer “No” here.

FreeTaxUSA shows the same page we saw before in the conversion section. Confirm and continue.

It tells us we don’t get a deduction because our income is too high. If you see a deduction here it means the software thinks your income qualifies for a deduction, which may or may not be correct. Please see the Troubleshooting section.

Taxable Income

You’re done with the 1099-R forms. Let’s look at how they show up on your tax return. Click on the three dots on the top right above the IRA Deduction Summary and then click on “Preview Return.”

Look for Lines 4a and 4b in your Form 1040.

Line 4a shows the amount on your 1099-R for the Roth conversion. Line 4b shows the taxable amount, which is the earnings between the time you contributed to your Traditional IRA and the time you converted it to Roth. The taxable amount on Line 4b would be zero if you didn’t have any earnings.

Go toward the end in the pop-up to find Form 8606. It shows these for our example:

Line #Amount16,500 (only if you also did a “clean” backdoor Roth on top, otherwise blank.)26,0003The sum of Line 1 and Line 25The same as Line 38The amount on your 1099-R with a code 2 or 713The same as Line 314blank (or a small amount if your Traditional IRA had a small balance at the end of 2023)16The same as Line 817Line 3 minus Line 1418The difference between Line 16 and Line 17Form 8606Troubleshooting

If you followed the steps and you are not getting the expected results, here are a few things to check.

Conversion Is Taxed

If you don’t have a retirement plan at work, you have a higher income limit to take a deduction on your Traditional IRA contribution. If you have a retirement plan at work but your income is low enough, you are also eligible for a deduction on your Traditional IRA contribution. FreeTaxUSA gives you the deduction if it sees that your income qualifies. It doesn’t give you the choice of making it non-deductible.

Part of your conversion could be taxed because you took a deduction on the Traditional IRA contribution last year or this year. You see whether you took a deduction by looking at Schedule 1 Line 20 on last year’s and this year’s tax returns.

The taxable Roth IRA conversion and the deduction for your Traditional IRA contribution offset each other to create a wash. This is normal and it doesn’t cause any problems when you indeed don’t have a retirement plan at work or when your income is sufficiently low.

If you actually have a retirement plan at work, maybe the software didn’t see it. Whether you have a retirement plan at work is marked by the “Retirement plan” box in Box 13 of your W-2.

Maybe you forgot the check it when you entered the W-2. Double-check the “Retirement plan” box in Box 13 of your (and your spouse’s) W-2 entries in FreeTaxUSA to make sure they match the W-2.

Self vs Spouse

If you are married, make sure you don’t have the 1099-R and the IRA contribution mixed up between yourself and your spouse. If you inadvertently assigned two 1099-Rs to one person instead of one for you and one for your spouse, the second 1099-R will not match up with a Traditional IRA contribution made by a spouse. If you entered a 1099-R for both yourself and your spouse but you only entered one Traditional IRA contribution, you will be taxed on one 1099-R.

Learn the Nuts and Bolts I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action.Read Reviews

The post Split-Year Backdoor Roth IRA in FreeTaxUSA, 2nd Year appeared first on The Finance Buff.

2024 2025 HSA Contribution Limits and HDHP Qualification

The contribution limits for various tax-advantaged accounts for the following year are usually announced in October, except for the HSA, which comes out in April or May. The contribution limits are adjusted for inflation each year, subject to rounding rules.

You can only contribute to an HSA if you’re covered by a High Deductible Health Plan (HDHP) with no other coverage. You can use the money already in the HSA for qualified medical expenses regardless of what insurance you currently have.

Table of ContentsHSA Contribution LimitsAge 55 Catch-Up ContributionTwo Plans Or Mid-Year ChangesHDHP QualificationContribute Outside PayrollNon-Dependent Adult ChildrenBest HSA ProvidersHSA Contribution Limits20242025Individual Coverage$4,150$4,300Family Coverage$8,300$8,550HSA Contribution Limits

Source: IRS Rev. Proc. 2023-23, author’s calculation.

Employer contributions are included in these limits.

The family coverage numbers happened to be double the individual coverage numbers in 2024 but it isn’t always the case every year. Because the individual coverage limit and the family coverage limit are both rounded to the nearest $50, the family coverage limit can be slightly more or slightly less than double the individual coverage limit when one number rounds up and the other number rounds down.

Age 55 Catch-Up Contribution

As in 401k and IRA contributions, you are allowed to contribute extra if you are above a certain age. If you are age 55 or older by the end of the year (not age 50 as in 401k and IRA contributions), you can contribute an additional $1,000 to your HSA. If you are married, and both of you are age 55, each of you can contribute an additional $1,000 to your respective HSA.

However, because an HSA is in one individual’s name, just like an IRA — there is no joint HSA even when you have family coverage — only the person age 55 or older can contribute the additional $1,000 in his or her own name. If only the husband is 55 or older and the wife contributes the full family contribution limit to the HSA in her name, the husband has to open a separate account in his name for the additional $1,000. If both husband and wife are age 55 or older, they must have two HSA accounts in separate names if they want to contribute the maximum. There’s no way to hit the combined maximum with only one account.

The $1,000 additional contribution limit is fixed by law. It’s not adjusted for inflation.

Two Plans Or Mid-Year Changes

The limits are more complicated if you are married and the two of you are on different health plans. It’s also more complicated when your health insurance changes mid-year. The insurance change could be due to a job change, marriage or divorce, enrolling in Medicare, the birth of a child, and so on.

For those situations, please read HSA Contribution Limit For Two Plans Or Mid-Year Changes.

HDHP Qualification

The IRS also defines what qualifies as an HDHP. For 2024, an HDHP with individual coverage must have at least $1,600 in annual in-network deductible and no more than $8,050 in annual out-of-pocket expenses. For family coverage, the numbers are a minimum of $3,200 in annual deductible and no more than $16,100 in annual out-of-pocket expenses.

For 2025, an HDHP with individual coverage must have at least $1,650 in annual deductible and no more than $8,300 in annual out-of-pocket expenses. For family coverage, the numbers are a minimum of $3,300 in annual deductible and no more than $16,600 in annual out-of-pocket expenses.

Please note the deductible number is a minimum while the out-of-pocket number is a maximum. The maximum out-of-pocket limit only applies to the in-network number. If the in-network out-of-pocket limit of your insurance policy is too high, it doesn’t qualify as an HSA-eligible policy.

In addition, just having the minimum deductible and the maximum out-of-pocket isn’t sufficient to make a plan qualify as HSA eligible. The plan must also meet other criteria. See Not All High Deductible Plans Are HSA Eligible.

20242025Individual Coverageminimum deductible$1,600$1,650maximum out-of-pocket$8,050$8,300Family Coverageminimum deductible$3,200$3,300maximum out-of-pocket$16,100$16,600HDHP Qualification

Source: IRS Rev. Proc. 2023-23, author’s calculation.

Contribute Outside Payroll

If you have a High Deductible Health Plan (HDHP) through your employer, your employer may already set up a linked HSA for you at a selected provider. Your employer may be contributing an amount on your behalf there. Your payroll contributions also go into that account. Your employer may be paying the fees for you on that HSA. You save Social Security and Medicare taxes when you contribute to the HSA through payroll.

When you contribute to an HSA outside an employer, you claim the tax deduction on your tax return similar to when you contribute to a Traditional IRA. If you use tax software, be sure to answer the questions on HSA contributions. The tax deduction shows up on Form 8889 line 13 and Schedule 1 line 13.

Non-Dependent Adult Children

If your HDHP also covers your adult children who are not claimed as a dependent on your tax return, each non-dependent adult child can also contribute to a separate HSA in their name at the family coverage level when they don’t have other non-HDHP coverage. This is because they meet the eligibility:

(a) Covered by an HDHP with no other coverage; and
(b) The HDHP policy they have covers more than one person.

Each non-dependent adult child can open a separate HSA on their own with an HSA provider.

Best HSA Providers

If you get the HSA-eligible high deductible plan through an employer, your employer usually has a designated HSA provider for contributing via payroll deduction. It’s best to use that one because your contributions via payroll deduction are usually exempt from Social Security and Medicare taxes. If you want better investment options, you can transfer or roll over the HSA money from your employer’s designated provider to a provider of your choice afterward. See How To Rollover an HSA On Your Own and Avoid Trustee Transfer Fee.

If you are not going through an employer, or if you’d like to contribute on your own, you can also open an HSA with a provider of your choice. For the best HSA providers with low fees and good investment options, see Best HSA Provider for Investing HSA Money.

Learn the Nuts and Bolts I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action.Read Reviews

The post 2024 2025 HSA Contribution Limits and HDHP Qualification appeared first on The Finance Buff.

2023 2024 2025 HSA Contribution Limits and HDHP Qualification

The contribution limits for various tax-advantaged accounts for the following year are usually announced in October, except for the HSA, which comes out in April or May. The contribution limits are adjusted for inflation each year, subject to rounding rules.

Table of ContentsHSA Contribution LimitsAge 55 Catch-Up ContributionTwo Plans Or Mid-Year ChangesHDHP QualificationContribute Outside PayrollBest HSA ProvidersHSA Contribution Limits202420242025Individual Coverage$3,850$4,150$4,300Family Coverage$7,750$8,300$8,550HSA Contribution Limits

Source: IRS Rev. Proc. 2022-24, Rev. Proc. 2023-23, author’s calculation.

Employer contributions are included in these limits.

The family coverage numbers happened to be double the individual coverage numbers in 2024 but it isn’t always the case every year. Because the individual coverage limit and the family coverage limit are both rounded to the nearest $50, the family coverage limit can be slightly more or slightly less than double the individual coverage limit when one number rounds up and the other number rounds down.

Age 55 Catch-Up Contribution

As in 401k and IRA contributions, you are allowed to contribute extra if you are above a certain age. If you are age 55 or older by the end of the year (not age 50 as in 401k and IRA contributions), you can contribute an additional $1,000 to your HSA. If you are married, and both of you are age 55, each of you can contribute an additional $1,000 to your respective HSA.

However, because an HSA is in one individual’s name, just like an IRA — there is no joint HSA even when you have family coverage — only the person age 55 or older can contribute the additional $1,000 in his or her own name. If only the husband is 55 or older and the wife contributes the full family contribution limit to the HSA in her name, the husband has to open a separate account in his name for the additional $1,000. If both husband and wife are age 55 or older, they must have two HSA accounts in separate names if they want to contribute the maximum. There’s no way to hit the combined maximum with only one account.

The $1,000 additional contribution limit is fixed by law. It’s not adjusted for inflation.

Two Plans Or Mid-Year Changes

The limits are more complicated if you are married and the two of you are on different health plans. It’s also more complicated when your health insurance changes mid-year. The insurance change could be due to a job change, marriage or divorce, enrolling in Medicare, the birth of a child, and so on.

For those situations, please read HSA Contribution Limit For Two Plans Or Mid-Year Changes.

HDHP Qualification

You can only contribute to an HSA if you have a High Deductible Health Plan (HDHP). You can use the money already in the HSA for qualified medical expenses regardless of what insurance you currently have.

The IRS also defines what qualifies as an HDHP. For 2023, an HDHP with individual coverage must have at least $1,500 in annual deductible and no more than $7,500 in annual out-of-pocket expenses. For family coverage, the numbers are a minimum of $3,000 in annual deductible and no more than $15,000 in annual out-of-pocket expenses.

For 2024, an HDHP with individual coverage must have at least $1,600 in annual deductible and no more than $8,050 in annual out-of-pocket expenses. For family coverage, the numbers are a minimum of $3,200 in annual deductible and no more than $16,100 in annual out-of-pocket expenses.

For 2025, an HDHP with individual coverage must have at least $1,650 in annual deductible and no more than $8,300 in annual out-of-pocket expenses. For family coverage, the numbers are a minimum of $3,300 in annual deductible and no more than $16,600 in annual out-of-pocket expenses.

Please note the deductible number is a minimum while the out-of-pocket number is a maximum. If the out-of-pocket limit of your insurance policy is too high, it doesn’t qualify as an HSA-eligible policy.

In addition, just having the minimum deductible and the maximum out-of-pocket isn’t sufficient to make a plan qualify as HSA eligible. The plan must also meet other criteria. See Not All High Deductible Plans Are HSA Eligible.

202320242025Individual Coverageminimum deductible$1,500$1,600$1,650maximum out-of-pocket$7,500$8,050$8,300Family Coverageminimum deductible$3,000$3,200$3,300maximum out-of-pocket$15,000$16,100$16,600HDHP Qualification

Source: IRS Rev. Proc. 2022-24, Rev. Proc. 2023-23, author’s calculation.

Contribute Outside Payroll

If you have a High Deductible Health Plan (HDHP) through your employer, your employer may already set up a linked HSA for you at a selected provider. Your employer may be contributing an amount on your behalf there. Your payroll contributions also go into that account. Your employer may be paying the fees for you on that HSA. You save Social Security and Medicare taxes when you contribute to the HSA through payroll.

When you contribute to an HSA outside an employer, you get the tax deduction on your tax return, similar to when you contribute to a Traditional IRA. If you use tax software, be sure to answer the questions on HSA contributions. The tax deduction shows up on Form 8889 line 13 and Schedule 1 line 13.

If your HDHP also covers your adult child who’s not claimed as a dependent on your tax return, they can also contribute to an HSA in their own name if they don’t have other non-HDHP coverage. They get a separate family coverage limit. They will have to open an HSA on their own with an HSA provider.

Best HSA Providers

If you get the HSA-eligible high deductible plan through an employer, your employer usually has a designated HSA provider for contributing via payroll deduction. It’s best to use that one because your contributions via payroll deduction are usually exempt from Social Security and Medicare taxes. If you want better investment options, you can transfer or roll over the HSA money from your employer’s designated provider to a provider of your choice afterward. See How To Rollover an HSA On Your Own and Avoid Trustee Transfer Fee.

If you are not going through an employer, or if you’d like to contribute on your own, you can also open an HSA with a provider of your choice. For the best HSA providers with low fees and good investment options, see Best HSA Provider for Investing HSA Money.

Learn the Nuts and Bolts I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action.Read Reviews

The post 2023 2024 2025 HSA Contribution Limits and HDHP Qualification appeared first on The Finance Buff.

Split-Year Backdoor Roth IRA in FreeTaxUSA, 1st Year

The best way to do a backdoor Roth is to do it “clean” by contributing *for* and converting in the same year — contribute for 2023 in 2023 and convert in 2023, contribute for 2024 in 2024 and convert in 2024, and contribute for 2025 in 2025 and convert in 2025. Don’t split them into two years such as contributing for 2022 in 2023 and converting in 2023 or contributing for 2023 in 2024 and converting in 2024. If you did a “clean” backdoor Roth and you’re using FreeTaxUSA, please follow How to Report Backdoor Roth In FreeTaxUSA (Updated).

However, many people didn’t know they should’ve done it “clean.” Some people thought it was natural to contribute to an IRA for 2023 between January 1 and April 15, 2024. Some people contributed directly to a Roth IRA for 2023 in 2023 and only found out their income was too high when they did their taxes in 2024. They had to recharacterize the previous year’s Roth IRA contribution as a Traditional IRA contribution and convert it again to Roth after the fact.

When you contribute for the previous year and convert (or recharacterize and convert in the following year), you have to report them on your tax return in two different years: the contribution in one year and the conversion in the following year. It’s more confusing than a straight “clean” backdoor Roth but that’s the price you pay for not knowing the right way. This post shows you how to do the contribution part in FreeTaxUSA for the first year. A follow-up post shows you how to do the conversion part for the second year.

If you recharacterized your 2023 Roth IRA contribution to Traditional in 2023 and converted to Roth again in 2023, please use another follow-up post.

I’m showing two examples — (1) a direct contribution to a Traditional IRA for the previous year; and (2) recharacterizing a Roth contribution for the previous year as a Traditional contribution. Please see which example matches your scenario and follow along accordingly.

Table of ContentsContributed for the Previous YearContributed to Traditional IRAForm 8606Break the CycleRecharacterized Roth ContributionContributed to Roth IRARecharacterized to TraditionalForm 8606Switch to Clean Backdoor RothTroubleshootingNo 1099-RContribution Is DeductibleContributed for the Previous Year

Here’s the example scenario for a direct contribution to the Traditional IRA:

You contributed $6,500 to a Traditional IRA for 2023 between January 1 and April 15, 2024. You then converted it to Roth in 2024.

Because your contribution was *for* 2023, you need to report it on your 2023 tax return by following this guide. Because you converted in 2024, you won’t get a 1099-R for your conversion until January 2025. You will report the conversion when you do your 2024 tax return. Come again next year to follow the follow-up post.

If you contributed to a Traditional IRA in 2023 for 2022, everything below should’ve happened in your 2022 tax return. In other words,

You contributed $6,000 to a Traditional IRA for 2022 between January 1 and April 15, 2023. You then converted it to Roth in 2023.

Then you should’ve gone through the steps below in your 2022 tax return. If you didn’t, you should fix your 2022 return. The conversion part is covered in a follow-up post.

If you’re married and both you and your spouse did the same thing, you must follow the same steps below for both you and your spouse.

If you first contributed to a Roth IRA and then recharacterized it as a Traditional contribution in the following year, please jump over to the next example.

Contributed to Traditional IRA

Find the “IRA Contributions” section under the “Deductions / Credits” menu.

Answer Yes to the first question and enter your contribution in the first box even though the question says “made during 2023″ and you actually contributed in the following year. Leave the answer to “Did you recharacterize” at No.

We didn’t contribute to a SEP, SIMPLE, or solo 401k plan in this example. Answer Yes if you did.

Withdraw means pulling money out of a Traditional IRA back to your checking account. Converting to Roth is not a withdrawal. Answer “No” here.

The first box is normally zero if this is the first time you contributed to a Traditional IRA. If you made nondeductible contributions to a Traditional IRA in previous years, get the value from your last year’s Form 8606 Line 14 (assuming you did your tax return correctly). If you entered a number in the first box because you didn’t understand what it was asking, now is the chance to correct it.

The second box is also blank or zero when you had no Traditional, SEP, or SIMPLE IRA as of December 31, 2023.

Enter your contribution in the third box because you did it between January 1 and April 15, 2024.

It tells us we don’t get a deduction because our income was too high. We know. That’s why we did the Backdoor Roth. If the number isn’t zero here, it means the software thinks you qualify for a deduction with your income. You don’t have a choice to decline the deduction.

Form 8606

Let’s look at the Form 8606 to confirm that it did everything correctly. Click on the three dots on the top right above the IRA Deduction Summary and then click on “Preview Return.”

Scroll toward the end of the tax forms to find Form 8606. You should see that only lines 1, 3, and 14 are filled in with your contribution amount. It’s important to see the number in Line 14. This number will carry over to 2024. It’ll make your conversion in 2024 not taxable.

If you don’t see a Form 8606 or if your Form 8606 doesn’t look right, please check the Troubleshooting section.

Break the Cycle

While you’re at it, you should break the cycle of contributing for the previous year and create a new habit of contributing for the current year. Contribute to a Traditional IRA for 2024 in 2024 and convert in 2024.

You’re allowed to convert more than once in a single year. You’re allowed to convert more than one year’s contribution amount in a single year. Your larger conversion is still not taxable when you convert both your 2023 contribution and your 2024 contribution in 2024. Then you will start 2025 fresh. Contribute for 2025 in 2025 and convert in 2025.

Recharacterized Roth Contribution

Now let’s look at our second example scenario.

You contributed $6,500 to a Roth IRA for 2023 in 2023. You realized that your income was too high when you did your taxes in 2024. You recharacterized the Roth contribution for 2023 as a Traditional contribution before April 15, 2024. The IRA custodian moved $6,600 from your Roth IRA to your Traditional IRA because your original $6,500 contribution had some earnings. Then you converted it to Roth in 2024.

Because your contribution was for 2023, you need to report it on your 2023 tax return by following this guide. Because you converted in 2024, you won’t get a 1099-R for your conversion until January 2025. You will report the conversion when you do your 2024 tax return. Come back again next year to the follow-up post.

Similar to our first example, if you did the same in 2023 for 2022, you should’ve done everything below when you did your taxes for 2022. In other words,

You contributed $6,000 to a Roth IRA for 2022 in 2022. You realized that your income was too high when you did your 2022 taxes in 2023. You recharacterized the Roth contribution for 2022 as a Traditional contribution before April 15, 2023. The IRA custodian moved $6,100 from your Roth IRA to your Traditional IRA because your original $6,000 contribution had some earnings. Then you converted it to Roth in 2023.

Then you should’ve taken all the steps below last year in your 2022 tax return. If you didn’t, you need to fix your 2022 return. The conversion part is covered in the follow-up post.

Contributed to Roth IRA

Find the IRA Contributions section under the “Deductions / Credits” menu.

Answer “Yes” to the first question and enter your contribution in the second box (because you originally contributed to a Roth IRA). It doesn’t matter when the question says “made during 2023″ and you actually contributed in the following year. Answer “Yes” to “Did you recharacterize.”

Recharacterized to Traditional

Select “Yes” to confirm you recharacterized a contribution. It opens up additional inputs for a statement required by the IRS. If you recharacterized 100% of your original contribution, enter it in the first box. It’s $6,500 in our example. We enter $6,600 from our example in the second box.

We didn’t contribute to a SEP, SIMPLE, or solo 401k plan in this example. Answer Yes if you did.

Withdraw means pulling money out of a Traditional IRA back to your checking account. Converting to Roth is not a withdrawal. Answer “No” here.

All three boxes should normally be blank or zero.

The first box is normally zero when you didn’t make any nondeductible contributions to a Traditional IRA in previous years. If you did, get the value from your last year’s Form 8606 Line 14 (assuming you did your tax return correctly). If you entered a number in the first box because you didn’t understand what it was asking, now is the chance to correct it.

The second box is also blank or zero when you had no Traditional, SEP, or SIMPLE IRA as of December 31, 2023.

The third box is also blank or zero because you made the original contribution in 2023. Recharacterizing makes it as if you contributed to a Traditional IRA to begin with.

It tells us we don’t get a deduction because our income was too high. We know. That’s why we did the Backdoor Roth. If the number isn’t zero here, it means the software thinks you qualify for a deduction with your income. You don’t have a choice to decline the deduction.

Form 8606

Let’s look at the Form 8606 to confirm that it did everything correctly. Click on the three dots on the top right above the IRA Deduction Summary and then click on “Preview Return.”

Scroll toward the end of the tax forms to find Form 8606. You should see that only lines 1, 3, and 14 are filled in with your contribution amount. It’s important to see the number in Line 14. This number will carry over to 2024. It’ll make your conversion in 2024 not taxable.

If you don’t see a Form 8606 or if your Form 8606 doesn’t look right, please check the Troubleshooting section.

Switch to Clean Backdoor Roth

While you are at it, you should switch to a clean backdoor Roth for 2024. Rather than contributing directly to a Roth IRA, seeing that you exceed the income limit, recharacterizing it, and converting it again, you should simply contribute to a Traditional IRA for 2024 in 2024 and convert it to Roth in 2024 if there’s any possibility that your income will be over the limit again.

You’re allowed to do a clean backdoor Roth even if your income ends up below the income limit for a direct contribution to a Roth IRA. It’s much simpler than the confusing recharacterize-and-convert maneuver.

You’re allowed to convert more than once in a single year. You’re allowed to convert more than one year’s contribution amount in a single year. Your larger conversion is still not taxable when you convert both your 2023 contribution and your 2024 contribution in 2024. Then you will start 2025 fresh. Contribute for 2025 in 2025 and convert in 2025.

Troubleshooting

If you followed the steps and you are not getting the expected results, here are a few things to check.

No 1099-R

You get a 1099-R only if you converted to Roth in 2023. Because you only converted in 2024, you won’t get a 1099-R until 2025. This is normal. You do the conversion part next year by using the follow-up post.

Contribution Is Deductible

If you don’t have a retirement plan at work, you have a higher income limit to take a deduction on your Traditional IRA contribution. FreeTaxUSA will give you the deduction if it sees that you qualify. It doesn’t give you the choice of making it non-deductible. You see this deduction on Schedule 1, Line 20.

You don’t get a Form 8606 when your contribution is fully deductible. The numbers on Lines 1, 3, and 14 of your Form 8606 are less than your full contribution when your contribution is partially deductible.

Taking this deduction also makes your Roth IRA conversion taxable next year. You’ll pay less tax this year and more tax next year. In a way, it’s better because you get to use the money for one year.

If you actually have a retirement plan at work, the software didn’t see it. Whether you have a retirement plan at work is marked by the “Retirement plan” box in Box 13 of your W-2.

Maybe you forgot to check it when you entered the W-2. Double-check the “Retirement plan” box in Box 13 of your (and your spouse’s) W-2 entries in FreeTaxUSA to make sure they match the W-2.

Learn the Nuts and Bolts I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action.Read Reviews

The post Split-Year Backdoor Roth IRA in FreeTaxUSA, 1st Year appeared first on The Finance Buff.

Backdoor Roth in H&R Block: Recharacterized in the Same Year

You may have contributed to a Roth IRA and then realized later in the year that you would exceed the income limit. You recharacterized the Roth IRA contribution as a Traditional IRA contribution and converted it to Roth again before the end of the year. Your IRA custodian sent you two 1099-R forms, one for the recharacterization and one for the conversion. This post shows you how to put them into the H&R Block tax software.

If you had done the recharacterizing and converting in the following year, you would have to split the tax reporting into two years by following Split-Year Backdoor Roth IRA in H&R Block, 1st Year and Split-Year Backdoor Roth IRA in H&R Block, 2nd Year. Now because you caught the problem soon enough before the end of the year, you can handle all of it in the same year by following this guide.

Here’s the example scenario we’ll use in this guide:

You contributed $6,500 to a Roth IRA for 2023 in 2023. You realized that your income would be too high later in 2023. You recharacterized the Roth contribution for 2023 as a Traditional contribution. The IRA custodian moved $6,600 from your Roth IRA to your Traditional IRA because your original $6,500 contribution had some earnings. The value increased again to $6,700 when you converted it to Roth before December 31, 2023. You received two 1099-R forms, one for $6,600 and another for $6,700.

If you didn’t do any of these recharacterizing and converting, please follow our guide for a “clean” backdoor Roth in How to Report Backdoor Roth in H&R Block Tax Software.

If you’re married and both you and your spouse did the same thing, you should follow the steps below once for yourself and once again for your spouse.

Table of ContentsUse H&R Block Download Software1099-R for Recharacterization1099-R for ConversionConverted, Did Not Roll OverRoth IRA Contribution Recharacterized to TraditionalTaxable IncomeSwitch to Clean Backdoor RothTroubleshootingFresh StartConversion Is TaxedUse H&R Block Download Software

The screenshots below are taken from H&R Block Deluxe downloaded software. The downloaded software is both less expensive and more powerful than H&R Block’s online software. If you haven’t paid for your H&R Block Online filing yet, consider buying H&R Block download software from Amazon, Walmart, Newegg, and many other places. If you’re already too far in entering your data into H&R Block Online, make this your last year of using H&R Block Online. Switch over to H&R Block download software next year.

1099-R for Recharacterization

We handle the 1099-R form for the recharacterization first. This 1099-R form has a code “N” in Box 7.

Click on Federal -> Income. Scroll down and find IRA and Pension Income (Form 1099-R). Click on “Go To.”

Click on Import 1099-R if you’d like. I show manual entries with “Enter Manually” here.

Just a regular 1099-R.

The 1099-R form for the recharacterization shows the amount moved from the Roth IRA to the Traditional IRA in Box 1. The taxable amount is 0 in Box 2a and the “Taxable amount not determined” box isn’t checked. The code in Box 7 is “N.”

The “IRA/SEP/SIMPLE” box may or may not be checked on your form. It isn’t checked in our form.

Not a retired public safety officer.

We like to hear that.

You’re done with the first 1099-R form. Click on “Enter Manually” to add the second one if you don’t already have both 1099-R forms imported.

1099-R for Conversion

The 1099-R for the Roth conversion has either a code “2” or code “7” in Box 7.

The second 1099-R form is also a regular 1099-R.

It’s normal to see the conversion reported in Box 2a as the taxable amount when Box 2b is checked to say “Taxable amount not determined.” The code in Box 7 is “2″ when you’re under 59-1/2 or “7” when you’re over 59-1/2.

The “IRA/SEP/SIMPLE” box is checked on this 1099-R form for the Roth conversion.

Did not inherit it.

Converted, Did Not Roll Over

This is an important question. Read carefully. Answer No, because you converted, not rolled over.

Now answer Yes, you converted.

We converted all of it.

It’s safer to answer “Yes” here because you can always say your basis was zero when the software asks you what it was.

The refund meter drops a lot at this point. Don’t panic. It’s normal and only temporary. It will come back up after we continue.

You are done with one 1099-R. Repeat the above if you have another 1099-R. If you’re married and both of you converted to Roth, pay attention to whose 1099-R it is when you enter the second one. You’ll have problems if you assign both 1099-R’s to the same person when they belong to each spouse. Click on “Finished” when you are done with all the 1099-Rs.

H&R Block has a few more questions.

The wording is confusing here but you should answer “Yes.” You recharacterized a Roth IRA contribution as a Traditional IRA contribution. It counts.

H&R Block will wait until you also enter your 2023 contribution. Your refund meter is still depressed but don’t worry.

Roth IRA Contribution Recharacterized to Traditional

Click on Federal -> Adjustments. Find IRA Contributions. Click on “Go To.”

Answer “Yes” because you contributed to an IRA for the year in question.

Check the box for Roth IRA because you originally contributed to a Roth IRA before you recharacterized your contribution.

Enter your original contribution amount. It’s $6,500 in our example.

Answer Yes because you recharacterized the contribution.

The amount here is relative to the original contribution amount. If you recharacterized the whole thing, enter $6,500 in our example, not $6,600 which was the amount with earnings that the IRA custodian moved into the Traditional IRA.

The IRS requires a brief statement to describe your recharacterization.

Leave the boxes blank because you recharacterized before the end of 2023.

The box should be blank or zero when you emptied all your Traditional IRAs after converting 100% to Roth. If you had a few dollars of earnings after you converted and you left them in the account, get the value from your year-end statements and put it here. The software will apply the pro-rata rule.

No excess contribution.

0 in Traditional IRA deduction means it’s nondeductible. If you see a deduction here it means the software thinks you qualify for a deduction. You don’t have a choice to decline the deduction. Click on Next. Repeat for your spouse if both of you contributed to a Roth IRA for 2023 and then recharacterized before the end of 2023.

Now the refund meter should go back up.

Taxable Income

You’re done with the two 1099-R forms and your Roth IRA contribution recharacterized to Traditional. Let’s look at how they show up on your tax return. Click on Forms on the top and open Form 1040 and Schedules 1-3. Click on Hide Mini WS. Scroll down to lines 4a and 4b.

Line 4a shows the sum of your two 1099-R forms. It’s $13,300 in our example ($6,600 recharacterization plus $6,700 conversion). This is normal. Line 4b shows that $201 is taxable when we expect it to be the $200 in earnings (contributed $6,500, converted $6,700). This is also normal due to rounding.

Form 8606 shows these for our example:

Line #Amount16,50036,50056,500136,499 (due to rounding, should be 6,500)141 (due to rounding, should be 0)166,700176,499 (due to rounding, should be 6,500)18201 (due to rounding, should be 200)Form 8606Switch to Clean Backdoor Roth

You avoided having to split your IRA contribution and Roth conversion in two different tax returns by recharacterizing in the same year and converting before December 31. Still, you had to do the extra work with your IRA custodian and follow all these steps in this guide when you do your taxes.

It’s much better to go with a “clean” backdoor Roth from the get-go. If there’s any possibility that your income will be over the limit again, simply contribute to a Traditional IRA for 2024 in 2024 and convert it to Roth in 2024.

You’re allowed to do a clean backdoor Roth even if your income ends up below the income limit for a direct contribution to a Roth IRA. It’s much simpler than the confusing recharacterize-and-convert maneuver. Then you only need to follow our guide for a clean backdoor Roth in How to Report Backdoor Roth in H&R Block Tax Software.

Troubleshooting

If you followed the steps and you are not getting the expected results, here are a few things to check.

Fresh Start

It’s best to follow the steps fresh in one pass. If you already went back and forth with different answers before you found this guide, some of your previous answers may be stuck somewhere you no longer see. You can delete them and start over.

Click on Forms and delete IRA Contributions Worksheet, 1099-R Worksheet, and Form 8606. Then start over by following the steps here.

Conversion Is Taxed

If you don’t have a retirement plan at work, you have a higher income limit to take a deduction on your Traditional IRA contribution. If you have a retirement plan at work but your income is low enough, you are also eligible for a deduction on your Traditional IRA contribution. The software gives you the deduction if it sees that your income qualifies. It doesn’t give you the choice of making it non-deductible. You see this deduction on Schedule 1 Line 20.

Taking this deduction makes your conversion taxable. The taxable Roth IRA conversion and the deduction for your Traditional IRA contribution offset each other to create a wash. This is normal and it doesn’t cause any problems when you indeed don’t have a retirement plan at work or when your income is sufficiently low.

If you actually have a retirement plan at work, maybe the software didn’t see it. Whether you have a retirement plan at work is marked by the “Retirement plan” box in Box 13 of your W-2. Maybe you forgot the check it when you entered the W-2. Double-check the “Retirement plan” box in Box 13 of your (and your spouse’s) W-2 entries to make sure it matches the W-2.

Learn the Nuts and Bolts I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action.Read Reviews

The post Backdoor Roth in H&R Block: Recharacterized in the Same Year appeared first on The Finance Buff.

Split-Year Backdoor Roth IRA in H&R Block, 2nd Year

The previous post Split-Year Backdoor Roth in H&R Block, 1st Year dealt with contributing to a Traditional IRA for the previous year and recharacterizing a previous year’s Roth IRA contribution as a Traditional IRA contribution. This post handles the conversion part.

We cover two example scenarios. Here’s the first:

You contributed $6,000 to a Traditional IRA for 2022 in 2023. The value increased to $6,200 when you converted it to Roth in 2023. You received a 1099-R form listing this $6,200 Roth conversion.

You should’ve already reported the contribution part on your 2022 tax return by following Split-Year Backdoor Roth in H&R Block, 1st Year. The IRA custodian sent you a 1099-R form for the conversion in 2023. This post shows you how to put it into H&R Block tax software.

Here’s the second example scenario:

You contributed $6,000 to a Roth IRA for 2022 in 2022. You realized that your income was too high when you did your 2022 taxes in 2023. You recharacterized the Roth contribution for 2022 as a Traditional contribution before April 15, 2023. The IRA custodian moved $6,100 from your Roth IRA to your Traditional IRA because your original $6,000 contribution had some earnings. The value increased again to $6,200 when you converted it to Roth in 2023. You received two 1099-R forms, one for $6,100 and another for $6,200.

You should’ve already reported the recharacterized contribution on your 2022 tax return by following Split-Year Backdoor Roth in H&R Block, 1st Year. The IRA custodian sent you two 1099-R forms, one for the recharacterization, and the other for the conversion. This post shows you how to put both of them into H&R Block tax software.

If you contributed for 2023 in 2024 or if you recharacterized a 2023 contribution in 2024, you’re still in the first year of this journey. Please follow Split-Year Backdoor Roth in H&R Block, 1st Year. If you recharacterized your 2023 contribution in 2023 and converted in 2023, please follow Backdoor Roth in H&R Block: Recharacterized in the Same Year.

If neither of these example scenarios fits you, please consult our guide for a normal “clean” backdoor Roth: How to Report Backdoor Roth in H&R Block Tax Software.

If you’re married and both you and your spouse did the same thing, you should follow the steps below once for yourself and once again for your spouse.

Table of ContentsUse H&R Block Download Software1099-R for Recharacterization1099-R for ConversionMore QuestionsClean Backdoor Roth On TopDid Not RecharacterizeBasisTaxable IncomeTroubleshootingFresh StartConversion Is TaxedUse H&R Block Download Software

The screenshots below are taken from H&R Block Deluxe downloaded software. The downloaded software is way better than online software. If you haven’t paid for your H&R Block Online filing yet, consider buying H&R Block download software from Amazon, Walmart, Newegg, and many other places. If you’re already too far in entering your data into H&R Block Online, make this your last year of using H&R Block Online. Switch over to H&R Block download software next year.

1099-R for Recharacterization

This section only applies to the second example scenario. If you didn’t recharacterize (the first example scenario), please skip this section and jump over to the conversion section.

We handle the 1099-R form for recharacterization first. This 1099-R form has a code ‘R’ in Box 7.

Click on Federal -> Income. Scroll down and find IRA and Pension Income (Form 1099-R). Click on “Go To.”

Click on Import 1099-R if you’d like. I show manual entries with “Enter Manually” here.

Just a regular 1099-R.

The amount that moved from your Roth IRA to your Traditional IRA is shown in Box 1. The taxable amount in Box 2a is zero. The two checkboxes in Box 2b aren’t checked. The code in Box 7 is “R.”

The “IRA/SEP/SIMPLE” box under Box 7 may or may not be checked. It’s not checked in our sample 1099-R.

Not a retired public safety officer.

We like to hear that.

You’re done with the first 1099-R form. Click on “Enter Manually” to add the second one if you don’t already have both 1099-R forms imported.

1099-R for Conversion

The 1099-R for conversion has either a code “2” or code “7” in Box 7.

The second 1099-R form is also a regular 1099-R.

It’s normal to see the conversion reported in Box 2a as the taxable amount when Box 2b is checked to say “Taxable amount not determined.” The code in Box 7 is ‘2‘ when you’re under 59-1/2 or ‘7‘ when you’re over 59-1/2.

The “IRA/SEP/SIMPLE” box is checked on this 1099-R form for the conversion.

Did not inherit it.

This is a very important question. Read carefully. Answer No, because you converted, not rolled over.

Now answer Yes, you converted.

We converted all of it in our example.

Answer Yes because your contribution for the prior year was your basis.

The refund in progress drops a lot at this point. Don’t panic. It’s normal and only temporary. It will come back up after we continue.

You are done with one 1099-R. Repeat the above if you have another 1099-R. If you’re married and both of you converted to Roth, pay attention to whose 1099-R it is when you enter the second one. You’ll have problems if you assign both 1099-R’s to the same person when they belong to each spouse. Click on Finished when you are done with all the 1099-Rs.

More Questions

H&R Block has a few more questions.

Answer Yes if you did a “clean” backdoor Roth in 2023 on top of converting your 2022 contribution, in other words, you also contributed to a Traditional IRA for 2023 in 2023 and converted both your 2022 contribution and your 2023 contribution in 2023. Your 1099-R includes converting two year’s worth of contributions in a single year.

If you answered “Yes” to the previous question, H&R Block will wait until you also enter your 2023 contribution. Your refund meter is still depressed but don’t worry.

If you answered “No” to the previous question because you didn’t contribute to a Traditional IRA for 2023, the software will ask you for your basis. Get that number from Line 14 of your Form 8606. It’s $6,000 in our example.

Clean Backdoor Roth On Top

The conversion part of the clean backdoor Roth is already included in the 1099-R form we just completed. Now we do the contribution part.

Click on Federal -> Adjustments. Find IRA Contributions. Click on “Go To.”

Answer “Yes” because you contributed to a Traditional IRA in 2023 for 2023.

Check the box for Traditional IRA.

You know you don’t get a deduction due to income. Enter anyway. If you don’t see this question, it means the software thinks you’re eligible for a deduction. You can’t decline the deduction.

Enter your contribution amount. We contributed $6,500 in our example.

Did Not Recharacterize

This is important. Answer No because you didn’t recharacterize. You converted to Roth.

No excess contribution.

Basis

H&R Block should import this from last year’s data but it doesn’t. Get it from last year’s Form 8606 Line 14. If you didn’t have a Form 8606 last year because the software gave you a deduction on Schedule 1 Line 20, your basis is zero. It’s $6,000 in our example.

This is another important question. If you emptied out all your Traditional IRA and you don’t have any SEP or SIMPLE IRAs, technically you can answer Yes and skip some questions. The safer bet is to answer No and go through the follow-up questions. If you’ve been going through these screens back and forth, you may have put in some incorrect answers in a previous round. You will have a chance to review and correct those answers only if you answer No.

Leave the boxes blank when you contributed for 2023 in 2023.

The box should be blank or zero when you emptied all your Traditional IRAs after converting them to Roth. If you had a few dollars of earnings after you converted and you left them in the account, get the value from your year-end statements and put it here. The software will apply the pro-rata rule.

0 in Traditional IRA deduction means it’s nondeductible. Click on Next. Repeat for your spouse if both of you contributed to a Traditional IRA.

Now the refund meter should go back up after you enter the Traditional IRA contributions.

Taxable Income

You’re done with the two 1099-R forms. Let’s look at how they show up on your tax return. Click on Forms on the top and open Form 1040 and Schedules 1-3. Click on Hide Mini WS. Scroll down to lines 4a and 4b.

Line 4a shows the amount on your 1099-R for the Roth conversion. Line 4b shows the taxable amount, which is the earnings between the time you contributed to your Traditional IRA and the time you converted it to Roth. The taxable amount would be zero if you didn’t have any earnings. The taxable amount can be off by a few dollars due to rounding.

Form 8606 shows these for our example:

Line #Amount16,500 (only if you also did a “clean” backdoor Roth on top, otherwise blank.)26,0003The sum of Line 1 and Line 25The same as Line 313The same as Line 3 (or close to it due to rounding)14016The amount on your 1099-R with a code 2 or 717The same as Line 3 (or close to it due to rounding)18The difference between Line 16 and Line 17Form 8606Troubleshooting

If you followed the steps and you are not getting the expected results, here are a few things to check.

Fresh Start

It’s best to follow the steps fresh in one pass. If you already went back and forth with different answers before you found this guide, some of your previous answers may be stuck somewhere you no longer see. You can delete them and start over.

Click on Forms and delete IRA Contributions Worksheet, 1099-R Worksheet, and Form 8606. Then start over by following the steps here.

Conversion Is Taxed

If you don’t have a retirement plan at work, you have a higher income limit to take a deduction on your Traditional IRA contribution. If you have a retirement plan at work but your income is low enough, you are also eligible for a deduction on your Traditional IRA contribution. The software gives you the deduction if it sees that your income qualifies. It doesn’t give you the choice of making it non-deductible.

Part of your conversion could be taxed because you took a deduction on the Traditional IRA contribution last year or this year. You see whether you took a deduction by looking at Schedule 1 Line 20 on last year’s and this year’s tax returns.

The taxable Roth IRA conversion and the deduction for your Traditional IRA contribution offset each other to create a wash. This is normal and it doesn’t cause any problems when you indeed don’t have a retirement plan at work or when your income is sufficiently low.

If you actually have a retirement plan at work, maybe the software didn’t see it. Whether you have a retirement plan at work is marked by the “Retirement plan” box in Box 13 of your W-2. Maybe you forgot the check it when you entered the W-2. Double-check the “Retirement plan” box in Box 13 of your (and your spouse’s) W-2 entries to make sure it matches the W-2.

Learn the Nuts and Bolts I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action.Read Reviews

The post Split-Year Backdoor Roth IRA in H&R Block, 2nd Year appeared first on The Finance Buff.

Split-Year Backdoor Roth in H&R Block, 2nd Year

The previous post Split-Year Backdoor Roth in H&R Block, 1st Year dealt with contributing to a Traditional IRA for the previous year and recharacterizing a previous year’s Roth IRA contribution as a Traditional IRA contribution. This post handles the conversion part.

We cover two example scenarios. Here’s the first:

You contributed $6,000 to a Traditional IRA for 2022 in 2023. The value increased to $6,200 when you converted it to Roth in 2023. You received a 1099-R form listing this $6,200 Roth conversion.

You should’ve already reported the contribution part on your 2022 tax return by following Split-Year Backdoor Roth in H&R Block, 1st Year. The IRA custodian sent you a 1099-R form for the conversion in 2023. This post shows you how to put it into H&R Block tax software.

Here’s the second example scenario:

You contributed $6,000 to a Roth IRA for 2022 in 2022. You realized that your income was too high when you did your 2022 taxes in 2023. You recharacterized the Roth contribution for 2022 as a Traditional contribution before April 15, 2023. The IRA custodian moved $6,100 from your Roth IRA to your Traditional IRA because your original $6,000 contribution had some earnings. The value increased again to $6,200 when you converted it to Roth in 2023. You received two 1099-R forms, one for $6,100 and another for $6,200.

You should’ve already reported the recharacterized contribution on your 2022 tax return by following Split-Year Backdoor Roth in H&R Block, 1st Year. The IRA custodian sent you two 1099-R forms, one for the recharacterization, and the other for the conversion. This post shows you how to put both of them into H&R Block tax software.

If you contributed for 2023 in 2024 or if you recharacterized a 2023 contribution in 2024, you’re still in the first year of this journey. Please follow Split-Year Backdoor Roth in H&R Block, 1st Year. If you recharacterized your 2023 contribution in 2023 and converted in 2023, please follow a separate follow-up post.

If neither of these example scenarios fits you, please consult our guide for a normal “clean” backdoor Roth: How to Report Backdoor Roth in H&R Block Tax Software.

If you’re married and both you and your spouse did the same thing, you should follow the steps below once for yourself and once again for your spouse.

Table of ContentsUse H&R Block Download Software1099-R for Recharacterization1099-R for ConversionMore QuestionsClean Backdoor Roth On TopDid Not RecharacterizeBasisTaxable IncomeTroubleshootingFresh StartConversion Is TaxedUse H&R Block Download Software

The screenshots below are taken from H&R Block Deluxe downloaded software. The downloaded software is way better than online software. If you haven’t paid for your H&R Block Online filing yet, consider buying H&R Block download software from Amazon, Walmart, Newegg, and many other places. If you’re already too far in entering your data into H&R Block Online, make this your last year of using H&R Block Online. Switch over to H&R Block download software next year.

1099-R for Recharacterization

This section only applies to the second example scenario. If you didn’t recharacterize (the first example scenario), please skip this section and jump over to the conversion section.

We handle the 1099-R form for recharacterization first. This 1099-R form has a code ‘R’ in Box 7.

Click on Federal -> Income. Scroll down and find IRA and Pension Income (Form 1099-R). Click on “Go To.”

Click on Import 1099-R if you’d like. I show manual entries with “Enter Manually” here.

Just a regular 1099-R.

The amount that moved from your Roth IRA to your Traditional IRA is shown in Box 1. The taxable amount in Box 2a is zero. The two checkboxes in Box 2b aren’t checked. The code in Box 7 is “R.”

The “IRA/SEP/SIMPLE” box under Box 7 may or may not be checked. It’s not checked in our sample 1099-R.

Not a retired public safety officer.

We like to hear that.

You’re done with the first 1099-R form. Click on “Enter Manually” to add the second one if you don’t already have both 1099-R forms imported.

1099-R for Conversion

The 1099-R for conversion has either a code “2” or code “7” in Box 7.

The second 1099-R form is also a regular 1099-R.

It’s normal to see the conversion reported in Box 2a as the taxable amount when Box 2b is checked to say “Taxable amount not determined.” The code in Box 7 is ‘2‘ when you’re under 59-1/2 or ‘7‘ when you’re over 59-1/2.

The “IRA/SEP/SIMPLE” box is checked on this 1099-R form for the conversion.

Did not inherit it.

This is a very important question. Read carefully. Answer No, because you converted, not rolled over.

Now answer Yes, you converted.

We converted all of it in our example.

Answer Yes because your contribution for the prior year was your basis.

The refund in progress drops a lot at this point. Don’t panic. It’s normal and only temporary. It will come back up after we continue.

You are done with one 1099-R. Repeat the above if you have another 1099-R. If you’re married and both of you converted to Roth, pay attention to whose 1099-R it is when you enter the second one. You’ll have problems if you assign both 1099-R’s to the same person when they belong to each spouse. Click on Finished when you are done with all the 1099-Rs.

More Questions

H&R Block has a few more questions.

Answer Yes if you did a “clean” backdoor Roth in 2023 on top of converting your 2022 contribution, in other words, you also contributed to a Traditional IRA for 2023 in 2023 and converted both your 2022 contribution and your 2023 contribution in 2023. Your 1099-R includes converting two year’s worth of contributions in a single year.

If you answered “Yes” to the previous question, H&R Block will wait until you also enter your 2023 contribution. Your refund meter is still depressed but don’t worry.

If you answered “No” to the previous question because you didn’t contribute to a Traditional IRA for 2023, the software will ask you for your basis. Get that number from Line 14 of your Form 8606. It’s $6,000 in our example.

Clean Backdoor Roth On Top

The conversion part of the clean backdoor Roth is already included in the 1099-R form we just completed. Now we do the contribution part.

Click on Federal -> Adjustments. Find IRA Contributions. Click on “Go To.”

Answer “Yes” because you contributed to a Traditional IRA in 2023 for 2023.

Check the box for Traditional IRA.

You know you don’t get a deduction due to income. Enter anyway. If you don’t see this question, it means the software thinks you’re eligible for a deduction. You can’t decline the deduction.

Enter your contribution amount. We contributed $6,500 in our example.

Did Not Recharacterize

This is important. Answer No because you didn’t recharacterize. You converted to Roth.

No excess contribution.

Basis

H&R Block should import this from last year’s data but it doesn’t. Get it from last year’s Form 8606 Line 14. If you didn’t have a Form 8606 last year because the software gave you a deduction on Schedule 1 Line 20, your basis is zero. It’s $6,000 in our example.

This is another important question. If you emptied out all your Traditional IRA and you don’t have any SEP or SIMPLE IRAs, technically you can answer Yes and skip some questions. The safer bet is to answer No and go through the follow-up questions. If you’ve been going through these screens back and forth, you may have put in some incorrect answers in a previous round. You will have a chance to review and correct those answers only if you answer No.

Leave the boxes blank when you contributed for 2023 in 2023.

The box should be blank or zero when you emptied all your Traditional IRAs after converting them to Roth. If you had a few dollars of earnings after you converted and you left them in the account, get the value from your year-end statements and put it here. The software will apply the pro-rata rule.

0 in Traditional IRA deduction means it’s nondeductible. Click on Next. Repeat for your spouse if both of you contributed to a Traditional IRA.

Now the refund meter should go back up after you enter the Traditional IRA contributions.

Taxable Income

You’re done with the two 1099-R forms. Let’s look at how they show up on your tax return. Click on Forms on the top and open Form 1040 and Schedules 1-3. Click on Hide Mini WS. Scroll down to lines 4a and 4b.

Line 4a shows the amount on your 1099-R for the Roth conversion. Line 4b shows the taxable amount, which is the earnings between the time you contributed to your Traditional IRA and the time you converted it to Roth. The taxable amount would be zero if you didn’t have any earnings. The taxable amount can be off by a few dollars due to rounding.

Form 8606 shows these for our example:

Line #Amount16,500 (only if you also did a “clean” backdoor Roth on top, otherwise blank.)26,0003The sum of Line 1 and Line 25The same as Line 313The same as Line 3 (or close to it due to rounding)14016The amount on your 1099-R with a code 2 or 717The same as Line 3 (or close to it due to rounding)18The difference between Line 16 and Line 17Form 8606Troubleshooting

If you followed the steps and you are not getting the expected results, here are a few things to check.

Fresh Start

It’s best to follow the steps fresh in one pass. If you already went back and forth with different answers before you found this guide, some of your previous answers may be stuck somewhere you no longer see. You can delete them and start over.

Click on Forms and delete IRA Contributions Worksheet, 1099-R Worksheet, and Form 8606. Then start over by following the steps here.

Conversion Is Taxed

If you don’t have a retirement plan at work, you have a higher income limit to take a deduction on your Traditional IRA contribution. If you have a retirement plan at work but your income is low enough, you are also eligible for a deduction on your Traditional IRA contribution. The software gives you the deduction if it sees that your income qualifies. It doesn’t give you the choice of making it non-deductible.

Part of your conversion could be taxed because you took a deduction on the Traditional IRA contribution last year or this year. You see whether you took a deduction by looking at Schedule 1 Line 20 on last year’s and this year’s tax returns.

The taxable Roth IRA conversion and the deduction for your Traditional IRA contribution offset each other to create a wash. This is normal and it doesn’t cause any problems when you indeed don’t have a retirement plan at work or when your income is sufficiently low.

If you actually have a retirement plan at work, maybe the software didn’t see it. Whether you have a retirement plan at work is marked by the “Retirement plan” box in Box 13 of your W-2. Maybe you forgot the check it when you entered the W-2. Double-check the “Retirement plan” box in Box 13 of your (and your spouse’s) W-2 entries to make sure it matches the W-2.

Learn the Nuts and Bolts I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action.Read Reviews

The post Split-Year Backdoor Roth in H&R Block, 2nd Year appeared first on The Finance Buff.

Split-Year Backdoor Roth IRA in H&R Block, 1st Year

The best way to do a backdoor Roth is to do it “clean” by contributing for and converting in the same year — contribute for 2023 in 2023 and convert in 2023, contribute for 2024 in 2024 and convert in 2024, and contribute for 2025 in 2025 and convert in 2025. Don’t split them into two years such as contributing for 2022 in 2023 and converting in 2023 or contributing for 2023 in 2024 and converting in 2024. If you did a “clean” backdoor Roth and you’re using H&R Block tax software, please follow How to Report Backdoor Roth in H&R Block Tax Software.

However, many people didn’t know they should’ve done it “clean.” Some people thought it was natural to contribute to an IRA for 2023 between January 1 and April 15 in 2024. Some people contributed directly to a Roth IRA for 2023 in 2023 and only found out their income was too high when they did their taxes in 2024. They had to recharacterize the previous year’s Roth IRA contribution as a Traditional IRA contribution and convert it again to Roth after the fact.

When you contribute for the previous year and convert (or recharacterize and convert in the following year), you have to report them on your tax return in two different years: the contribution in one year and the conversion in the following year. It’s more confusing than a straight “clean” backdoor Roth but that’s the price you pay for not knowing the right way. This post shows you how to do the contribution part in H&R Block for the first year. Split-Year Backdoor Roth in H&R Block, 2nd Year shows you how to do the conversion part for the second year.

If you recharacterized your 2023 contribution in 2023 and converted in 2023, please follow Backdoor Roth in H&R Block: Recharacterized in the Same Year.

I’m showing two examples — (1) a direct contribution to a Traditional IRA for the previous year; and (2) a Roth contribution for the previous year recharacterized as a Traditional contribution. Please see which example matches your scenario and follow along accordingly.

Table of ContentsUse H&R Block Download SoftwareContributed for the Previous YearContributed to Traditional IRADid Not RecharacterizeForm 8606Break the CycleRecharacterized in the Following YearContributed to Roth IRARecharacterized to TraditionalForm 8606Switch to Clean Backdoor RothTroubleshootingNo 1099-RContribution Is DeductibleUse H&R Block Download Software

The screenshots below are taken from H&R Block Deluxe downloaded software. The downloaded software is way better than online software. If you haven’t paid for your H&R Block Online filing yet, consider buying H&R Block download software from Amazon, Walmart, Newegg, and many other places. If you’re already too far in entering your data into H&R Block Online, make this your last year of using H&R Block Online. Switch over to H&R Block download software next year.

Contributed for the Previous Year

Here’s the example scenario for a direct contribution to the Traditional IRA:

You contributed $6,500 to a Traditional IRA for 2023 between January 1 and April 15, 2024. You then converted it to Roth in 2024.

Because your contribution was *for* 2023, you need to report it on your 2023 tax return by following this guide. Because you converted in 2024, you won’t get a 1099-R for your conversion until January 2025. You will report the conversion when you do your 2024 tax return. Come again next year to use Split-Year Backdoor Roth in H&R Block, 2nd Year.

If you contributed to a Traditional IRA in 2023 for 2022, everything below should’ve happened in your 2022 tax return. In other words,

You contributed $6,000 to a Traditional IRA for 2022 between January 1 and April 15, 2023. You then converted it to Roth in 2023.

Then you should’ve gone through the steps below in your 2022 tax return. If you didn’t, you should fix your 2022 return. The conversion part is covered in Split-Year Backdoor Roth in H&R Block, 2nd Year.

If you’re married and both you and your spouse did the same thing, you must follow the same steps below once for you and once again for your spouse.

If you first contributed to a Roth IRA and then recharacterized it as a Traditional contribution, please jump over to the next example.

Contributed to Traditional IRA

Click on Federal -> Adjustments. Find IRA Contributions. Click on “Go To.”

The “Are you contributing to …” wording isn’t exactly accurate when you already contributed but answer “Yes” anyway because you contributed to an IRA for the year in question.

Check the box for Traditional IRA because you contributed directly to a Traditional IRA. See the next example if you contributed to a Roth IRA first and then recharacterized your contribution.

You know you don’t get a deduction due to income. Enter anyway. If you don’t see this question, it means H&R Block thinks you qualify for a deduction. You don’t have the choice to decline the deduction.

Enter your contribution amount. We contributed $6,500 in our example.

Did Not Recharacterize

This is important. Answer No because you didn’t recharacterize. You converted to Roth.

No excess contribution.

Enter zero if this is the first year you contributed to a Traditional IRA. If you contributed non-deductible for previous years (regardless of when), enter the number on line 14 of your Form 8606 from last year.

A summary of your contributions. 0 in Traditional IRA deduction means it’s nondeductible. Click on Next. Repeat for your spouse if both of you contributed to a Traditional IRA for the previous year.

Form 8606

Click on Forms on the top and open Form 8606. Click on Hide Mini WS. You should see that only lines 1, 3, and 14 are filled in with your contribution amount. It’s important to see the number in Line 14. This number will carry over to 2024. It’ll make your conversion in 2024 not taxable.

If you don’t see a Form 8606 or if your Form 8606 doesn’t look right, please check the Troubleshooting section.

Break the Cycle

While you’re at it, you should break the cycle of contributing for the previous year and create a new habit of contributing for the current year. Contribute to a Traditional IRA for 2024 in 2024 and convert in 2024.

You’re allowed to convert more than once in a single year. You’re allowed to convert more than one year’s contribution amount in a single year. Your larger conversion is still not taxable when you convert both your 2023 contribution and your 2024 contribution in 2024. Then you will start 2025 fresh. Contribute for 2025 in 2025 and convert in 2025.

Recharacterized in the Following Year

Now let’s look at our second example scenario.

You contributed $6,500 to a Roth IRA for 2023 in 2023. You realized that your income was too high when you did your taxes in 2024. You recharacterized the Roth contribution for 2023 as a Traditional contribution before April 15, 2024. The IRA custodian moved $6,600 from your Roth IRA to your Traditional IRA because your original $6,500 contribution had some earnings. Then you converted it to Roth in 2024.

Because your contribution was for 2023, you need to report it on your 2023 tax return by following this guide. Because you converted in 2024, you won’t get a 1099-R for your conversion until January 2025. You will report the conversion when you do your 2024 tax return. Come back again next year to use Split-Year Backdoor Roth in H&R Block, 2nd Year.

Similar to our first example, if you did the same in 2023 for 2022, you should’ve done everything below when you did your taxes for 2022. In other words,

You contributed $6,000 to a Roth IRA for 2022 in 2022. You realized that your income was too high when you did your 2022 taxes in 2023. You recharacterized the Roth contribution for 2022 as a Traditional contribution before April 15, 2023. The IRA custodian moved $6,100 from your Roth IRA to your Traditional IRA because your original $6,000 contribution had some earnings. Then you converted it to Roth in 2023.

Then you should’ve taken all the steps below last year in your 2022 tax return. If you didn’t, you need to fix your 2022 return. The conversion part is covered in Split-Year Backdoor Roth in H&R Block, 2nd Year.

Contributed to Roth IRA

Click on Federal -> Adjustments. Find IRA Contributions. Click on “Go To.”

Answer “Yes” because you contributed to an IRA for the year in question.

Check the box for Roth IRA because you originally contributed to a Roth IRA before you recharacterized your contribution.

Enter your original contribution amount. It’s $6,500 in our example.

Recharacterized to Traditional

Answer Yes because you recharacterized the contribution.

The amount here is relative to the original contribution amount. If you recharacterized the whole thing, enter $6,500 in our example, not $6,600 which was the amount with earnings that the IRA custodian moved into the Traditional IRA.

The IRS requires a brief statement to describe your recharacterization.

No excess contribution.

This is as expected. 0 in Traditional IRA deduction means it’s nondeductible. Click on Next. Repeat for your spouse if both of you contributed to a Roth IRA for the previous year and then recharacterized in the following year.

Form 8606

Click on Forms on the top and open Form 8606. Click on Hide Mini WS. You should see that only lines 1, 3, and 14 are filled in with your contribution amount. It’s important to see the number in Line 14. This number will carry over to 2024. It’ll make your conversion in 2024 not taxable.

If you don’t see a Form 8606 or if your Form 8606 doesn’t look right, please check the Troubleshooting section.

Switch to Clean Backdoor Roth

While you are at it, you should switch to a clean backdoor Roth for 2024. Rather than contributing directly to a Roth IRA, seeing that you exceed the income limit, recharacterizing it, and converting it again, you should simply contribute to a Traditional IRA for 2024 in 2024 and convert it to Roth in 2024 if there’s any possibility that your income will be over the limit again.

You’re allowed to do a clean backdoor Roth even if your income ends up below the income limit for a direct contribution to a Roth IRA. It’s much simpler than the confusing recharacterize-and-convert maneuver.

You’re allowed to convert more than once in a single year. You’re allowed to convert more than one year’s contribution amount in a single year. Your larger conversion is still not taxable when you convert both your 2023 contribution and your 2024 contribution in 2024. Then you will start 2025 fresh. Contribute for 2025 in 2025 and convert in 2025.

Troubleshooting

If you followed the steps and you are not getting the expected results, here are a few things to check.

No 1099-R

You get a 1099-R only if you converted to Roth in 2023. Because you only converted in 2024, you won’t get a 1099-R until 2025. This is normal. You do the conversion part next year by following Split-Year Backdoor Roth IRA in H&R Block, 2nd Year.

Contribution Is Deductible

If you don’t have a retirement plan at work, you have a higher income limit to take a deduction on your Traditional IRA contribution. If you have a retirement plan at work but your income is low enough, you are also eligible for a deduction on your Traditional IRA contribution. The software will give you the deduction if it sees that your income qualifies. Unlike TurboTax, H&R Block software doesn’t give you the choice of making it non-deductible. You can see this deduction on Schedule 1 Line 20.

You don’t get a Form 8606 when your contribution is fully deductible. The numbers on Lines 1, 3, and 14 of your Form 8606 are less than your full contribution when your contribution is partially deductible.

Taking this deduction will make your Roth IRA conversion taxable next year. You’ll pay less tax this year and more tax next year. In a way, it’s better because you get to use the money for one year. This is normal when you indeed don’t have a retirement plan at work or when your income is sufficiently low.

If you actually have a retirement plan at work, maybe the software didn’t see it. Whether you have a retirement plan at work is marked by the “Retirement plan” box in Box 13 of your W-2.

Maybe you forgot the check it when you entered the W-2. Double-check the “Retirement plan” box in Box 13 of your (and your spouse’s) W-2 entries to make sure it matches the W-2.

Learn the Nuts and Bolts I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action.Read Reviews

The post Split-Year Backdoor Roth IRA in H&R Block, 1st Year appeared first on The Finance Buff.

Split-Year Backdoor Roth in H&R Block, 1st Year

The best way to do a backdoor Roth is to do it “clean” by contributing for and converting in the same year — contribute for 2023 in 2023 and convert in 2023, contribute for 2024 in 2024 and convert in 2024, and contribute for 2025 in 2025 and convert in 2025. Don’t split them into two years such as contributing for 2022 in 2023 and converting in 2023 or contributing for 2023 in 2024 and converting in 2024. If you did a “clean” backdoor Roth and you’re using H&R Block tax software, please follow How to Report Backdoor Roth in H&R Block Tax Software.

However, many people didn’t know they should’ve done it “clean.” Some people thought it was natural to contribute to an IRA for 2023 between January 1 and April 15 in 2024. Some people contributed directly to a Roth IRA for 2023 in 2023 and only found out their income was too high when they did their taxes in 2024. They had to recharacterize the previous year’s Roth IRA contribution as a Traditional IRA contribution and convert it again to Roth after the fact.

When you contribute for the previous year and convert (or recharacterize and convert in the following year), you have to report them on your tax return in two different years: the contribution in one year and the conversion in the following year. It’s more confusing than a straight “clean” backdoor Roth but that’s the price you pay for not knowing the right way. This post shows you how to do the contribution part in H&R Block for the first year. Split-Year Backdoor Roth in H&R Block, 2nd Year shows you how to do the conversion part for the second year.

If you recharacterized your 2023 contribution in 2023 and converted in 2023, it will be in another separate follow-up post.

I’m showing two examples — (1) a direct contribution to a Traditional IRA for the previous year; and (2) a Roth contribution for the previous year recharacterized as a Traditional contribution. Please see which example matches your scenario and follow along accordingly.

Table of ContentsUse H&R Block Download SoftwareContributed for the Previous YearContributed to Traditional IRADid Not RecharacterizeForm 8606Break the CycleRecharacterized in the Following YearContributed to Roth IRARecharacterized to TraditionalForm 8606Switch to Clean Backdoor RothTroubleshootingNo 1099-RContribution Is DeductibleUse H&R Block Download Software

The screenshots below are taken from H&R Block Deluxe downloaded software. The downloaded software is way better than online software. If you haven’t paid for your H&R Block Online filing yet, consider buying H&R Block download software from Amazon, Walmart, Newegg, and many other places. If you’re already too far in entering your data into H&R Block Online, make this your last year of using H&R Block Online. Switch over to H&R Block download software next year.

Contributed for the Previous Year

Here’s the example scenario for a direct contribution to the Traditional IRA:

You contributed $6,500 to a Traditional IRA for 2023 between January 1 and April 15, 2024. You then converted it to Roth in 2024.

Because your contribution was *for* 2023, you need to report it on your 2023 tax return by following this guide. Because you converted in 2024, you won’t get a 1099-R for your conversion until January 2025. You will report the conversion when you do your 2024 tax return. Come again next year to use Split-Year Backdoor Roth in H&R Block, 2nd Year.

If you contributed to a Traditional IRA in 2023 for 2022, everything below should’ve happened in your 2022 tax return. In other words,

You contributed $6,000 to a Traditional IRA for 2022 between January 1 and April 15, 2023. You then converted it to Roth in 2023.

Then you should’ve gone through the steps below in your 2022 tax return. If you didn’t, you should fix your 2022 return. The conversion part is covered in Split-Year Backdoor Roth in H&R Block, 2nd Year.

If you’re married and both you and your spouse did the same thing, you must follow the same steps below once for you and once again for your spouse.

If you first contributed to a Roth IRA and then recharacterized it as a Traditional contribution, please jump over to the next example.

Contributed to Traditional IRA

Click on Federal -> Adjustments. Find IRA Contributions. Click on “Go To.”

The “Are you contributing to …” wording isn’t exactly accurate when you already contributed but answer “Yes” anyway because you contributed to an IRA for the year in question.

Check the box for Traditional IRA because you contributed directly to a Traditional IRA. See the next example if you contributed to a Roth IRA first and then recharacterized your contribution.

You know you don’t get a deduction due to income. Enter anyway. If you don’t see this question, it means H&R Block thinks you qualify for a deduction. You don’t have the choice to decline the deduction.

Enter your contribution amount. We contributed $6,500 in our example.

Did Not Recharacterize

This is important. Answer No because you didn’t recharacterize. You converted to Roth.

No excess contribution.

Enter zero if this is the first year you contributed to a Traditional IRA. If you contributed non-deductible for previous years (regardless of when), enter the number on line 14 of your Form 8606 from last year.

A summary of your contributions. 0 in Traditional IRA deduction means it’s nondeductible. Click on Next. Repeat for your spouse if both of you contributed to a Traditional IRA for the previous year.

Form 8606

Click on Forms on the top and open Form 8606. Click on Hide Mini WS. You should see that only lines 1, 3, and 14 are filled in with your contribution amount. It’s important to see the number in Line 14. This number will carry over to 2024. It’ll make your conversion in 2024 not taxable.

Break the Cycle

While you’re at it, you should break the cycle of contributing for the previous year and create a new habit of contributing for the current year. Contribute to a Traditional IRA for 2024 in 2024 and convert in 2024.

You’re allowed to convert more than once in a single year. You’re allowed to convert more than one year’s contribution amount in a single year. Your larger conversion is still not taxable when you convert both your 2023 contribution and your 2024 contribution in 2024. Then you will start 2025 fresh. Contribute for 2025 in 2025 and convert in 2025.

Recharacterized in the Following Year

Now let’s look at our second example scenario.

You contributed $6,500 to a Roth IRA for 2023 in 2023. You realized that your income was too high when you did your taxes in 2024. You recharacterized the Roth contribution for 2023 as a Traditional contribution before April 15, 2024. The IRA custodian moved $6,600 from your Roth IRA to your Traditional IRA because your original $6,500 contribution had some earnings. Then you converted it to Roth in 2024.

Because your contribution was for 2023, you need to report it on your 2023 tax return by following this guide. Because you converted in 2024, you won’t get a 1099-R for your conversion until January 2025. You will report the conversion when you do your 2024 tax return. Come back again next year to use Split-Year Backdoor Roth in H&R Block, 2nd Year.

Similar to our first example, if you did the same in 2023 for 2022, you should’ve done everything below when you did your taxes for 2022. In other words,

You contributed $6,000 to a Roth IRA for 2022 in 2022. You realized that your income was too high when you did your 2022 taxes in 2023. You recharacterized the Roth contribution for 2022 as a Traditional contribution before April 15, 2023. The IRA custodian moved $6,100 from your Roth IRA to your Traditional IRA because your original $6,000 contribution had some earnings. Then you converted it to Roth in 2023.

Then you should’ve taken all the steps below last year in your 2022 tax return. If you didn’t, you need to fix your 2022 return. The conversion part is covered in Split-Year Backdoor Roth in H&R Block, 2nd Year.

Contributed to Roth IRA

Click on Federal -> Adjustments. Find IRA Contributions. Click on “Go To.”

Answer “Yes” because you contributed to an IRA for the year in question.

Check the box for Roth IRA because you originally contributed to a Roth IRA before you recharacterized your contribution.

Enter your original contribution amount. It’s $6,500 in our example.

Recharacterized to Traditional

Answer Yes because you recharacterized the contribution.

The amount here is relative to the original contribution amount. If you recharacterized the whole thing, enter $6,500 in our example, not $6,600 which was the amount with earnings that the IRA custodian moved into the Traditional IRA.

The IRS requires a brief statement to describe your recharacterization.

No excess contribution.

This is as expected. 0 in Traditional IRA deduction means it’s nondeductible. Click on Next. Repeat for your spouse if both of you contributed to a Roth IRA for the previous year and then recharacterized in the following year.

Form 8606

Click on Forms on the top and open Form 8606. Click on Hide Mini WS. You should see that only lines 1, 3, and 14 are filled in with your contribution amount. It’s important to see the number in Line 14. This number will carry over to 2024. It’ll make your conversion in 2024 not taxable.

Switch to Clean Backdoor Roth

While you are at it, you should switch to a clean backdoor Roth for 2024. Rather than contributing directly to a Roth IRA, seeing that you exceed the income limit, recharacterizing it, and converting it again, you should simply contribute to a Traditional IRA for 2024 in 2024 and convert it to Roth in 2024 if there’s any possibility that your income will be over the limit again.

You’re allowed to do a clean backdoor Roth even if your income ends up below the income limit for a direct contribution to a Roth IRA. It’s much simpler than the confusing recharacterize-and-convert maneuver.

You’re allowed to convert more than once in a single year. You’re allowed to convert more than one year’s contribution amount in a single year. Your larger conversion is still not taxable when you convert both your 2023 contribution and your 2024 contribution in 2024. Then you will start 2025 fresh. Contribute for 2025 in 2025 and convert in 2025.

Troubleshooting

If you followed the steps and you are not getting the expected results, here are a few things to check.

No 1099-R

You get a 1099-R only if you converted to Roth during 2023. Because you only converted in 2024, you won’t get a 1099-R until 2025. This is normal. You do the conversion part next year with the 1099-R.

Contribution Is Deductible

If you don’t have a retirement plan at work, you have a higher income limit to take a deduction on your Traditional IRA contribution. If you have a retirement plan at work but your income is low enough, you are also eligible for a deduction on your Traditional IRA contribution. The software will give you the deduction if it sees that your income qualifies. Unlike TurboTax, H&R Block software doesn’t give you the choice of making it non-deductible. You can see this deduction on Schedule 1 Line 20, which reduces your AGI.

Taking this deduction will make your Roth IRA conversion taxable next year. You’ll pay less tax this year and more tax next year. In a way, it’s better because you get to use the money for one year. This is normal when you indeed don’t have a retirement plan at work or when your income is sufficiently low.

If you actually have a retirement plan at work, maybe the software didn’t see it. Whether you have a retirement plan at work is marked by the “Retirement plan” box in Box 13 of your W-2. Maybe you forgot the check it when you entered the W-2. Double-check the “Retirement plan” box in Box 13 of your (and your spouse’s) W-2 entries to make sure it matches the W-2.

Learn the Nuts and Bolts I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action.Read Reviews

The post Split-Year Backdoor Roth in H&R Block, 1st Year appeared first on The Finance Buff.

How to Close Out a Box Spread Early at Fidelity

Selling a short box spread is a way to get a loan at a good rate using your investments as collateral. I sold some short box spreads to get cash for building a home because I didn’t want to sell stocks when stocks were down. Now that stocks recovered, I sold stocks to close out the box spreads before the expiration date.

When you close out a box spread early, you may end up with a gain or loss depending on the interest rate changes. The interest rate happened to have gone up since I originally sold the short box spreads. I ended up with a small gain.

The broker will include the realized gain or loss on a 1099-B form. See Taxes on Box Spread Trades in TurboTax, H&R Block, FreeTaxUSA for how to report it on your tax return.

Here’s how I closed out my short box spreads early.

Close Out a Short Box Spread

I executed these trades when I originally sold the box spread:

Sell to Open a call on SPX in December 2027 at 4,300Buy to Open a call on SPX in December 2027 at 5,000Buy to Open a put on SPX in December 2027 at 4,300Sell to Open a put on SPX in December 2027 at 5,000

Sell – Buy – Buy – Sell.

To close out this box spread, I needed to execute trades in the opposite direction. “Sell to Open” becomes “Buy to Close” and “Buy to Open” becomes “Sell to Close.” Therefore, these are the closing trades:

Buy to Close a call on SPX in December 2027 at 4,300Sell to Close a call on SPX in December 2027 at 5,000Sell to Close a put on SPX in December 2027 at 4,300Buy to Close a put on SPX in December 2027 at 5,000

Buy – Sell – Sell – Buy.

Set Up Four Legs

I held the box spreads through Fidelity. Fidelity shows the contracts you hold when you enter the ticker symbol and choose “Buy to Close” in the action dropdown.

Here are all four legs:

Calculate the Limit Price

I checked the Treasury yields near the expiration date. It was around 4.4%.

Boxspreads.com showed that if I wanted a 4.65% yield (0.25% above Treasury), the target price for a 700-point spread in December 2027 was 594.65.

Use that price for the limit order in Fidelity.

Partial Close

If you don’t have enough money to close out the full box, you can also execute a partial close. You go up from the bottom of your spread or come down from the top of your spread to shrink the spread to a smaller size.

Suppose I want to shrink my 700-point spread to a 500-point spread, I would close at 4,300 and open at 4,500.

It’s still Buy – Sell – Sell – Buy except you’re going up from 4,300 to only 4,500, not from 4,300 to 5,000. After this trade executes, you’re left with a 4,500 – 5,000 box spread.

Alternatively, you can also come down from the top, to close at 5,000 and open at 4,800. Then you’re left with a 4,300 – 4,800 box spread.

Buy to Open a call on SPX in December 2027 at 4,800Sell to Close a call on SPX in December 2027 at 5,000Sell to Open a put on SPX in December 2027 at 4,800Buy to Close a put on SPX in December 2027 at 5,000Close Out a Long Box Spread

The same principle applies when you’re closing out a long box spread. These are the original trades for a long box spread:

Buy to Open a call at XSell to Open a call at X + spreadSell to Open a put at XSell to Open a put at X + spread

Buy – Sell – Sell – Buy.

In opposite trades, “Buy to Open” becomes “Sell to Close” and “Sell to Open” becomes “Buy to Close.” These trades will close out a long box spread:

Sell to Close a call at XBuy to Close a call at X + spreadBuy to Close a put at XSell to Close a put at X + spread

Sell – Buy – Buy – Sell.

Similarly, you can also partially close out a long box spread by using a smaller spread in your closeout trades.

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