Feeling a bit overwhelmed by tax season? You're not alone! Many people find navigating IRA contributions, especially non-deductible ones, to be a tricky business. But don't worry, with TurboTax and this step-by-step guide, you'll be able to report your non-deductible IRA contributions accurately and avoid any future tax headaches. Let's dive in!
Understanding Non-Deductible IRA Contributions
Before we jump into TurboTax, let's quickly clarify what a non-deductible IRA contribution is and why it's important to report it correctly.
A traditional IRA allows you to contribute money for retirement. Depending on your income and whether you're covered by a retirement plan at work, your contributions might be tax-deductible. However, if your income exceeds certain limits and you are covered by a workplace retirement plan, your traditional IRA contributions become non-deductible. This means you don't get an upfront tax break for these contributions.
So why make them? The main reason is that the earnings within the IRA still grow tax-deferred. This can be a valuable retirement savings strategy, especially for those who want to execute a "backdoor Roth IRA conversion." The key is to keep track of these non-deductible contributions, as they form your "basis" in the IRA. When you eventually withdraw money, or convert it to a Roth IRA, this basis will be returned to you tax-free. If you don't report them, you could end up paying taxes on the same money twice! The IRS uses Form 8606, Nondeductible IRAs, to track this basis.
Now, let's get down to business with TurboTax!
Step 1: Initiating the IRA Contribution Section in TurboTax
Alright, let's kick things off right inside your TurboTax account. This is where we'll tell the software about your contributions.
Sub-heading: Accessing the Right Section
Log in to your TurboTax account: Go to the TurboTax website and sign in.
Open your return: If you're in the middle of preparing your taxes, ensure you have your current tax return open.
Navigate to the search bar: Look for the "Search" bar, usually located at the top right of the TurboTax interface.
Type and jump: In the search bar, type "IRA Contribution Information" (or just "IRA contributions"). A "Jump to" link should appear. Click on this link. This will take you directly to the relevant section for IRA contributions.
Alternatively:
Go to "Federal Taxes" / "Deductions & Credits": From the main menu, click on "Federal Taxes" (or "Personal Info" if you're using TurboTax Home & Business).
Select "Deductions & Credits": Then, choose the "Deductions & Credits" tab.
Find "Retirement & Investments": Scroll down until you see the "Retirement & Investments" section.
Click "Start" or "Update" next to "Traditional & Roth IRA Contributions": This will open the IRA interview questions.
Step 2: Entering Your Traditional IRA Contribution Details
This is where you'll input the actual amount you contributed.
Sub-heading: Answering the Initial Questions
Select "Traditional IRA": On the screen asking about the type of IRA contribution, select the "Traditional IRA" option and click "Continue."
"Is This a Repayment of a Retirement Distribution?": You'll likely be asked, "Is This a Repayment of a Retirement Distribution?" For a typical non-deductible contribution, select "No" and proceed.
"Tell Us How Much You Contributed": On this screen, enter the total amount you contributed to your traditional IRA for the tax year. Be precise! Click "Continue."
"Did You Change Your Mind?": This question pertains to recharacterizations (moving money between IRA types). For a standard non-deductible contribution, select "No" and continue.
Step 3: Identifying the Contribution as Non-Deductible
This is the crucial step where you inform TurboTax that your contribution is not deductible.
Sub-heading: Choosing Not to Deduct
"Choose Not to Deduct IRA Contributions" or Income Limits Met: TurboTax will guide you through a series of questions to determine your IRA deduction eligibility.
If your income is above the phase-out limits for deducting traditional IRA contributions while being covered by a workplace retirement plan, TurboTax will likely automatically determine that your contribution is non-deductible. You might see a screen saying "Income Too High To Deduct an IRA Contribution" and that your contribution will automatically be non-deductible. This is exactly what you want.
If you are within the income limits or not covered by a workplace plan but choose not to deduct the contribution (perhaps for a backdoor Roth conversion), you will likely see a screen titled "Choose Not to Deduct IRA Contributions." Select "Yes, make part of my IRA contribution nondeductible" and then enter the amount you wish to make non-deductible (which could be the entire contribution amount).
Continue through the remaining screens: Answer any subsequent questions TurboTax presents regarding your IRA contributions.
Step 4: Reporting Prior-Year Basis (If Applicable)
If you've made non-deductible IRA contributions in previous years, you need to tell TurboTax about your existing "basis." This is incredibly important to avoid double taxation on your withdrawals or conversions later.
Sub-heading: Locating and Entering Your Basis
"Any Nondeductible Contributions to Your IRA?": At some point in the IRA interview (it might be after you enter your current year contribution or when reviewing a 1099-R for a distribution/conversion), TurboTax will ask, "Any nondeductible Contributions to your IRA?" You must select "Yes" if you have any prior-year non-deductible contributions.
Enter Prior-Year Basis: TurboTax will then prompt you to enter your total basis in traditional IRAs from prior years. This amount should be found on Line 14 of your last filed Form 8606.
Important Note: If you failed to file Form 8606 in a prior year for a non-deductible contribution, you should generally file that missing Form 8606 separately with the IRS. Do not simply add it to your current year's basis if you haven't reported it previously. Filing a standalone Form 8606 for a prior year can be done by mailing it to the IRS. TurboTax will guide you on how to handle the current year's contribution and basis once previous years are properly reported.
Enter Year-End IRA Value: You will also be asked to enter the combined value of all your traditional IRAs (including SEP and SIMPLE IRAs) as of December 31st of the tax year. This information is crucial for calculating the taxable portion of any distributions or conversions.
Step 5: Reviewing Form 8606 in TurboTax
TurboTax will automatically generate Form 8606 based on your inputs. It's vital to review this form to ensure accuracy.
Sub-heading: What to Look For on Form 8606
Accessing Form 8606: In TurboTax Desktop, you can often switch to "Forms" mode to directly view Form 8606. In TurboTax Online, you might need to go to "Tax Tools" -> "Tools" -> "View Tax Summary" or "Preview my 1040" and then navigate to the forms list.
Key Lines to Check:
Line 1: Nondeductible contributions for the tax year. This should match the amount you entered as non-deductible.
Line 2: Basis in traditional IRAs from prior years. This should match the amount you entered from your prior year's Form 8606, Line 14.
Line 3: Total basis. This is the sum of Line 1 and Line 2.
Line 14: Basis in traditional IRAs for future years. This line is crucial as it carries forward your remaining non-deductible basis to the next tax year. If you made a non-deductible contribution and no distribution/conversion, Line 14 should generally equal Line 3.
Backdoor Roth Conversion Specifics: If you are performing a backdoor Roth IRA conversion (where you contribute non-deductible money to a traditional IRA and then immediately convert it to a Roth IRA), ensure that:
Line 4a of your Form 1040 shows the full conversion amount.
Line 4b of your Form 1040 (taxable amount) is zero (unless there were earnings between contribution and conversion).
Your Form 8606 correctly reflects the conversion, and that the non-taxable portion of the conversion is accounted for.
Step 6: Final Review and Filing
Once you've entered all your IRA information and reviewed Form 8606, proceed with the rest of your tax return.
Sub-heading: Double-Checking and Submitting
Complete the rest of your return: Finish entering all other income, deductions, and credits.
Run the error check: Always run TurboTax's final review and error check to catch any potential issues.
File your return: Once you're confident everything is accurate, proceed to file your tax return electronically or by mail.
By diligently following these steps, you'll correctly report your non-deductible IRA contributions in TurboTax, ensuring you avoid unnecessary taxes on those funds in the future. Congratulations on taking control of your tax reporting!
10 Related FAQ Questions:
How to calculate my prior year IRA basis for TurboTax?
Your prior year IRA basis is found on Line 14 of your last filed IRS Form 8606. If you made non-deductible contributions in prior years but didn't file Form 8606, you might need to file those missing forms directly with the IRS or carefully reconstruct your basis from contribution records.
How to find Form 8606 in TurboTax after entering contributions?
In TurboTax Desktop, you can usually switch to "Forms" mode and look for Form 8606 in the list of forms. In TurboTax Online, after completing the IRA interview, you may find it by navigating to "Tax Tools" -> "Tools" -> "View Tax Summary" or "Preview my 1040" and then Browse the forms generated.
How to handle a backdoor Roth IRA conversion in TurboTax?
A backdoor Roth involves making a non-deductible traditional IRA contribution and then converting it to a Roth IRA. TurboTax will guide you through entering the non-deductible contribution first (as detailed above), and then entering your Form 1099-R for the conversion. Ensure you answer questions indicating it was a conversion and that you had a basis, leading to a non-taxable conversion (unless there were earnings).
How to correct a mistake if I forgot to enter a non-deductible IRA contribution in a prior year?
If you forgot to report a non-deductible IRA contribution in a prior year, you generally should not amend your previous tax return. Instead, you should file Form 8606 for that prior year directly with the IRS, mailed separately from your main tax return. This establishes your basis with the IRS.
How to enter a non-deductible IRA contribution if my income is too high to deduct it?
TurboTax will often automatically determine that your contribution is non-deductible if your income exceeds the IRS limits for deducting IRA contributions while you are covered by a workplace retirement plan. Simply enter your contribution, and TurboTax will indicate that $0 is deductible and generate Form 8606.
How to ensure Form 8606 is generated by TurboTax?
Form 8606 is automatically generated by TurboTax when you correctly enter non-deductible traditional IRA contributions or if you have a prior-year basis and take a distribution/conversion from a traditional IRA. The key is to answer the interview questions accurately, especially the one about having non-deductible contributions.
How to verify if my non-deductible IRA contribution was correctly reported on my tax return?
After completing the TurboTax interview, review your Form 1040, Line 4b (taxable amount of IRA distributions), which should be zero if you had a backdoor Roth conversion and no earnings. More importantly, check Form 8606, especially Line 1 (current year non-deductible contribution) and Line 14 (total basis carried forward).
How to avoid paying taxes twice on my non-deductible IRA contributions?
The critical step to avoid double taxation is accurately reporting your non-deductible contributions each year on Form 8606. This form tracks your "basis" or the after-tax money you've put into your IRA, ensuring that when you withdraw or convert those funds, you don't pay tax on them again.
How to handle a Form 1099-R if I made a non-deductible IRA contribution and then converted it?
When entering a Form 1099-R for a Roth conversion of non-deductible IRA funds, TurboTax will ask about your prior-year basis. Make sure you input your total non-deductible basis from all your traditional IRAs. This will allow TurboTax to correctly calculate the non-taxable portion of your conversion.
How to get help from TurboTax if I'm stuck on entering non-deductible IRA contributions?
If you're stuck, first try reviewing the TurboTax help articles and community forums, which are often very informative. If the issue persists, you can typically contact TurboTax customer support directly through their website for personalized assistance. They may be able to view your diagnostic file (without personal info) to help troubleshoot.
