Introduction:

In this case study, we’re going to examine a client's experience with TurboTax and the challenges they faced when reporting their backdoor Roth IRA contributions. Despite following the correct process of contributing to a traditional IRA and then converting it to a Roth IRA, Shelly encountered issues with the reporting, resulting in a penalty for excess contributions. We’ll explore how we helped Shelly navigate the tax reporting process to avoid costly mistakes.

Background:

Shelly typically handled her tax returns through TurboTax and had successfully made backdoor Roth IRA contributions in the past. However, this year, TurboTax indicated that her contributions were excessive, and she faced a 6% penalty. Seeking advice, Shelly reached out to us for help on how to approach her dilemma. 

Approach:

We reviewed Shelly's situation and identified the root of the problem. TurboTax assumed that she was attempting to deduct her IRA contribution, which was not her intention. Shelly is fortunate to have a high level of income, and cannot deduct her IRA contribution. Instead, she had made a non-deductible contribution and, therefore, did not have an excess contribution.

We advised Shelly to review her Form 8606 carefully and ensure that it was correctly filled out. If she faced any issues with the TurboTax system, she could call and work with one of their representatives. We also emphasized the importance of having a balance of zero in the traditional IRA by December 31st before converting to Roth because it would make the conversion tax-free.

Outcome:

After working with us and TurboTax over the phone, Shelly was able to correct the mistake and avoid the penalty for excess contributions. Our guidance helped the client understand the importance of correctly reporting their backdoor Roth IRA contributions and navigating the tax system's complexities.

Conclusion:

Even if you’re taking a D.I.Y. approach to taxes, it’s still worth having a financial advisor to support you. Our tax planning services include helping you through one-off problems like these as well as a whole suite of other long-term solutions. By working with our team, you can avoid costly mistakes and make more of your retirement savings. 

If you have tax-related questions of your own, or are interested to learn more about the tax planning we do with clients, please don’t hesitate to reach out. You can reach out to us at (650) 336-0598 or schedule a complimentary appointment. 

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