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Backdoor Roth annoying tax issue

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  • Backdoor Roth annoying tax issue

    Somehow when I converted my traditional IRA to the Roth, $1.76 of interest got transferred with my $5500. My wife's had $1 with it.  I'm assuming this interest accrued while waiting for the funds to become available for transfer?  Anyway, Turbotax is telling me I need to withdraw $2 and $1 in order to avoid penalty.  How do I do this?  Do I just withdraw $2 from my Roth?  Or is there some sort of special form I have to fill out for tax purposes?

    I'm not sure how to avoid this in the future because I don't know how it happened in the first place.  My traditional IRA account balance was zero at the time of my initial contribution and it didn't show the $1.76 when I converted it to a Roth.

  • #2

    You don't need to withdraw anything, but you're going to owe tax on $3.

    You might not be filling out Turbotax right. The only limit is on your contribution, not your conversion.
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    • #3
      You contributed $5,500 (lines 1,3,5) and converted $5,502 (lines 8 & 9). $5,500 ÷ $5,502 = 0.9996, which still rounds to 1.000 on line 10 (line 5 ÷ line 9) on form 8606, which means still nothing should be taxable ($5,502 on line 11). This means that both lines 16 (8) and 17 (11) are $5,502 and thus line 18 (line 16 minus line 17), the taxable amount of Roth conversion, is $0.

      The proportion in line 10 rounded to three decimal places creates a rounding error that gives you up to $2 growth for a free conversion.

      ...even if it were more than that, you'd be adding a single-digit amount to your taxable income. No big deal. TurboTax should be able to figure out form 8606.