I contributed to traditional IRA (after tax) $5000 and converted them to Roth IRA. The conversion is done right after the money is put into the traditional IRA so there is no capital gain on the $5000 before the conversion.

My 1099-R shows that the full $5000 is taxable (box 2a). However, box 2b is also checked. My understanding is that if contribution to traditional IRA is after tax, only the capital gain should be taxed, NOT the full conversion amount. Am I right? If I am right, what should I enter into the tax form? Since the 1099-R is downloaded from my brokerage firm, which I assume sent a copy to IRS, how should I explain the difference if I indeed do not have to pay tax on the full $5000 conversion?

Thanks.

RC

You don't need to "explain" anything. Just follow the instructions on your tax form. The instructions for line 15a and 15b on Form 1040 will tell you to fill out Form 8606 since you had nondeductible contributions and also had a conversion.

Your understanding is correct unless you had prior deductible IRAs. If you had prior deductible IRAs, then the conversion will convert some deductible and some nondeductible amounts pro-rata, which means you will have to pay some tax on the conversion. If you didn't have any prior deductible IRAs, then filling out the forms correctly will show that you indeed do not have to pay any tax.