Amended tax return for 2020 Roth IRA recharacterization: reason for amendment

[macuser_22]

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@71YTA31 wrote:

Ok, then could you address the following:

Excess contribution: $3,000

Amount recharacterized: $3,000

Amount transferred: $2500 with loss of $500.

Is the above correct? Or are the amounts of recharacterized vs transferred flipped?

Also, the prior question about penalty accrual over time is still not clear. Does accrual depend on calendar year or tax filing year? Will not filing the amendment this year and waiting till filing next year after the 1099-R is released cause another penalty to be added?

e.g. 

Current penalty status is $180. Recharacterized soon after.

After amendment in 2021, penalty is $0.

However, if amendment is filed in 2022, then will penalty go to $360, then amendment in 2022 brings it back down to $0? Or will the penalty not automatically increment between calendar years? Meaning that the current penalty stays as is until amendment is filed in 2022?

The reason I ask this is from here:

https://investor.vanguard.com/ira/excess-contribution

If you discover it after you've filed your tax return

You can either:

• Remove the excess within 6 months and file an amended return by October 15—if eligible, the excess plus your earnings can be removed by this date.
• Remove the excess once discovered, even after October 15. You'll need to reduce next year's contributions by the amount of the excess. For example, if your limit is $6,000 and you exceed it by $1,500 in the current year, you can offset the excess by limiting your contributions to $4,500 the following year.

Be aware you'll have to pay a 6% penalty each year until the excess is absorbed or corrected.

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What you quote is what happens if the excess is neither removed or recharactorized within the time limits, then the 6% applies and repeats each year until the excess is removed with a regular distribution, but can not be simply returned or recharacterized.  You recharactorized in time.

As soon as the recharacterization is entered in the IRA contribution interview as I showed above, the excess disappears as do all penalties.      It does not flow to 2022 because you will have amended before that.

As I said above, the exact amount of the contribution is recharacterized, not accounting for any gains of losses.  If a loss then you simply account for it in the explanation statement.    While any gain is also transferred to the other IRA, losses just mean that the IRA has less money (just like it would be if it remained in the Roth.)

[71YTA31]

Ok, but in your earlier responses, you suggested filing the amendment after receiving the 1099-R, which wouldn't happen till January 2022.

The information from Vanguard is saying to file the amendment by October 15th 2021.

For the amount recharacterized vs the amount transferred, the IRA contribution interview you keep referencing does not address the question as it is being asked in its current form. The question is formatted to represent the TurboTax input:

Amount Contributed

Amount Recharacterized

Amount Transferred

If you could address the actual numbers in the question, particularly amount transferred, that would be great.

Thanks.

[macuser_22]

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@71YTA31 wrote:

Ok, but in your earlier responses, you suggested filing the amendment after receiving the 1099-R, which wouldn't happen till January 2022.

The information from Vanguard is saying to file the amendment by October 15th 2021.

For the amount recharacterized vs the amount transferred, the IRA contribution interview you keep referencing does not address the question as it is being asked in its current form. The question is formatted to represent the TurboTax input:

Amount Contributed

Amount Recharacterized

Amount Transferred

If you could address the actual numbers in the question, particularly amount transferred, that would be great.

Thanks.

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You receive the 1099-R in January 2022 an file the 2021 tax return before April 15 2022, after you amend - it you import after you amend then the penalty will be gone.

I did address the numbers in the way to report the recharacterization.    In the IRA contribution interview you just enter the exact amount of the Roth contribution and then say you "switched" it to a Traditional IRA.   You account for the loss in the explanation statement.

Don't rely on tax advice that you get from a financial institution - it is usually wrong or incomplete.

Like I said - amend tomorrow if it makes you fell better.  The amended return will take about 6 months to process anyway.