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

[71YTA31]

Hi,

When filing an amended tax return for a 2020 Roth IRA recharacterization to a traditional IRA for excess contribution, do you file as a "special situation" pursuant Section 301.9100-2 Election, or do you just file with a brief description outlining the recharacterization?

For example, excess contribution was made in 2021 to Roth IRA for 2020 tax year before May 17th, 2021 and recharacterization to traditional IRA completed after May 17th.

Thanks!

[macuser_22]

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@71YTA31 wrote:

Hi,

When filing an amended tax return for a 2020 Roth IRA recharacterization to a traditional IRA for excess contribution, do you file as a "special situation" pursuant Section 301.9100-2 Election, or do you just file with a brief description outlining the recharacterization?

For example, excess contribution was made in 2021 to Roth IRA for 2020 tax year before May 17th, 2021 and recharacterization to traditional IRA completed after May 17th.

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If you filed your 2020 tax return on time (by May 17) then you have an automatic extension until Oct, 15, 2021 to do the reharacterization.

Do not amend not until you receive the 2021 1099-R from the financial institution in Jan of 2022.  You should receive a 1099-R with a code R for that.

When you amend - enter it this way;

A 2021 1099-R with a code R in box 7 (Recharacterized IRA contribution made for 2020 and recharactorized in 2021) will tell you that you must amend 2020.

A code R 1099-R does nothing whatsoever if entered into the 1099-R section of an amended 2020 return. It does not get sent to the IRS and nothing goes on the tax return at all. The only purpose of the 1099-R is to report the recharacterization to the IRS, but it still must be reported on your 2020 tax return.

The box 1 on the 1099-R will report the total recharacterized amount (contribution plus earnings) but it does not separately report the earnings and box 2a must be zero.

The proper way to report the recharacterization and earnings which is to enter the 2020 IRA contribution in the IRA contribution interview section and then say yes to "Did you switch from a Roth to a Traditional IRA - recharacterize".

The amount The amount of the original Roth contribution must be entered - not any earnings or losses.

Then TurboTax will ask for an explanation statement where it should be stated that the original $xxx.xx plus $xxx.xx earnings (or loss) were recharactorized.

There is no tax or penalty on the before-tax earnings since the earning were simply switched into the recharactorized account.

That is the only way to prepare and attach the proper explanation statement for a code R 1099-R.

Enter IRA contributions here:
Federal Taxes,
Deductions & Credits,
I’ll choose what I work on (if that screen comes up),
Retirement & Investments,
Traditional & Roth IRA contribution.

OR Use the "Tools" menu (if online version under My Account) and then "Search Topics" for "ira contributions" which will take you to the same place.

Since the after-tax Roth contribution is now a Traditional IRA contribution it can be either a before-tax deduction if your MAGI allows a deduction which might result in an additional 2020 refund, or it will be an after-tax contribution reported on a 8606 form (line 1 & 14) as a "basis" in the Traditional IRA that will reduce the tax of future distributions.

[macuser_22]

BTW:  you only need to write write "Filed pursuant to section 301.9100-2" on the top of the  return if you mail file - if the amended is e-filed, that is not necessary.

[71YTA31]

The account has already been recharacterized. If what you're saying about the 1099-R is true ("A code R 1099-R does nothing whatsoever if entered into the 1099-R section of an amended 2020 return. It does not get sent to the IRS and nothing goes on the tax return at all. The only purpose of the 1099-R is to report the recharacterization to the IRS, but it still must be reported on your 2020 tax return."), what is the advantage of waiting to file with it? Wouldn't it be better to file the amendment now before Oct 15th 2021?

[71YTA31]

TurboTax asks if this falls under special circumstances and lists several options including "...filed pursuant to section 301.9100-2." So if I plan on e-filing, I should not select this option?

[macuser_22]

If it asks that then by all means say yes.  I was not aware that was asked.

[macuser_22]

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@71YTA31 wrote:

what is the advantage of waiting to file with it? Wouldn't it be better to file the amendment now before Oct 15th 2021?

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Oct 15 has nothing to do with it since you already recharacterized long before that.

The only advantage is that if the  actual 1099-R when it comes, is at all different than what you think it will be, then you will need the amend  the amendment which is messy and can take up to a year to process.   It is best to amend only once.    Since you have 3 years to amend, there is no rush.  In the mean time, if anything else comes up that might require amending it can be included.   The 1099-R sent  to the IRS by the financial institution (not you) tells the IRS that you met the requirement - as long as you amend within 3 years (from the original due date), it does not matter when you amend.

[71YTA31]

I see. How does that work with the penalty (6%)? Since I recharacterized after May 17th, but well before Oct 15th, I was thinking that amending within the same year instead of waiting till next year to file the amendment would allow for the penalty assessed to be refunded and no further penalties to be assessed.

Does waiting till receiving the 1099-R in 2022 and filing an amendment at that time increase the penalty by another year or negate receiving the additional refund for 2020?

[macuser_22]

There is no 6% penalty or any other penalty for a recharacterization.    If it is showing a penalty then you did not follow the steps above in the IRA contribution interview. 

A recharacterization is simply making the contribution to a Traditional IRA  instead of the Roth as if the Roth never happened at all.  No penalty and you only report as I said above as long as it is withing the time, limits,which you are.

[71YTA31]

There is a penalty for excess contributions at 6% per year. Hence the need for recharacterization. If the recharacterization occurs after the original filing deadline, then an amendment must be submitted. Therefore, the original filing includes the penalty. The amended return does not show the penalty.

e.g.

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?

In the above example, the penalty assessed would be $180. So in the original filing the the penalty was added to the taxes due. In the amended return, the penalty is gone and an additional refund is to be given for the said penalty amount.

The previous question was regarding the accrual of penalty over time. Therefore, would waiting till filing next year for the amendment when the 1099-R is issued cause the penalty to increment by 6%, meaning $180 due to waiting till 2022 to file or would the amendment resolve any penalties completely and just issue an additional refund as long as it's submitted within 3 years?

[macuser_22]

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@71YTA31 wrote:

There is a penalty for excess contributions at 6% per year. Hence the need for recharacterization. If the recharacterization occurs after the original filing deadline, then an amendment must be submitted. Therefore, the original filing includes the penalty. The amended return does not show the penalty.

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There would be no penalty unless your original    tax return showed the penalty and you paid it.  When you amend the penalty will disappear and if you paid it then it will be a refund.   

The 6% penalty ONLY applies if the excess is not EITHER removed by the due date of the return (or extended due date) OR recharacterized.   Once the due date (or extended due date) passes the 6% penalty cannot be avoided by removing or recharacterizing.

If the original tax return was filed on time (for 2020 that was May 17) then the extended due date is Oct 15, 2021 to remove or recharacterize is automatic.    That means the removal or recharacterization must be done before Oct 15,2021, NOT that the amendment must be filed by that date - you have 3 years from the original filing date to amend.     The time limit is on the removal or recharacterization, not the amendment.

[71YTA31]

That is incorrect. If you file with the excess contribution (by May 17th), the penalty applies to the tax return. The whole purpose of the amendment is to report the recharacterization and remove the penalty and receive the penalized amount as a refund.

[macuser_22]

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@71YTA31 wrote:

That is incorrect. If you file with the excess contribution (by May 17th), the penalty applies to the tax return. The whole purpose of the amendment is to report the recharacterization and remove the penalty and receive the penalized amount as a refund.

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As I said, if the original return had the penalty then amending will remove it and apply it to the refund. 

Also as I alluded to,  amend tomorrow if you want and would feel better (amended returns normally take 4 months to process, but with the huge IRS backlog because of COVID they are now taking 6-8 months.)  but if the 1099-R is not what you expect it to be and you need to amended again then that will take a year or more.

Personally, I would wait for the 1099-R, but that is up to you.

[macuser_22]

Last post edited - it misread it at first.

[71YTA31]

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.