DanaB27
Expert Alumni

Investors & landlords

Yes, they shouldn't have the 6% penalty in 2021 and 2022 since they recharacterized the amounts before the due dates of the 2021/ 2022 tax returns.

 

No, the earnings of $110.81 are deemed to have been earned in the traditional IRA not in the Roth IRA because of the recharacterization.

 

They should have reported the recharacterization on their 2021 tax return and have a 2021 Form 8606 with the $6,000 basis on line 14 (which has to be entered on the 2022 tax return):

 

  1. Open your return
  2. Click “Deductions &Credits” on the top
  3. Click "I'll choose what to work on"
  4. Scroll down to “Traditional and Roth IRA Contributions” and click “Start
  5. Select “Roth IRA
  6. Answer ‘Yes” on the “Roth IRA Contribution” screen
  7. Answer “No” to “Is This a Repayment of a Retirement Distribution
  8. Enter the Roth contribution amount ($6,000)
  9. Answer “Yes” to the recharacterized question on the “Switch from a Roth To a Traditional IRA?” screen and enter the contribution amount of $6,000 (no earnings or losses) on the next screen.
  10. TurboTax will ask for an explanation statement where it should be stated that the original $6,000 plus $110.81 earnings were recharacterized.
  11. On the screen "Choose Not to Deduct IRA Contributions" answer "Yes" (if you are thinking about doing a backdoor Roth. If you have a retirement plan at work and are over the income limit it will be nondeductible automatically and you only get a warning and then a screen saying $0 is deductible)

 

You will get a 2022 Form 1099-R  for the recharacterization with code R-Recharacterized IRA contribution made for 2021 and this belongs on the 2021 return. But a Form 1099-R with code R will do nothing to your return. You can only report it as mentioned above. Therefore, you can ignore the 2021 Form 1099-R with code R.

 

 

 

On the 2022 tax return, you will report the recharacterization of the contribution for 2022 with the steps below and make it nondeductible (if it isn't automatically nondeductible).

 

  1. Open your return
  2. Click “Deductions &Credits” on the top
  3. Click "I'll choose what to work on"
  4. Scroll down to “Traditional and Roth IRA Contributions” and click “Start
  5. Select “Roth IRA
  6. Answer ‘Yes” on the “Roth IRA Contribution” screen
  7. Answer “No” to “Is This a Repayment of a Retirement Distribution
  8. Enter the Roth contribution amount ($7,000)
  9. Answer “Yes” to the recharacterized question on the “Switch from a Roth To a Traditional IRA?” screen and enter the contribution amount of $7,000 (no earnings or losses) on the next screen.
  10. TurboTax will ask for an explanation statement where it should be stated that the original $7,000 minus $528.84 loss were recharacterized.
  11. On the screen "Choose Not to Deduct IRA Contributions" answer "Yes" (if you are thinking about doing a backdoor Roth. If you have a retirement plan at work and are over the income limit it will be nondeductible automatically and you only get a warning and then a screen saying $0 is deductible)

 

 

To enter the Form 1099-Rs (for conversion and the 2022 recharacterization) on the 2022 tax return:

 

  1. Click "Federal Taxes" on the top and select "Wages & Income"
  2. Click "I'll choose what to work on"
  3. Scroll down and click "Start" next to "IRA, 401(k), Pension Plan (1099-R)
  4. Answer "Yes" to the question "Did You Have Any of These Types of Income?"
  5. Click "I'll Type it Myself"
  6. Choose "Form 1099-R, Withdrawal of Money from 401(k) Retirement Plans, Pensions, IRAs, etc."
  7. Click "Continue" and enter the information from your 1099-R for the conversion (code 2)
  8. Answer questions until you get to “What Did You Do With The Money” and choose “I moved it to another retirement account
  9. Then choose “I did a combination of rolling over, converting, or cashing out money.” and enter the amount next to "Amount converted to a Roth IRA account"
  10. On the "Your 1099-R Entries" screen click "add Form 1099-R"
  11. On the "Your 1099-R Entries" screen click "continue" (after all Form 1099-Rs are entered)
  12. Answer "yes" to "Any nondeductible Contribution to your IRA?" if you had any nondeductible contributions in prior years.
  13. Answer the questions about the basis from line 14 of your 2021 Form 8606 and the value of all traditional, SEP, and SIMPLE IRAs

 

Since she converted less than her basis in 2022 she should have a basis left on her 2022 Form 8606 line 14.

 

Please be aware, if she had any pre-tax funds in her traditional/SEP/SIMPLE IRAs then the pro-rata rule applies. This means that with each distribution/ conversion, you will have a taxable and nontaxable part.

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