Retirement tax questions

You can recharacterize your Roth contribution to a traditional IRA and make it nondeductible if your contribution to the Roth was limited because of your income. Then you will be able to convert it to a Roth IRA and the nondeductible part (basis) won't be taxable. This is called backdoor Roth IRA. Please see What Is a Backdoor Roth IRA? And How Does It Work? for additional information.

Another option is to withdraw the excess contribution and earnings by the due date, but then you would miss out on a contribution for 2020 if your contribution to the Roth IRA was limited by your income.

The total contributions you make each year to all of your traditional IRAs  and Roth IRAs can't be more than:

• $6,000 ($7,000 if you're age 50 or older), or
• If less, your taxable compensation for the year

If you decide to do this you will have to tell your bank that you want to recharacterize the Roth contributions as a traditional IRA contribution before the due date of the return (you will have to enter this on your 2020 tax return, please see below). There is no tax or penalty on the earnings since the earning will be simply switched into the recharacterized account. You will receive a 1099-R for the recharacterization.

Then later in 2021 you can convert the amount to a Roth IRA (this would be entered on your 2021 tax return).

You will enter the recharacterization when you enter the contribution to the Roth IRA (on your 2020 tax return):

1. Open your return 
2. Click on "Search" on the top right and type “IRA contributions”
3. Click on “Jump to IRA contributions"
4. Select “Roth IRA”
5. Answer “No” to “Is This a Repayment of a Retirement Distribution
6. Enter the Roth contribution amount 
7. Answer “Yes” to the recharacterized question on the “Did You Change Your Mind?” screen and enter the contribution amount (no earnings or losses)
8. TurboTax will ask for an explanation statement where it should be stated that the original $xxx.xx plus $xxx.xx earnings (or loss) were recharacterized.
9. On the screen "Choose Not to Deduct IRA Contributions" answer "Yes"

[Edited 1/21/2021 | 6:44am PST]

@rj1278