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Retirement tax questions
You are correct that a backdoor Roth contribution only works well if you do not have any deductible traditional IRA accounts since with each distribution/conversion an amount would be allocated to the basis (nondeductible) and the rest would be taxable because the contribution was deductible.
For the backdoor Roth to work well you need to make all contribution nondeductible and complete the conversion soon after the contribution to avoid having taxable gains.
Please, be aware that you can ignore the 1099-R with code R which belongs on your 2020 return since it will not do anything to your return. The only way to report the recharacterization is by following these steps:
- Click on "Search" on the top right and type “IRA contributions”
- Click on “Jump to IRA contributions"
- Select “Roth IRA”
- Answer “No” to “Is This a Repayment of a Retirement Distribution
- Enter the Roth contribution amount %7,000
- Answer “Yes” to the recharacterized question on the “Did You Change Your Mind?” screen and enter the contribution amount of $7,000 (no earnings or losses)
- 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.
Therefore, you only need to create one 1099-R on your 2020 tax return for the return of the contribution plus earnings.
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