Retirement tax questions


@techie353 wrote:

Recap of the facts: 

My contribution was in April of 2021 and applied to Roth contribution 2021.

I rolled my IRA into my Solo 401(k) just before Dec. 31, 2021. 

 

So according to the above responses, I should request a recharacterization. I did this yesterday. 

So my question was, do I receive a 1099-R from Vanguard before the 4/15 filing? How do I enter this recharacterization into my Desktop version of TurboTax? Thanks in advance!


 

[See corrected answers below]

If you recharacterize the Roth contribution to a traditional IRA, and assuming you can't take a tax deduction based on your income, then you have a non-deductible basis in your traditional IRA as of April 2021.  That would then mean you only did a partial rollover over your IRA balances into your 401(k), and that rollover included part of the non-deductible recharacterized balance—because all your IRA balances are aggregated for tax purposes, even if they are in different accounts.

 

For example, suppose you have $54,000 of traditional pre-tax IRA balance in plan A.  In April 2021, you make a non-deductible traditional IRA contribution of $6000 to plan B (via the recharacterization).  In December, you roll over the balance from plan A into your 401(k).  At this point, 10% of your combined IRA balance is non-deductible, so that means that 10% of what you rolled over into the 401(k) is your non-deductible basis from the recharacterization.  That means that at the end of 2021, you have:

  • A 401(k) that contains $5400 of already-taxed money (the non-deductible recharacterized balance).  You will pay income tax on all your 401(k) withdrawals in retirement, meaning this $5400 will get taxed twice.
  • Your $6000 balance in plan B is now considered to only have a $600 non-deductible basis.  When you do a Roth conversion, you will owe income tax on $5400.  It won't be a "backdoor" conversion any more.  

At worst, these transactions may be illegal.  At best, you are paying double tax on the $6000 (or $7000) that you are trying to recharacterize.

 

My recommendation is to try and cancel the recharacterization immediately, and then take some time to get proper tax advice.

 

[These instructions for reporting the recharacterization are correct]

Now, assuming you do nothing and keep the recharacterization as-is, you won't get a revised 1099-R for 2021.  Instead, you will report the recharacterization in Turbotax.  Enter the deductions page, go to retirement, and enter your Roth contribution.  The next step will ask if you recharacterized it.

 

You should have a 1099-R for the IRA to 401(k) rollover.  When you enter this, and you have a non-deductible basis, Turbotax will prepare form 8606 and do the calculations for you.  You should print and save your return and keep a copy of the form 8606 because you will need it when you rollover the rest of the IRA to a Roth.

 

In 2022, you will get a 1099-R from plan B for the recharacterization, but it won't be taxable again.  

 

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