Retirement tax questions

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@richardk19 wrote:

Hi,

 

My brokerage recharacterized my excess ROTH contribution into a traditional IRA. I thought they would recharacterize the current market value, about $5,500, showing a loss from the original $6,000 contribution. But instead, my brokerage recharacterized about $6,500 ($5,500 from the original $6,000 contribution from one fund, and an additional $1,000 from another fund in my ROTH IRA brokerage account). 

 

My brokerage firm said because I had lost $500 from my original $6,000 contribution, they had to recharacterize an additional $1,000 from another ROTH fund to ensure that the $6,000 original contribution was recharacterized into my Traditional IRA. They said the reason that my Traditional IRA value is now $6,500 and (not $6,000) is because the calculations on gains/losses are based on my entire ROTH IRA portfolio.

 

1) Does this change anything that I need to enter for my 2021 taxes? I had written in the explanation statement of Turbotax:

1. Answer Yes on the screen Switch from a Roth To Traditional IRA?
2. On the next screen, Tell Us How Much You Transferred, enter the excess contribution amount (don't include earnings or losses) $6,000 (the amount I contributed in March 2021 for 2021 Tax Year)

On the screen Roth IRA Explanation Statement, enter the original amount plus the amount of earnings or loss that were recharacterized. I wrote: I recharacterized $6000 minus losses of $500 = $5500.      

 

Am I still telling Turbotax that I recharacterized the exact amount as original contribution, not accounting for any gain or loss?

 

When I convert the traditional IRA into a backdoor ROTH (as soon as possible), will I avoid paying taxes (whether I had gains or losses) because I will have no distributions?

 

2) Does this change anything that I need to do for my 2022 taxes? Will I report the backdoor Roth on my 2021 taxes, or on my 2022 taxes? 

 

Thank you!

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That would indicate that the entire IRA (not individual funds in the IRA) had an increase in value of  $500 attributed to the $6,000 contribution.   That means that the $6,000 contribution plus $500 of gains were moved to the Tradition IRA account.  

Assuming that this was a 2021 contribution recharactorized in 2021---

The proper way to report the recharacterization and earnings which is to enter the 2021 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.