Retirement tax questions

OK - Assuming that Merill Lynch properly reported the 2016 contribution made in 2017 for 2016 as a 2016 contribution:

1) On an amended 2016 tax return, in the IRA contribution section enter a Roth IRA contribution.  The interview will ask if you changed your mind and recharactorized the Roth to a Traditional IRA, say yes.  Then the interview will ask if you want to take the deduction or make a non-deductible contribution - answer that you want it all non-deductible.  Also enter an explanation statement that you recharacterized a Roth to a Trad IRA.  That will create a 8606 form with the non-deductible contribution on lines 1,3 and 14.   The explanation statement is what informs the IRS of the recharacterization.   There is no need to enter any 1099-R into 2016 because even if you had a 1099-R with a code R it would be ignored anyway.

2) Enter the 2017 1099-R with the code 2 in the 1099-R section on your 2017 tax return.  In the follow-up questions say that you moved that to another account and then that you converted that to a Roth.  The interview will ask if you tracked non-deductible contributions - answer yes, then enter the 2016 8606 line 14 amount from the 2016 8606.  Then enter the total 2017 year end value of all existing Traditional, SEP and SIMPLE IRA accounts.  Assuming that will be zero,  that will create a new 8606 form that will apply the 2016 non-deductible amount to offset the taxable amount on lines 6-15 on the 8606 form.  

If the year end value of all Traditional IRA accounts is not zero then the taxable amount will be prorated and only a part will be not taxable or any remaining basis to carry  forward .

3) As far as the 1099-R with the code N:

The best option would be to get Vanguard to correct that to a code R.  Assuming that they refuse to do so, then I would just ignore it since there really is no way to enter a code N 1099-R into TurboTax - it is ignored just like a code R is because the explanation statement for the recharacterization is the only way to report the recharacterization, but because you had no such 2017 recharacterization there is no way to report what did not happen.  Keep your documentation and if the IRS ever questions the 2017 recharacterization reported by Vanguard that did not happen, your explanation of an incorrectly reported 1099-R with a code N in place of a code R, that was correctly reported in 2016 should satisfy them.  I doubt you will ever hear form the IRS.
**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**

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