Recharacterization

[blazingtiger1]

Put $7500 into Roth account in DEC 2023.  Realized income limits were met and recharacterized to traditional in FEB.   It asks how much was transferred from Roth to traditional.  Is this the whole $7500 even though I only truly transferred $7145 because of losses?  It is not clear and if I enter $7145 transferred because the explanation page then asks for amount transferred and amount recharacterized.  If I enter $7145 transferred it states I will owe a penalty until I remove the excess $355 when there is no excess.

[DanaB27 · Accepted solution]

You will enter the contribution amount of $7,500.

You will enter the recharacterization when you enter the contribution to the Roth IRA:

1. Login to your TurboTax Account 
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 ‘Yes” on the “Roth IRA Contribution” screen
6. Answer “No” to “Is This a Repayment of a Retirement Distribution
7. Enter the Roth contribution amount 
8. Answer “Yes” to the recharacterized question on the “Switch from a Roth To a Traditional IRA?” screen and enter the contribution amount of $7,500 (no earnings or losses) on the next screen.
9. TurboTax will ask for an explanation statement where it should be stated that the original $7,500 minus $355 loss were recharacterized.
10. On the screen "Choose Not to Deduct IRA Contributions" answer "Yes" if you are thinking about doing a backdoor Roth. Otherwise select "No". (If you have a retirement plan at work and are over the income limit it will be nondeductible automatically and you only get a warning and then a screen saying $0 is deductible)

[blazingtiger1]

Would it be the same if my wife's Roth started with $7,500 and recharacterized $8,012.  I wouldn't only state $7,500 recharacterized?  I think in this situation I have to recharacterize $8,012 and remove the $512 overage.  Correct?

[fanfare]

Not correct. the earnings move silently with your recharacterization.

It is now growth in your IRA instead of growth in your Roth.

If you want a deduction it is $7,500.

If it is non-deductible your basis is $7,500.

[Evergreen50]

 A similar question: I made too much income in 2023 to contribute to a Roth, but already contributed to a Roth in 2023.  I am 66 years old.  I had my brokerage firm today take out the contribution with earnings and place it back in the taxable account it came from intially. I put in $7,500, but with earnings, it will be $8,100 that they take out. 

I will not receive the 1099-R until next year.  How will the IRS know I took out the contribution and earnings before the tax deadline so I don't have to pay a penalty of 6%?  I know I have to pay taxes on the earnings.  

[DanaB27]

To confirm, you requested the withdrawal of the excess Roth IRA contribution for 2023 plus earnings in 2024.

If yes, then you will get a 2024 Form 1099-R  in 2025 with codes P and J for the withdrawal of excess contributions and earnings. This 1099-R will have to be included on your 2023 tax return and you have two options:  

• You can wait until you receive the 2024 Form 1099-R in 2025 and amend your 2023 return or
• You can report it now in your 2023 return and ignore the 1099-R when it comes unless there is Box 4 Federal Tax withholding and/or Box 14 State withholding. Then you must enter the 2024 Form 1099-R into the 2024 tax return since the withholdings are reported in the year that the tax was withheld. The 2024 code P will not do anything to the 2024 tax return income but the withholdings will be applied to 2024.

To create a Form 1099-R in your 2023 return please follow the steps below:

1. Login to your TurboTax Account 
2. Click on the "Search" on the top right and type “1099-R” 
3. Click on “Jump to 1099-R”
4. Answer "Yes" to "Did you get a 1099-R in 2023?"
5. Select "I'll type it in myself"
6. Box 1 enter total distribution (contribution plus earning)
7. Box 2a enter the earnings
8. Box 7 enter J and P
9. Click "Continue"
10. On the "Which year on Form 1099-R" screen say that this is a 2024 Form 1099-R.
11. Click "Continue" after all 1099-R are entered and answer all the questions.
12. Continue until "Did you use your IRA to pay for any of these expenses?" screen and enter the amount of earnings under "Corrective distributions made before the due date of the return".

Please be aware, code P will say in the drop-down menu "Return of contribution taxable in 2022" but you can ignore that since the follow-up question will tell TurboTax that it will be taxable in 2023.

@Evergreen50 

[Critter-3]

To all the future readers of this thread ... PLEASE don't make the same error.  If you are going to do a "back door" ROTH conversion then put the IRA contribution in a "cash" account in the broker so it neither earns income or loses value  until the conversion happens.  Doing this makes for a clean conversion.   

[Evergreen50]

Mine was not a backdoor Roth.

[Evergreen50]

Yes, I had the contribution and excess removed.  Your answer is exactly what I was looking for...Thank you so much!