Recharacterizing backdoor Roth conversion - urgent help

[mprabs]

Hello,

Here is my scenario:

1. Contributed to my Fidelity Traditional IRA in December 2022 to the tune of $7000 (which I eligible to contribute)

2. Initiated backdoor Roth IRA conversion in December; however Fidelity had completed the processing only in Jan of 2023

3. Fidelity had sent me Form 5498 depicting my contribution to Traditional IRA for 2022 and told me that they will send a 1099-R in 2023 since the Roth conversion only in Jan of 2023

While I started capturing this in my Turbotax, it showed a message that I need to recharacterize this before tax filing date since I am non-compliant (since I am not income eligible to contribute to Roth IRA) or otherwise I would be levied a penalty. 

When I try to recharacterize the amount from Roth IRA to Traditional IRA to become compliant, Fidelity tells me that they can not recharacterize the amount converted into Roth IRA due to Tax Reform Act of 2018 and Roth conversion is permanent (i.e. it can not be moved to back to Traditional IRA). They also mentioned no financial institution will be able to do that either.

What are my options now?  I'd really appreciate any guidance here.

Thanks in advance.

[AnnetteB6]

When you make a contribution to a Traditional IRA and then convert it to a Roth IRA, that is not considered to be a Roth IRA contribution.  Based on the information you shared, it seems that you may have entered a Roth contribution as part of your return.  You do not need to recharacterize the Roth.  

Instead, you need to enter the non-deductible Traditional IRA contribution that you made in December of 2022 as part of your 2022 tax return.  Then, on your 2023 tax return, you will enter the information reported on your Form 1099-R for the distribution from the Traditional IRA that you converted to a Roth IRA.  This whole process is call a back door Roth conversion.  

Take a look at the step by step instructions below for how to report a back door Roth IRA conversion in TurboTax.  Keep in mind that you will only complete the first part of the process on your 2022 return.  The second part will be reported next year when you have the Form 1099-R in hand.

How do I enter a backdoor Roth IRA conversion?

[mprabs]

This is super helpful. But before I breathe a sigh of relief, I noticed this extra question in Turbotax Home & Biz;

Right after "Tell Us How Much You Contributed", I get "Tell Us How Much You Transferred":
How much of the $7000 you contributed to a traditional IRA for 2022 did you switch, or "recharacterize" (this does not include conversion or rollovers), to a Roth IRA?

Do I mention "0" (and not $7000) in this case? Assuming, I put "0" and proceed, it is showing my IRA deduction is "0" since the income is above the limit of $129,000 while being covered by a retirement plan at work.

[DanaB27]

Yes, you will put $0 on the "Tell Us How Much You Transferred" screen since you did not make a recharacterization. You will have a 2022 Form 8606 with a basis on line 14 and this will carry over to the 2023 tax return.

Next year on your 2023 tax return you will enter the 2023 Form 1099-R for the conversion:

1. Click "Federal Taxes" on the top and select "Wages & Income"
2. Click "I'll choose what to work on"
3. Scroll down and click "Start" next to "IRA, 401(k), Pension Plan (1099-R)" 
4. Answer "Yes" to the question "Did You Have Any of These Types of Income?"
5. Click "I'll Type it Myself"
6. Choose "Form 1099-R, Withdrawal of Money from 401(k) Retirement Plans, Pensions, IRAs, etc."
7. Click "Continue" and enter the information from your 1099-R
8. Answer questions until you get to “What Did You Do With The Money” and choose “I moved it to another retirement account”
9. Then choose “I did a combination of rolling over, converting, or cashing out money.” and enter the amount next to "Amount converted to a Roth IRA account"
10. On the "Your 1099-R Entries" screen click "continue"
11. Answer "yes" to "Any nondeductible Contribution to your IRA?" if you had any nondeductible contributions in prior years.
12. Answer the questions about the basis from line 14 of your 2022 Form 8606 and the value of all traditional, SEP, and SIMPLE IRAs

Please see What's the difference between a conversion and a recharacterization? for additional information.