Do I need to amend last year's tax return due to recharacterization of Roth IRA contribution?

[hudson4351]

On 11/19/2014, I contributed $5500 to my Roth IRA for tax year 2014 that ended up being $3000 too high due to income limits.  On 4/13/2015 I had $3000 of my contribution recharacterized as a non-deductible contribution to an existing traditional IRA at the same financial institution.

In my 2014 tax return, I included Form 8606 with $3000 entered on line 1.  Line 15a of my form 1040 is blank, but the explanation for line 15a included with my tax return indicates:    

- date of original contribution (11/19/2014)    

- date of recharacterization (04/13/2015)    

- the amount recharacterized ($3000)    

- the amount transferred ($3000)    

- Reason for the Recharacterization: income too high for 2014

Now I am doing my taxes for 2015 and after entering my form 1099-R, TurboTax says:

It Looks Like You May Need to Amend Your 2014 Return

Here's why: Your 1099-R reports earnings on a contribution you made in 2014. This information needs to go on your 2014 return.  If you've already filed your 2014 return, then you'll need to amend it. Here's how.         

My question: Do I really need to amend my 2014 return?  It looks like the only discrepancy is in my included statement, where I indicated that $3000 was transferred, but it was actually $3136.78.  Is there anything else that needs to be updated in my 2014 return?

[macuser_22]

If your 1099-R has a code "R" in box 7 entering it into your 2014 tax return would have no effect since a code R does not actually do anything.     The recharacterization should be entered in to the IRA contributions section (Roth contribution recharactorized to a Traditional IRA).

I believe that you did it properly since any earnings in the Roth will transfer to the Traditional IRA and is not taxable.  Only the actual Roth contribution is recharactorized.

[hudson4351]

When you say "The recharacterization should be entered in to the IRA contributions section (Roth contribution recharactorized to a Traditional IRA).", do you mean for my 2015 tax return form?

[macuser_22]

2014 - the year that the contribution was for.  It sounds like you already did that last year.  So you should be fine.

[cymantha]

hudson, I have an almost identical situation, and was wondering why I needed to amend my 2014 tax return.  In my case, on my 2014 return I DID indicate in my note for Line 15a that the amount transferred was the amount "re-characterized PLUS the earnings or losses", so I don't think that was the sole reason that alert comes up.  I'm wondering if Turbo Tax alerts us that we *may* need to amend our 2014 return if for some reason we had contributed to a Roth and then decided to re-characterize part or all of the money back to a *deductible* IRA (in other words, in the case where a person's income still allows them to deduct part or all of their IRA on line 32.) I wish there was more of an explanation from Turbo tax at that point.

[macuser_22]

@cymantha - A recharactorization as opposed to a return of contribution, is treating the Roth contribution as if it was a Traditional IRA contribution when it was made.   It must be reported on the 2014 tax return either as a deductible Traditional IRA contribution (if you qualify for and wish to take the deduction), or it must be reported as a after-tax "basis" in the Traditional IRA and reported on a 8606 form as part of the 2014 tax return.  

All the money in the Roth, including any earnings would be recharactorized to the Traditional IRA.  

A return of contribution, on the other hand, would report the earnings in box 2a of the 1099-R which would be taxable income on line 7 of the 2014 1040 form.

[cymantha]

Oh good then, thank you! Now I know that I don't have to do the amended 2014 tax return because I properly added the re-characterized portion (basis) to my 8606 form at 2014's filing. (And, of course, the mutual fund company moved over the earnings associated with that re-characterization.) Thanks again for the thorough explanation!

[hudson4351]

In my case, the only discrepancy is in my included statement on my 2014 return, where I used $3000 as "The Amount Transferred (Recharacterization plus earnings or losses):", but it was actually $3136.78.  The contribution amount was $3000.  Does TurboTax parse/store the values you include in those statements?  Does the IRS care if there is an error in them?  I don't think the amount transferred is used anywhere in the actual tax calculations.

[macuser_22]

You characterize the amount of the original contribution, not the earnings or losses.   If the contribution was $3,000 then that is the amount of the recharacterization.    The earnings are accounted for o  a 1099-R form and your explanations statement for the recharactorization.     The is no change in the tax or IRA basis.

No need to amend a do-nothing amended return.  If the IRS questions it (doubtful) just answer their letter with the facts - easier than amending.

[vz28bh]

Wouldn't the extra $137 be taxable in 2014, which would require that the 2014 tax return be amended to include that income? The logic would be that the $137 has not been taxed because it was generated in the Roth, so in order for it to be an "after tax" or non-deductible contribution to a traditional IRA you have to pay tax on it. Otherwise it is like tax-free income. Or is there something I'm not aware of?

[macuser_22]

@vz28bh - Earnings, whether in a Traditional or Roth IRA are always before-tax money.   In a Traditional IRA, you pay the tax when you take the money out - which is why it is referred to as a "tax deferred" account.   When recharacterizing those before tax earnings are also transferred to the Traditional IRA and are treated as if they were earned in the Traditional IRA.  (Which is what a recharactorization is - treating the contribution exactly as if it had been made to the Traditional IRA in the first place).

[vz28bh]

Ah, OK, thanks. I guess I had been thinking that since I wasn't eligible to contribute to either type of IRA then I wouldn't get any tax deferred gains either. So the only reason for doing the amendment would be to add some documentation that is already in the following years return? Seems like a lot of effort for something that makes no difference, but who said taxes make sense!

[macuser_22]

You can *always* contribute to a Traditional IRA.  If you are covered by a retirement plan at work and your AGI exceeds a certain amount then you cannot *deduct* the contribution, but you can still contribute.  The gains are not a contribution and would have been earned in the Traditional IRA had you contributed to it in the first place.

The characterization must be entered for the tax year that the contribution was made - if in 2015 then it goes on your 2015 tax return, if 2014 and not already reported on the 2014 tax return, then you must amend.  

Your add on question does not give any of those facts.

[vz28bh]

Thanks, the reason I had commented on this was because I was in a similar situation for 2015 taxes when I got a 1099-R for 2015 with code R and TurboTax said I might have to amend my return from 2014. I had already done the recharacterization before I filed my 2014 taxes so all the information was already in the 2014 return. TurboTax must just be giving the warning about amending to be thorough without actually checking the previous return. I guess some people might have filed before knowing the numbers or done the recharacterization after filing and I assume those people would need to amend.

[GC76]

Same situation this year - glad I found this thread! Also received a 1099-R with the "R" code for funds I recharacterized last year and indicated so on last year's return with Form 8606.  So one additional question.  Do I still need to enter the 1099-R information in this year's return, or is it more for my records?