2020 Roth recharacterization before filing, followed by rollover back to Roth

[InfiniteJoy]

@macuser_22 - Looks like you understand this challenge well, but didn't want to intrude on other posts.

I made a 2020 Roth IRA contribution in early 2020.  Then prior to filing my 2020 taxes in early April 2021, I realized the capital gains from a stock sale now left my MAGI too high to make any 2020 Roth contributions.

On April 1, 2021 before filing, I had Vanguard recharacterize the $6000 into a Traditional IRA.  They included $281 in gains.  So I have just received a 1099-R from the Roth IRA for $6281 with code R in box 7. I also see a 5498 in my Vanguard account from May 2021 still indicating a $6000 Roth contribution for 2020 in box 10.

Then, on April 5, 2021, I did a conversion of the $6281 from that Traditional IRA into my Roth IRA.  So I have also just received a second 1099-R from the Traditional IRA for $6281 with code 2 in box 7.

When TurboTax pulls in these 1099-R forms, I end up with $12,562 of income.  My understanding from Vanguard is that this should have resulted in $0 of taxable income.  But I'm stuck on how to get there.

[macuser_22 · Accepted solution]

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@InfiniteJoy wrote:

@macuser_22 - Looks like you understand this challenge well, but didn't want to intrude on other posts.

I made a 2020 Roth IRA contribution in early 2020.  Then prior to filing my 2020 taxes in early April 2021, I realized the capital gains from a stock sale now left my MAGI too high to make any 2020 Roth contributions.

On April 1, 2021 before filing, I had Vanguard recharacterize the $6000 into a Traditional IRA.  They included $281 in gains.  So I have just received a 1099-R from the Roth IRA for $6281 with code R in box 7. I also see a 5498 in my Vanguard account from May 2021 still indicating a $6000 Roth contribution for 2020 in box 10.

Then, on April 5, 2021, I did a conversion of the $6281 from that Traditional IRA into my Roth IRA.  So I have also just received a second 1099-R from the Traditional IRA for $6281 with code 2 in box 7.

When TurboTax pulls in these 1099-R forms, I end up with $12,562 of income.  My understanding from Vanguard is that this should have resulted in $0 of taxable income.  But I'm stuck on how to get there.

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The 1099-R with a code R will do nothing in TurboTax and can be ignored - it it to report the recharacterization to the IRS.    However, you must report it on your 2020 tax return.  If you did not then you need to amend 2020 and enter it int the IRA contribution section for Roth and in the interview you say you changed the contribution to a Traditional IRA contribution (recharactorize).    When the interview asks you say you want it to be non-deductible.   That will produce a 8606 form with the non-deductible contribution in box 1 and 14.

For 2021 when you enter the 1099-R the interview will ask if you had non-deductible contributions  - say yes and for prior year contributions enter the box 14 amount from  the 2020 8606 form.

[InfiniteJoy]

Thank you - It makes sense that I would amend the 2020 return because I didn't report any IRA contribution in 2020.   

For the 2021 filing, am I then only entering the code 2 1099-R from the traditional account?  Could you just explain how this approach will still result in $0 additional taxable income?

In review, it is still showing the distribution as taxable (the amount is only doubled here because this situation applies to my spouse as well):

These are the options I chose:

[macuser_22]

It will only result in zero tax if the value of ALL existing Traditional IRA accounts are zero to the end of 2021, but any earnings that were converted will result in some tax.

The "Backdoor Roth" does not exist in tax law. It is a procedure used by some to take advantage of a quirk in tax law that allows making a non-deductible contribution to a Traditional IRA when one cannot contribute to a Roth IRA, and the immediately converting the Traditional IRA to a Roth IRA, thereby getting the money into the Roth via "backdoor" tax free.

That "procedure" can only work of all these requirements are met:
1) No Traditional IRA account whatsoever can exist (that includes any SEP or SIMPLE IRA accounts) at the start. If existing IRA's contain any before-tax money or earnings then it will be partly taxable.
2) The Tradition IRA contributions must be reported on a 8606 form as non-deductible.
3) The conversion to a ROTH must be shortly after the contribution to avoid taxable gains.
4) The entire Traditional IRA value must be zero that the end of the year of conversion.

Otherwise the conversion will be partly taxable.

First you must enter your Traditional IRA contributions (if there were 2020 contributions).

IRA contribution
Federal Taxes,
Deductions & Credits,
I’ll choose what I work on (if that screen comes up),,
Retirement & Investments,
Traditional & Roth IRA contribution.

Be SURE to answer the follow up that the are choosing to make this contribution NON-DEDUCTIBLE - if that screen comes up. (DO NOT say that you moved (recharacterized) the money to a Roth) – this is a conversion, not a recharactorazition.

Then enter the 1099-R that shows the distribution.

Federal Taxes,
Wages & Income
I’ll choose what I work on (if that screen comes up),,
Retirement Plans & Social Security,
IRA, 401(k), Pension Plan Withdrawals (1099-R).

Answer the follow-up questions answer the question that you moved the money to another retirement. The screen will open up with choices of where it was moved. Choose you converted it to Roth IRA.

When asked if you have made any non-deductible contributions say " "yes" if you did then enter the non-deductible contributions made for tax years before 2020.     (Usually zero unless you also made a 2019 or earlier non-deductible contribution. If you do have prior year basis then enter the last filed 8606 line 14 value.).

Enter the 2020 year end value of your Traditional IRA a "0" (zero) - if it is in fact zero - this tax free Roth conversion will not work if it is not zero.

[If you had any other Traditional IRA at the end of 2020, then the nondeductible "basis" must be pro-rated over the current distribution and the total IRA value and only a portion of the Roth conversion will be non taxable and part will be taxable, with the remaining non-deductible basis carrying forward for future distributions. You can never only withdrew the nondeductible basis as long as the IRA exists and has a value more than zero.]

The non-deductible amount of your contribution will be subtracted from the taxable amount of the conversion on then 8606 form and enter on line 4a of them 1040 form and a zero taxable amount on line 4b if you did it right.

Also see this TurboTax FAQ:
https://ttlc.intuit.com/questions/4350747-how-do-i-enter-a-backdoor-roth-ira-conversion

[InfiniteJoy]

Thank you - I had read that TurboTax article as well as some of your other posts on this topic.

So all 4 criteria do apply. 

1) It was a new Traditional IRA at the time of recharacterization. 

2) I will amend my 2020 return to report the recharacterized 2020 contribution as nondeductible

3) The conversion to Roth was a few days later with $0.01 in taxable gains

4) The entire Traditional IRA value was zero after conversion

What's not quite clear is the Traditional contribution.  If the recharacterization of a 2020 Roth contribution was done on April 1, 2021, prior to the 2020 filing due date, then isn't it as if the Traditional contribution was made for 2020 still? 

It sounds like you are saying here to report it in the 2021 filing as a 2021 contribution instead:

"First you must enter your Traditional IRA contributions (if there were 2020 contributions)."

[macuser_22]

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@InfiniteJoy wrote:

What's not quite clear is the Traditional contribution.  If the recharacterization of a 2020 Roth contribution was done on April 1, 2021, prior to the 2020 filing due date, then isn't it as if the Traditional contribution was made for 2020 still? 

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Yes.  It is a 2020 contribution and that must be reported on you 2020 tax return with a 2020 8606 form that shows the non-deductible contribution.

If you did not report it then you must amend 2020 and enter it in the Roth IRA contributions as explained in previous posts in this thread.

[InfiniteJoy]

Thank you so much - makes good sense now, and it helped to look at the 8606 a bit.

The 8606 for 2020 captures the recharacterized contribution as Traditional IRA for 2020.

The 8606 for 2021 has the total basis looking back to 2020's 8606 and then captures the conversion from Traditional to Roth.  This will result as $0 for 1040 line 4b (even though the full 1099-R distribution from Traditional is still reported on line 4a)

Thank you!