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Accidental recharacterization of a Roth

In April 2017 I contributed 5500 to a Roth IRA for tax year 2016 (I was under the income limit for this year).

November rolls around and (here’s where my error starts) I think to myself “oh no, I exceeded the income limit for 2017 (2017 my income DID exceed the limit) and I shouldn’t have contributed the 5500 earlier in the year." So I decide to recharacterize the Roth to a tIRA and then a few days later convert it backdoor to a Roth.

Vanguard issued me two 1099-Rs for tax year 2017. I believe one is for the recharacterization and one is for the conversion. I entered both into my 2017 taxes. In addition, in January I contributed 5500 to my tIRA for the 2017 tax year and converted to Roth a few days later, and I also entered that contribution into TurboTax. I assume Vanguard will issue that 1099-R next January.

I’m struggling to understand the implications of this. Mainly, does this affect the 2016 return in any way and do I have to amend it? On my 2017 return, it is showing line 15a IRA distributions as 11000 and taxable amount as 5500 which I’m guessing is the result of that error.

Thoughts? Thanks

1 Best answer

Accepted Solutions

Accidental recharacterization of a Roth

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.**

View solution in original post

11 Replies

Accidental recharacterization of a Roth

What are the codes in box 7 on both 1099-R's?

What did you already report on your 2016 tax return?    Did you report the recharactorized Roth to Traditional contribution as a deductible Traditional IRA contribution on the 1040 form line 32, or as a non-deductible contribution on line 1 & 14 on a 8606 form?
**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.**

Accidental recharacterization of a Roth

On the 2016 return I reported a Roth IRA contribution of 5500. The 1099-R Box 7 for one form is 02, the other one is N.

I definitely haven't amended any portion of the 2016 return to reflect the recharacterization or conversion; wasn't sure how or if I needed to do that.

Accidental recharacterization of a Roth

Your 1099-R with the code N does not fit the facts you gave.

The code "N" says that a 2017 Roth contribution made *in* 2017  *for* 2017 was recharacterized not the contribution *in* 2017 *for* 2016 which would have a code "R".

If you also made a $5,500 2017 Traditional IRA contribution then according to the 1099-R's you made two 2017 contributions totaling  $11,000 - exceeding the 2017 contribution limit.

You need to talk to Vanguard about this if they issued a code N when it should have been a code R.  

Did Vanguard actually post the 2016 Roth contribution made *in* 2017 as a 2016 contribution or a 2017 contribution in error?  If they did then they should have refused a 2nd 2017 Traditional IRA contribution because that would exceed the limits.

From the 2 1099-R's it would appear that Vanguard treated both contributions as 2017 contributions, recharacterized the Roth to a Traditional IRA and then reported the $11,000 Traditional IRA distribution resulting in two $5,500 2017 contributions that is not allowed.

Either they posed the 2016 contribution wrong or the 1099-R with the code N is in error.
**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.**

Accidental recharacterization of a Roth

Re reading your post, I think I assumed that "in January" was January 2017.   Now I think you meant January 2018 *for* 2017.

If that is the case, then it would seem that Vanguard did treat the contribution made *in* 2017  that you wanted to apply to 2016 as a 2017 contribution instead, so no 2016 contribution was posted at all.   That would be consistent with the code N.

Again, if that is what happened, then that would make the January 2018 contribution *for* 2017 an excess 2017 contribution, unless Vanguard  also posted that as a *2018* contribution instead of a 2017 contribution.
**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.**

Accidental recharacterization of a Roth

Thank you for the detailed response. It is possible that I oversimplified things. Here are the exact details if it helps:

Initial contribution was $5500 to Meriil Lynch on April 19 2017 for the 2016 tax year and was reported on the 2016 taxes.

In November of 2017 I moved all of my funds to a Vanguard Roth IRA. I then had the mental error and recharacterized the Roth IRA to a tIRA and then converted back to a Roth IRA a few days later.

This year I contributed 5500 to my tIRA at Vanguard and converted it for the 2017 tax year. I reported the contribution to my tIRA on 2017 taxes and will report the conversion on 2018 taxes.

I received the 2 1099-Rs from Vanguard and no forms from Merrill.

Does this help? Would it help to see the 1099-R forms?

Thank you again!

Accidental recharacterization of a Roth

@david.a.sallen  - If you came back and this post was gone - I don't know what happened - it got archived for some unknown reason - I had the moderators restore it.

I was about to post this when it got archived:

That complicates things.

Once you moved from ML to Vanguard which was a rollover, I am sure that Vanguard treated it as a 2017 contribution and reported it as such with the code N so is would be difficult to blame Vanguard for getting the code wrong and I doubt that they would change it because the contribution was not made with Vanguard.

What did you actually  report on the 2016 Tax return?  
Roth contributions do not actually go on a tax return, but a recharacterization does - did you report the recharacterization on your 2016 tax return?

Depending on what you actually reported on your 2016 tax return I can suggest how to fix this.
**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.**

Accidental recharacterization of a Roth

Thank you for doing that! I was also wondering what happened! I did not report anything on the 2016 return

Accidental recharacterization of a Roth

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.**

Accidental recharacterization of a Roth

thank you so much for your detailed response. i will put everything into action!

Accidental recharacterization of a Roth

Was wondering if you could take a look at form 8606 that was generated. Does this look right or no? <a rel="nofollow" target="_blank" href="https://drive.google.com/open?id=1_ckgNuJFdDWxYf-iSWzEPvKHpowDKCmP">https://drive.google.com/open?id...>

Again, thank you so much for your help!

Accidental recharacterization of a Roth

Yes, exactly.
**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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