Accidently Contribute to Traditional IRA instead of Roth IRA

[lololalabell]

In the year 2022, I made the mistake of contributing $7,000 to a Traditional IRA instead of a Roth IRA.  As soon as I noticed in Feb 2023 I requested Vanguard to recharacterize.

2023-02-28 - I did recharacterize all $7,000 to Roth IRA

2023-03-08 – File 2022 Tax Return that included contribution of $7000 to Roth IRA

2023-05 – Received 5498 from Vanguard showing I contribute to Traditional IRA

1. Do I have to amend in the year 2022 or 2023?
2. I checked my Roth IRA the amount coming in is about $6xxx.00, not the whole $7000 due to the loss.  How do I proceed with this tax amendment?
3. What is my next step for filing a 2023 Return?

Any help would be appreciated.

Thank you

[dmertz · Accepted solution]

Vanguard properly processed your recharacterization, so your 2022 tax return should have reflected a $7,000 Roth IRA contribution (generally not reportable unless it qualified you for a Retirement Savings Contributions Credit or was an excess contribution), no traditional IRA contribution on Schedule 1 line 20 or Form 8606 line 1.  If your 2022 tax return shows a traditional IRA contribution, you need to amend.

Along with showing no traditional IRA contribution, your 2022 tax return should have included an explanation statement describing the recharacterization of the $7,000 contribution that resulted in a transfer of $6,xxx due to investment loss.  You'll be receiving a code R 2023 Form 1099-R that reports the recharacterization, but the explanation statement with the 2022 tax return takes its place, so this Form 1099-R does not need to be reported.  Entering it into 2023 TurboTax will just cause TurboTax to remind you that the recharacterization needed to be reflected on your 2022 tax return.  Nothing about the recharacterization goes on your 2023 tax return, but make sure that TurboTax shows the $7,000 as part of your Roth IRA contribution basis and is not shown as part of your basis in nondeductible traditional IRA contributions, if any.

If you need to amend your 2022 tax return, you'll need to include the explanation of the recharacterization.  If you don't need to amend but your 2022 tax return did not include the explanation, just keep records incase the IRS asks for the explanation.

Finally, you'll receive a 2023 Form 5498 that confirms the recharacterization contribution of $6,xxx.

[lololalabell]

Thank you so much dmertz for the information.  I can see the whole process now. 

I would like to clarify that I do not need to file 8606 for my 2022 tax return since it is a Roth IRA even though I received 5498 from Vanguard showing I contributed to a Traditional IRA .   

My 2022 tax return did not show a traditional IRA contribution

Thank you

[dmertz]

The recharacterization results in you having made a traditional IRA contribution as of the date of the original Roth IRA contribution that you recharacterized, so the resulting traditional IRA contribution is required to have been reported on your 2022 tax return, either as deductible on line 20 of Schedule 1 or as nondeductible on line 1 of Form 8606.  Since your 2022 tax return showed no traditional IRA contribution, you need to amend your 2022 tax return.

I question your assertion that you received a Form 5498 from Vanguard showing I contributed to a Traditional IRA .  With regard to this contribution, you should have received from Vanguard a 2022 Form 5498 showing a Roth IRA contribution, no 2022 Form 5498 showing a traditional IRA contribution.  The transfer to the traditional IRA would be shown as a recharacterization contribution on the 2023 Form 5498 that you have yet to receive from the traditional IRA.

[lololalabell]

Thank you dmertz for your time providing valuable information. I appreciate.

As per the IRS “If you recharacterized the entire contribution, don’t report the contribution on Form 8606. In either case, attach a statement to your return explaining the recharacterization. If the recharacterization occurred in 2022, include the amount transferred from the traditional IRA on 2022 Form 1040, 1040-SR, or 1040-NR, line 4a. If the recharacterization occurred in 2023, report the amount transferred only in the attached statement, and not on your 2022 or 2023 tax return.”

1. I recharacterized the entire contribution of $7,000 to the Roth IRA which occurred in Feb 2023 before I filed tax return.  Do I still need to amend my 2020 Tax return?
2. I contacted Vanguard regarding 2022 Form 5498 not showing Roth IRA contribution, they mentioned that the 5498 is not needed for tax filing.  When I receive a 1099-R in mid-January, I will use that to file my recharacterization with my taxes.  How do I proceed?
3. 

Thank you for being patient with me.  I have learned a lot.