Amend prior return to include recharacterization?

Forum|Forum|2 years ago
January 3, 2024
1 reply
8 views

I contributed to a Roth IRA in 2020, but then realized in Jan 2021 that I was not eligible due to income limit. I did a recharacterization and transferred the contributions from the Roth into an traditional IRA. When I filed my tax return for 2020, I did not include the recharacterization. I would like to go back and correct this, but I do not know which year to amend. I recieved the 1099-R and 5498 showing the recharacterization that was done in Jan 2021 for tax year 2020. Which year do I amend, 2020 or 2021?

Opus 17

Level 15

If you recharacterized your 2020 contributions, that is reported on your 2020 tax return, even though it was performed in January 2021. If the IRA contribution is not tax-deductible, then you will generate a form 8606 that tracks your taxable basis in a traditional (deductible) IRA. You need this form 8606 when you start to make withdrawals, so you can document the non-taxable percentage of the withdrawal.

Additionally, if you continued to make non-deductible contributions to a traditional IRA in 2021 or 2022, you will also need to amend the form 8606s from those years. Then you will use the amended form 8606 from 2022 when you prepare your 2023 tax return. (Basically, if you had non-deductible contributions before 2020, you use the old form 8606 plus the 2020 Recharacterizations to create a new 2020 form 8606 that tracks your basis. If you make non-deductible contributions in 2021, you use the 2020 form plus the new information to create a 2021 form 8606, and so on.). The IRS will not keep track of your non-deductible contributions for you, you must keep track using form 8606, and you need to keep a copy of your most recent form 8606 until you start to make withdrawals, however long that might be (it's an exception to the general rule of holding tax papers for 3 or 7 years).

tmiller1973Author

Level 2

I did not make any further contributions to either the Roth or the trad IRA past Dec 2020. I do have contributions in 2018 and 2019 that are also ineligible. I understand I need to file a return of excess for those years. It turns out I was over the income limit then as well. I understand I need to go back and file a Form 5329 for those 2 years and pay the 6% excise. Can this be done through Turbo Tax as well or do I need to fill them out manually and mail them in?

Opus 17

Level 15

If you have excess Roth contributions for 2018 and 2019, then you will owe a 6% penalty on every tax return from 2018 through 2023. It is far too late to use the normal removal process or to re-characterize them as traditional IRA contributions. You will need to file amended tax returns for all those years, or at least file amended form 5329s for each year to report and pay the penalties. The IRS will likely come back with a bill for interest on the late payments backdated to the original due date of each tax return; the interest can’t be waived or abated. If you withdraw the excess contributions in 2024, that will be reported on your 2024 return.

The failure to report the re-characterization of the 2020 contributions is a separate issue, that will be dealt with on the 2020 amended tax return along with the 6% penalty for the excess contributions that are carried over from 2018 and 2019. However, if you have not made any further nondeductible contributions to a traditional IRA, then you won’t have additional forms 8606 in future years to worry aboy. You will keep the amended form 8606 from 2020 with your other tax papers to document the taxable basis in your IRA when you begin making withdrawals.

turboTax is no longer available for 2018 or 2019. If you want to do this yourself, you will have to prepare the amended form 5329s by hand. Be sure to download the correct form for each year. At this point, you may want to pay for the assistance of a tax professional, since you have several years of issues to straighten out.

@dmertz further comments?