Amend prior return to include recharacterization?

[tmiller1973]

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]

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). 

[tmiller1973]

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]

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?

[tmiller1973]

Ok.   Thank you.  I understand that I need to file a form 5329 for contributions made in 2018 and then 2018+2019 in 2019 and each year after until now.  I don't need to include the contributions from 2020 in a 2020 5329 because they were recharacherized.  

When I do amend 2020, I need to state I made a contribution to a traditional/non-deductible IRA and Turbo Tax will generate the 8606 form to document this.  In Turbo Tax is this triggered from an Income item or a Deduction item?  I ask because not knowing where this is triggered is what got me into all this in the first place.  Thank you for your help!!!

[Opus 17]

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@tmiller1973 wrote:

Ok.   Thank you.  I understand that I need to file a form 5329 for contributions made in 2018 and then 2018+2019 in 2019 and each year after until now.  I don't need to include the contributions from 2020 in a 2020 5329 because they were recharacherized.  

When I do amend 2020, I need to state I made a contribution to a traditional/non-deductible IRA and Turbo Tax will generate the 8606 form to document this.  In Turbo Tax is this triggered from an Income item or a Deduction item?  I ask because not knowing where this is triggered is what got me into all this in the first place.  Thank you for your help!!!

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I believe you start by entering the Roth IRA contribution on the deduction/contribution interview.**.  Turbotax will tell you that you are not eligible, and will ask you what you want to do.  One of the choices will be "recharacterize before the filing deadline" and Turbotax will follow up from there.

(**Eligible Roth contributions are not required to be reported on a tax return, but turbotax allows you to enter them so it can check for situations like this.)

[dmertz]

I'll assume that you've been ineligible to make a Roth IRA contribution ever since making the excess contributions, otherwise you can apply some amount of excess each year that you were eligible to contribute but did not.

The excess contributions remain in your Roth IRA and to correct them you must obtain a regular distribution from your Roth IRA equal to the amount of the excess.  The distribution will be a nontaxable distribution of contribution basis.  It's unfortunate that you did not address this last week when you likely could have made this distribution in time to avoid the excess contribution penalty for 2023.

[tmiller1973]

Yes.  I have been ineligible since.  I agree, I'm a week late.  I thought I had until tax day to do the withdrawal.  I will make a Return of Excess Contribution request with the broker.  I assume I can direct those excess contributions into the non-deductible IRA, then do a IRA to Roth conversion up to annual contribution limit.

For the 1040X, the Turbo Tax instructions state to "attach all forms or schedules that changed".  I assume I would need to include the  2020 1040X, 2020 1040 (updated), the 2020 Schedule 2 and 2020 Form 5329.  I don't believe I need to include the Form 8606, but I do need to keep it for future filings for the basis.

Regarding the 2018 and 2019 form 5329's, can I manually fill them out (with the appropriate year's date form) as you earlier suggest and submit them together with the 2020 1040X and payment and include the additional payments for them?

Thanks again for staying with this to help!

[dmertz]

Excess Roth IRA contributions mad for 2018 and 2019 are corrected by making a regular distribution.  Telling the custodian that the distribution is to correct excess contributions made for those years is an invitation for the custodian to process the distribution incorrectly.

[fanfare]

"then do a IRA to Roth conversion up to annual contribution limit."

A conversion has nothing to do with a contribution limit since it is not a contribution.

You can convert any amount at any time.

@tmiller1973 

[tmiller1973]

Thank you for the clarification.  Essentially I need to both withdraw the contributions and any earnings.  The earnings will be taxed at my marginal income rate and there will be a 10% penalty. 

If I take the distribution before April 15th of this year, will I need to account for this in 2023 filing or will it be for 2024 since we are past Jan 1st?  As you mentioed before, I should have done this a week ago.  So now I pay another 6% for 2024 and the 10% + income tax will be accounted for in 2024 tax year?

[Opus 17]

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@tmiller1973 wrote:

Thank you for the clarification.  Essentially I need to both withdraw the contributions and any earnings.  The earnings will be taxed at my marginal income rate and there will be a 10% penalty. 

If I take the distribution before April 15th of this year, will I need to account for this in 2023 filing or will it be for 2024 since we are past Jan 1st?  As you mentioed before, I should have done this a week ago.  So now I pay another 6% for 2024 and the 10% + income tax will be accounted for in 2024 tax year?

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2024.

Remember as @dmertz clarified, a "return of excess contributions" can only be processed for current year excess.  That is, if you contributed excess in 2023, you would have until April 15, 2024 to remove it.  Since this excess is from 2020, you just ask for a regular withdrawal, and since it is a regular withdrawal that will occur in 2024, it gets reported on your 2024 tax return.  And, since you have until December 31, 2024 to do this (it makes no difference when you take the withdrawal), you can take the time to make sure the 5329s for 2018, 2019, the amended return for 2020, and the 5329s for 2021, 2022 and 2023 are all handled correctly first.  There is no benefit to rushing. 

[tmiller1973]

Thank you for the clarification.  I guess the only silver lining is I have some time this year to get all the mess straightend out and don't really have a driver to get it done before 4/15.  I think I at least have a clear path.  I appreciate the feedback and comments.

[tmiller1973]

A final question regarding the withdrawal.  Do I need to withdraw any earnings in the account or do I only need to withdraw the contributions that were made in the past?  For exaample, if I made $2400 contributions in 2020 and my balance is $3000 do I need to withdraw the $600 earnings or can they be left in the account?

[dmertz]

There is generally no need to adjust for attributable earnings when the corrective distribution is made after the due date of the tax return as is the case when now correcting a 2018 or 2019 excess contribution.  There is no penalty since the distribution is nontaxable a distribution of contribution basis.

The only case where I wonder if it would be appropriate to distribute earnings is if all amounts in the individual's Roth IRAs are attributable to excess contributions.  It seems inappropriate that someone could establish a Roth IRA balance only by making an entirely excess contribution and then removing only the excess contribution itself.  Still, an excess contribution does not start the 5-year Roth IRA qualification clock, so if that clock never gets started any earnings eventually distributed would be taxable and potentially subject to an early-distribution penalty depending on the participant's age at the time of the distribution.  In your case, though, the qualification clock has started no later than the beginning of the year in which the Roth conversion was deposited into the account and the balance in your Roth IRAs is not entirely attributable to excess contributions.