Backdoor Roth IRA Contribution

[techie353]

Hi!

Last year in 2020, I contributed to my Roth IRA for 2021. I found out later my income for 2021 is higher than usual and now need to do a Backdoor Roth IRA. The issue is ...  I already contributed last year and only this year  rolled over my Regular IRA to a Solo 401k account.  Is there anything I need to do? If anyone can assist. Thanks in advance!

[DanaB27]

You can recharacterize your Roth contribution as a traditional IRA contribution until the due date, make it nondeductible, and then convert it. Please request the recharacterization with your financial institute by the due date. The contribution will be entered on your 2021 tax return but the conversion will be reported on your 2022 tax return since will happen in 2022.

But a backdoor Roth only works as intended if your traditional, SEP, SIMPLE IRAs are empty. When did you roll your traditional IRA to a 401k?

You will enter the recharacterization when you enter the contribution to the Roth IRA

1. Login to your TurboTax Account 
2. Click on "Search" on the top right and type “IRA contributions”
3. Click on “Jump to IRA contributions"
4. Select “Roth IRA”
5. Answer “No” to “Is This a Repayment of a Retirement Distribution
6. Enter the Roth contribution amount 
7. Answer “Yes” to the recharacterized question on the “Did You Change Your Mind?” screen and enter the contribution amount (no earnings or losses)
8. TurboTax will ask for an explanation statement where it should be stated that the original $xxx.xx plus $xxx.xx earnings (or loss) were recharacterized.
9. On the screen "Choose Not to Deduct IRA Contributions" answer "Yes" (if you are thinking about doing a backdoor Roth. If you have a retirement plan at work and are over the income limit it will be nondeductible automatically and you only get a screen saying $0 is deductible)

You will get Form 1099-R  for the recharacterization with code R-Recharacterized IRA contribution made for 2021 and this belongs on the 2021 return. But a 1099-R with code R will do nothing to your return. You can only report it as mentioned above. Therefore, you can ignore the 1099-R with code R when you get it in 2023. The box 1 on the 1099-R will report the total recharacterized amount (contribution plus earnings) but it does not separately report the earnings and box 2a must be zero.

Please see What happens if I made an excess Roth IRA contribution for additional information.

[techie353]

No, I rolled my traditional IRA to a 401k before Dec 31, 2021. Does this change things?

[DanaB27]

Generally, it is a good strategy to empty the traditional IRA before starting with a backdoor Roth so it will make things easier moving forward.

[techie353]

So my scenario is interesting. I contributed to Roth IRA 2021 in 2020 (too early).  The contribution is for 2021 and traditional, SEP, SIMPLE IRAs are empty in 2021 (Dec 31st). Should I recharacterize for 2021? Sounds like I should. When should the deadline have been to recharacterize?

[DanaB27]

Did you verify that the early contribution was actually applied to 2021? Because you can only make contributions for 2021 from January 1, 2021, to April 18th, 2022 (due date).

Assuming the financial institute did a return of contribution of the wrong 2020 contribution and then applied it as a 2021 Roth contribution, then you have until April 18th (due date) to request the recharacterization with your financial institute. 

If you have an excess Roth contribution because your Modified Adjusted Gross Income (MAGI) is too high then you can recharacterize the contribution to avoid the 6% excess contribution penalty.

Please review What happens if I made an excess Roth IRA contribution for additional options.

@techie353

[techie353]

Actually, I'm wrong. My contribution was in fact in April of 2021 and applied to Roth contribution 2021. I just requested a recharacterization from Vanguard. So the next step (final step?) is to add this 'recharacterization ' into TurboTax as you mentioned above? When will I get the Form 1099-R? Next year?

[DanaB27]

Yes, you will enter the recharacterization as mentioned above.

Yes, you will get Form 1099-R  for the recharacterization with code R-Recharacterized IRA contribution made for 2021 next year and this belongs on the 2021 return. But a 1099-R with code R will do nothing to your return. You can only report it as mentioned above. Therefore, you can ignore the 1099-R with code R when you get it in 2023. The box 1 on the 1099-R will report the total recharacterized amount (contribution plus earnings) but it does not separately report the earnings and box 2a must be zero.

@techie353

[techie353]

I have the Desktop version of TurboTax. Since I notified Vanguard, they will send me a 1099-R to manually input into the TurboTax software? Or can I just manually enter that in myself?

[DanaB27]

No, you do not need to enter/create the 2022 Form 1099-R with code R on your 2021 tax return since you are reporting the recharacterization with the steps mentioned above when you enter your IRA contribution. 

A Form 1099-R with code R will not make any changes to your return. Therefore, you can ignore it. Just report the recharacterization with the steps above and you will be done.

@techie353

[Opus 17]

---

@techie353 wrote:

Actually, I'm wrong. My contribution was in fact in April of 2021 and applied to Roth contribution 2021. I just requested a recharacterization from Vanguard. So the next step (final step?) is to add this 'recharacterization ' into TurboTax as you mentioned above? When will I get the Form 1099-R? Next year?

---

Can you go back and start over?  You've changed the facts 3 times so far.  It makes a big difference if this mess started in 2020 or 2021.  When did you rollover your IRA into your 401(k)?

[See corrected answers below]

Here's one of my problems with your facts.  If you recharacterize the Roth IRA (April 2021 for tax year 2021) to a non-deductible traditional IRA contribution, that will drastically change the tax position of the rollover from your traditional IRA to your 401(k), which also occurred in 2021?

You may need professional assistance if you want to keep this money in your accounts.  It may be safer to simply remove the excess Roth for 2021 and not re-contribute or recharacterize it. 

@dmertz can you comment?  This one is getting complicated. 

[techie353]

Recap of the facts: 

My contribution was in April of 2021 and applied to Roth contribution 2021.

I rolled my IRA into my Solo 401(k) just before Dec. 31, 2021. 

So according to the above responses, I should request a recharacterization. I did this yesterday. 

So my question was, do I receive a 1099-R from Vanguard before the 4/15 filing? How do I enter this recharacterization into my Desktop version of TurboTax? Thanks in advance!

[Opus 17]

---

@techie353 wrote:

Recap of the facts: 

My contribution was in April of 2021 and applied to Roth contribution 2021.

I rolled my IRA into my Solo 401(k) just before Dec. 31, 2021. 

So according to the above responses, I should request a recharacterization. I did this yesterday. 

So my question was, do I receive a 1099-R from Vanguard before the 4/15 filing? How do I enter this recharacterization into my Desktop version of TurboTax? Thanks in advance!

---

[See corrected answers below]

If you recharacterize the Roth contribution to a traditional IRA, and assuming you can't take a tax deduction based on your income, then you have a non-deductible basis in your traditional IRA as of April 2021.  That would then mean you only did a partial rollover over your IRA balances into your 401(k), and that rollover included part of the non-deductible recharacterized balance—because all your IRA balances are aggregated for tax purposes, even if they are in different accounts.

For example, suppose you have $54,000 of traditional pre-tax IRA balance in plan A.  In April 2021, you make a non-deductible traditional IRA contribution of $6000 to plan B (via the recharacterization).  In December, you roll over the balance from plan A into your 401(k).  At this point, 10% of your combined IRA balance is non-deductible, so that means that 10% of what you rolled over into the 401(k) is your non-deductible basis from the recharacterization.  That means that at the end of 2021, you have:

• A 401(k) that contains $5400 of already-taxed money (the non-deductible recharacterized balance).  You will pay income tax on all your 401(k) withdrawals in retirement, meaning this $5400 will get taxed twice.
• Your $6000 balance in plan B is now considered to only have a $600 non-deductible basis.  When you do a Roth conversion, you will owe income tax on $5400.  It won't be a "backdoor" conversion any more.  

At worst, these transactions may be illegal.  At best, you are paying double tax on the $6000 (or $7000) that you are trying to recharacterize.

My recommendation is to try and cancel the recharacterization immediately, and then take some time to get proper tax advice.

[These instructions for reporting the recharacterization are correct]

Now, assuming you do nothing and keep the recharacterization as-is, you won't get a revised 1099-R for 2021.  Instead, you will report the recharacterization in Turbotax.  Enter the deductions page, go to retirement, and enter your Roth contribution.  The next step will ask if you recharacterized it.

You should have a 1099-R for the IRA to 401(k) rollover.  When you enter this, and you have a non-deductible basis, Turbotax will prepare form 8606 and do the calculations for you.  You should print and save your return and keep a copy of the form 8606 because you will need it when you rollover the rest of the IRA to a Roth.

In 2022, you will get a 1099-R from plan B for the recharacterization, but it won't be taxable again.  

[DanaB27]

I apologize, I misread the date of the rollover to the 401k and therefore assumed wrongly the rollover was before the Roth contribution that you are trying to recharacterize.

I agree with Opus 17  that the timing seemed to make your situation complicated at first thought since you made the contribution before the rollover to the 401k and, as Opus 17 wonderfully explained, normally when you have both a nondeductible basis and pre-tax funds in the IRA  you can't just say, "I'm only withdrawing the non-deductible part" or "I'm only withdrawing the after-tax part."

But after reviewing all the facts and the great input from dmertz, I agree with dmertz's information and Opus 17 final conclusion. You will be good to go with the recharacterization and will have the basis shown on line 14 of Form 8606 that you carry to 2022.

Next year on your 2022 tax return you will enter your 1099-R from the conversion and your basis like this:

1. Click "Federal Taxes" on the top and select "Wages & Income"
2. Click "I'll choose what to work on"
3. Scroll down and click "Start" next to "IRA, 401(k), Pension Plan (1099-R)" 
4. Answer "Yes" to the question "Did You Have Any of These Types of Income?"
5. Click "I'll Type it Myself"
6. Choose "Form 1099-R, Withdrawal of Money from 401(k) Retirement Plans, Pensions, IRAs, etc."
7. Click "Continue" and enter the information from your 1099-R
8. Answer questions until you get to “What Did You Do With The Money” and choose “I moved it to another retirement account”
9. Then choose “I did a combination of rolling over, converting, or cashing out money.” and enter the amount next to "Amount converted to a Roth IRA account"
10. On the "Your 1099-R Entries" screen click "continue"
11. Answer "yes" to "Any nondeductible Contribution to your IRA?"
12. Enter the basis from your 2021 Form 8606 line 14 and click "Continue"
13. Enter the value of all traditional, SEP, and SIMPLE IRAs

I also apologize for any confusion. 

[Edited 3/1/2022 | 2:10pm PST]

@techie353 

[dmertz]

@techie353 , since you appear to have provided conflicting information in your earlier posts, I'll summarize:

1. You made a Roth IRA contribution in 2021 for 2021
2. Your MAGI in 2021 was too high to permit a Roth IRA contribution
3. You rolled your existing traditional IRA over to your Solo 401(k) in 2021, leaving you with a traditional IRA balance on December 31, 2021 of $0.
4. You have requested a recharacterization of the Roth IRA contribution for 2021 to be a traditional IRA contribution  instead.

Given these facts, this has nothing to do with a return of contribution, so any mentions in other replies here of code P on a Form 1099-R are incorrect.  The original reply by  @DanaB27 is correct as to how to enter the contribution and recharacterization into TurboTax although it's likely that your traditional IRA contribution will already be nondeductible in which case TurboTax won't ask if you want to make the contribution nondeductible.  TurboTax will ask you to provide an explanation statement for the recharacterization.

You'll separately enter the Form 1099-R reporting the distribution from the traditional IRA that was rolled over to the Solo 401(k).  If done as a direct rollover, this Form 1099-R will have code G in box 7 and will have the IRA/SEP/SIMPLE box marked.  If you are using the online version of TurboTax you'll need to ignore the bogus message that online TurboTax generates that suggests that this rollover has anything to do with a Roth IRA; that's a bug in the online version of TurboTax. 

When you receive the code R 2022 Form 1099-R next year you can ignore it.  The explanation statement that you provide with your 2021 tax return takes its place.

Line 4a of your 2021 Form 1040 will show the amount of the rollover to the Solo 401(k), line 4b will show $0 and will have the word ROLLOVER next to the line.  Your 2021 tax return will also include Form 8606 showing the nondeductible traditional IRA contribution that resulted from the recharacterization.  The amount from line 14 of this form will carry forward to line 2 of your 2022 tax return when you prepare that a year from now.