Solved: Backdoor Roth with recharacterization and conversi...
Sign Up

Why sign in to the Community?

  • Submit a question
  • Check your notifications
or and start working on your taxes
Announcements
TurboTax has you covered during Covid. Get the latest stimulus info here.
cancel
Showing results for 
Search instead for 
Did you mean: 
alowrey11
Level 1

Backdoor Roth with recharacterization and conversion, 2019 potential mistake

@dmertz 

I'm working on filing my taxes and have myself in a very confusing state with a backdoor roth conversion and recharacterization starting with contributions from 2019. This is similar to the "backdoor roth with rechar and conversion - multiple years" question you answered, except I believe I made an error with my 2019 tax year return and it's even a bit more convoluted.

 

Activity timeline:

  • 12/31/19: $3,000 contribution to Roth for 2019
  • 1/16/20: $3,000 contribution to Roth for 2019
  • 4/3/20: Realized my 2019 income was in the middle of the Roth contribution phase-out, recharacterized $2,455.88 to Traditional IRA
  • 4/7/20: Converted $2,624.33 back into the Roth (backdoor conversion)

The forms I got for this year are:

  • 1099-R from traditional account, code 02, $2,624.33 distribution
  • 1099-R from Roth, code R, $2,455.66 distribution

I then filed my 2019 taxes without a form 8606 as I believed all this would be handled on the 2020 tax year form (which I'm doing now).

 

So, by contributing that $3,000 on 12/31/19, does that mean I needed to file a form 8606 for tax year 2019 to represent that $3,000 contribution? I'm confused because at that time it was a Roth contribution, so it's still unclear to me how to properly handle it for the 2019 return. And it seems I could mark the $3,000 from 12/31/19 as money that was not recharacterized on 4/3, hence avoiding the need to declare it on form 8606 for 2019.

 

TurboTax is telling me I likely need to refile for 2019, though, and I'm not sure what the path forward is. Any help is much appreciated! Thank you!

 

 

1 Best answer

Accepted Solutions
dmertz
Level 15

Backdoor Roth with recharacterization and conversion, 2019 potential mistake

1.  The nondeductible traditional IRA contribution that goes on 2019 Form 8606 line 1 is just the $2,455.88 (rounded to  $2,456) of Roth IRA contribution recharacterized (not the $2,624.33 gain-adjusted amount transferred).  This amount will fall through the calculations on the subsequent lines and appear as $2,455.88 on line 14 (assuming that you made to traditional IRA distributions or Roth conversions in 2019).

 

2.  Line 14 of your 2019 Form 8606 carries forward to line 2 of your 2020 Form 8606.  In TurboTax, click the Continue button on the page the lists the 1099-Rs that you've entered, indicate that you made nondeductible traditional IRA contributions and enter the $2,456 on the page that asks for you basis in nondeductible traditional IRA contributions.  TurboTax will then include this on line 2.

 

You mentioned no other traditional IRA contributions for 2019, only Roth IRA contributions, so line 1 of the 2019 Form 8606 will show only  $2,456 and line 2 of your 2020 Form 8606 will show only $2,456.  If you made any nondeductible traditional IRA contributions for 2020, those will appear on line 1 of your 2020 Form 8606, including those nondeductible traditional IRA contributions that resulted from recharacterizations of Roth IRA contributions made for 2020.

 

3.  Without knowing the details of your contributions made for 2020, it's impossible to say how much of you basis in nondeductible traditional IRA contributions applies to your 2020 Roth conversions and how much carries forward to 2021.

View solution in original post

9 Replies
dmertz
Level 15

Backdoor Roth with recharacterization and conversion, 2019 potential mistake

The recharacterization of a portion of your Roth IRA contribution caused that portion to be a traditional IRA contribution instead. Entered properly into 2019 TurboTax, TurboTax would have reported this traditional IRA contribution as deductible on 2019 Schedule 1 line 19 if the traditional IRA contribution was deductible or (most likely) on 2019 Form 8606 line 1 if the traditional IRA contribution was nondeductible.  The amount on line 1 of 2019 Form 8606 would then likely fall through to line 14 to be carried forward to line 2 of your 2020 Form 8606.  The taxable amount of your 2020 Roth conversion would then be determined on the remainder of 2020 Form 8606 Parts I and II.

 

If the resulting traditional IRA contribution was reported as deductible and you had no other basis in nondeductible traditional IRA contributions, the 2020 Roth conversion is taxable.

alowrey11
Level 1

Backdoor Roth with recharacterization and conversion, 2019 potential mistake

Thanks dmertz, that helps a lot. The contribution was nondeductible, so it sounds like a 2019 form 8606 should've been filed (and the conversion is not taxable, to your last paragraph).

 

So I think the steps forward are:

  1. Re-file 2019 to include a Form 8606 with line 1 filled out. Do I use $3,000 since that was the 2019 contribution, or just the recharacterization amount? And if it is just the recharacterization amount, that should not include and gains/losses, correct?
  2. For 2020, I'll take the carry-forward amount from line 1 on 2019's 8606, plus the contributions I made in 2020 for 2019 tax year (the remaining $3,000), and that should give me the $6,000 amount to Roth that also goes on Form 8606.
  3. And since I did a similar flow for tax year 2020 (contributed throughout 2020 to Roth, then recharacterized and backdoored in 2021 for the 2020 contributions), I'll want to carry forward $6,000 on my 2020 return so it falls through properly to my 2021 tax return.

Does that all seem right? From now on I'll just be doing the straightforward to traditional and immediate conversion to Roth, I can't believe how complicated I've made this.

 

Thanks again for all your insight!

dmertz
Level 15

Backdoor Roth with recharacterization and conversion, 2019 potential mistake

1.  The nondeductible traditional IRA contribution that goes on 2019 Form 8606 line 1 is just the $2,455.88 (rounded to  $2,456) of Roth IRA contribution recharacterized (not the $2,624.33 gain-adjusted amount transferred).  This amount will fall through the calculations on the subsequent lines and appear as $2,455.88 on line 14 (assuming that you made to traditional IRA distributions or Roth conversions in 2019).

 

2.  Line 14 of your 2019 Form 8606 carries forward to line 2 of your 2020 Form 8606.  In TurboTax, click the Continue button on the page the lists the 1099-Rs that you've entered, indicate that you made nondeductible traditional IRA contributions and enter the $2,456 on the page that asks for you basis in nondeductible traditional IRA contributions.  TurboTax will then include this on line 2.

 

You mentioned no other traditional IRA contributions for 2019, only Roth IRA contributions, so line 1 of the 2019 Form 8606 will show only  $2,456 and line 2 of your 2020 Form 8606 will show only $2,456.  If you made any nondeductible traditional IRA contributions for 2020, those will appear on line 1 of your 2020 Form 8606, including those nondeductible traditional IRA contributions that resulted from recharacterizations of Roth IRA contributions made for 2020.

 

3.  Without knowing the details of your contributions made for 2020, it's impossible to say how much of you basis in nondeductible traditional IRA contributions applies to your 2020 Roth conversions and how much carries forward to 2021.

View solution in original post

alowrey11
Level 1

Backdoor Roth with recharacterization and conversion, 2019 potential mistake

Awesome, all that makes sense, thank you so much! My wife also had a similar scenario, but luckily her first contribution wasn't until 1/22/2020 (instead of in 2019), so I at least won't have to refile a 2019 8606 for her.

 

For 2020 I made $6,000 in Roth contributions throughout the year (all within 2020), then recharacterized all $6,000 and converted that to roth for the backdoor this year (April 2021). Apologies for not providing details on that.

 

Thanks again for all the help!

dmertz
Level 15

Backdoor Roth with recharacterization and conversion, 2019 potential mistake

If your wife's 1/22/2020 contribution was for 2019, she must file a 2019 Form 8606.

 

The $6,000 Roth IRA contribution that you made for 2020 and recharacterized to be a nondeductible traditional IRA contribution for 2020 goes on line 1 of your 2020 Form 8606.  The amount that appears on line 14 of your 2020 Form 8606 will carry forward to your 2021 Form 8606 line 2 to be used in calculating the taxable amount of your Roth conversion that you performed in April 2021.

alowrey11
Level 1

Backdoor Roth with recharacterization and conversion, 2019 potential mistake

Ah ok, yeah that 1/22/2020 contribution (and another $3,000 that same month for the $6,000) were for 2019 (her 2020 contributions were done throughout the year, same as mine). So filing for the form isn't tied to the year when the contribution was actually made, rather what year the contribution is for, got it. I'll do the same with her as I'm doing for me then with the refiled 2019 8606 of the recharacterization amount and then carry it over to 2020.

 

And perfect, makes sense. Think I finally understand what all needs to be done (hopefully). Can't say enough about how helpful you've been, no way I could've figured this out without your help!

 

 

alowrey11
Level 1

Backdoor Roth with recharacterization and conversion, 2019 potential mistake

Hi @dmertz ,

 

I'm finishing up my taxes based on this conversation and am seeing some unexpected results, so I wanted to follow up with you one last time about if what I'm seeing seems correct. I've entered all the data, but weirdly on my 2020 8606 form, the taxable amount on line 18 is showing up as $51. I'd expect that to be $168 since the recharacterization amount into the traditional was $2,456 and the conversion back into the Roth was $2,624.

 

Here's what the Turbotax-generated 2020 8606 looks like:

Line 1 -> $6,000

Line 2 -> $2456 (this is as expected based on our conversation)

Line 3 -> $8456 (just adding 1+2)

Line 4 -> $0 (since the contributions were made in 2020, even though the were recharacterized in 2021, I think this is right)

Line 5 -> $8456 (just line 4- line 3)

 

Line 13 -> $2,573 (I'm confused by this number. Shouldn't it be $0? I also don't know where $2,573 comes from)

Line 14 -> $5,883 (also confused by this number, shouldn't it be $6000? Where'd the deduction come from?)

Line 15c -> $0

 

And then in Part 2:

Line 16 -> $2,624 (this seems right)

Line 17 -> $2,573 (how is this not $2456, my actual basis?)

Line 18 -> $51 (this should be $168 I believe)

 

I feel like something with how lines 1-5 are being generated (specifically line 4) is causing the resulting lines in part 2 to be slightly miscalculated, but I'm not sure what. I've gone through the IRA income and deduction sections multiple times and can't discern what I'm doing wrong. Any idea where Turbotax is generating those numbers from?

dmertz
Level 15

Backdoor Roth with recharacterization and conversion, 2019 potential mistake

TurboTax is apparently using Worksheet 1-1 from IRS Pub 590-B (Taxable IRA Distribution Worksheet in TurboTax) to do the calculation.  You said that your 2020 contribution was made all in 2020, so the worksheet should produce the same result as doing the calculation entirely on Form 8606.  You'll need to view the Taxable IRA Distribution Worksheet in TurboTax.

alowrey11
Level 1

Backdoor Roth with recharacterization and conversion, 2019 potential mistake

Thanks @dmertz , looking at that worksheet helps understand where the values are coming from. That said, I'm still unable to get the form/results to be right. Here's what the worksheet shows:

 

  1. Enter all contributions made to your traditional IRAs for 2020 -> $6,000
  2. Enter the basis in your traditional IRA(s) as of 12/31/2019 -> $2,456
  3. Add lines 1 and 2 -> $8,456
  4. Enter the value of all your tradition IRA(s) as of 12/31/2020 -> $0 (this value being set to $6,000 is what gave me the weird numbers I mentioned in my last comment, I now realize, since line 8 then comes out to .98052)
  5. Enter your distributions from traditional, SEP, and SIMPLE IRAs in 2020 -> $0
  6. Enter the net amount you converted from traditional to Roth IRAs in 2020 -> $2624
  7. Add lines 4, 5, and 6 -> $2624
  8. Divide line 3 by line 7. Enter as a decimal, do not enter more than 1.000 -> 1.000
  9. Nontaxable portion of the amount converted to Roth IRAs. Multiply line 6 by line 8 -> $2,624
  10. Nontaxable portion of the amount not converted to Roth IRAs. Multiply line 5 by line 8 -> $0
  11. Nontaxable portion of the distribution. Add lines 9 and 10 -> $2,624
  12. Taxable portion of the amount converted to Roth IRAs. Subtract line 9 from line 6. Enter the result here and on line 18 of form 8606 -> $0

So basically I see two outcomes from this form: either it saying I owe zero taxes on the conversion (which per our discussion is wrong), or it saying I owe $51 if I set line 4 to $6,000 (which is still wrong, but at least closer to the right value).

 

At this point I'm tempted to just move forward with entering $6,000 into line 4 (reflecting the $6,000 ROTH contributions that were recharacterized in 2021) and paying the $51 as Turbotax suggests.

Dynamic AdsDynamic Ads
v
Privacy Settings