Complex Roth IRA Conversion and Recharacterization

[DraconianTulip]

I have a complicated Roth IRA conversion and recharacterization scenario for the current tax year. I have been maxing out Roth IRAs for my spouse and I over last few years without issue though anticipated a significant change in income and converted a traditional IRA containing only rollover contributions from previous pre-tax 401(K) to Roth IRA early in 2021. This was followed by continued Roth IRA contributions ($12,000 total) using a separate account custodian through the remainder of the year and I completed maximal contributions for myself with one final contribution in early January 2022 ($6000 in Roth only).

However, this is when I realized our mAGI was in the phase-out range for direct Roth IRA contributions and made remaining contributions to spouse's traditional IRA for 2021 in February and March 2022 (reaching total of roughly $5200 in Roth and $800 in traditional). Using final TurboTax calculations for excess Roth contributions, I recharacterized the Roth account proportions to traditional IRAs and will now convert both the $800 and all recharacterized amounts back to Roth ideally for the 2021 tax year assuming this could still be claimed as such. I am having difficulty figuring out the basis and year-end balances as well as appropriate reporting and entering in TurboTax given these several maneuvers and multiple Roth conversions. All guides suggest treating contribution as originally done in second IRA account though do not handle subsequent conversions on these recharacterizations in a clean manner.

[DanaB27]

To verify your timeline, you made the Roth contributions in 2021 for 2021 and another contribution in 2022 for 2022? And the requested the recharacterization in 2022 for the 2021 contribution (which will be converted in 2022). You converted funds in 2021 and will also convert funds in 2022. Part of this conversion in 2021 had pre-taxed funds.

If this is all correct, then you will enter your traditional IRA contribution and the Roth contribution into the Deduction & Credit section. The recharacterization will be entered when you enter the Roth contribution.

1. Click on "Search" on the top right and type “IRA contributions”
2. Click on “Jump to IRA contributions"
3. Select "Traditional IRA" and “Roth IRA”
4. Answer “No” to “Is This a Repayment of a Retirement Distribution
5. Enter the traditional IRA contribution amount 
6. Answer “No” to “Is This a Repayment of a Retirement Distribution
7. Continue through the question until you get to the Roth IRA contribution part
8. Enter the Roth contribution amount 
9. Answer “Yes” to the recharacterized question on the “Did You Change Your Mind?” screen and enter the contribution amount (no earnings or losses)
10. 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.
11. On the screen "Choose Not to Deduct IRA Contributions" answer "Yes" (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)

Enter your 1099-R for the conversion:

1. Click on "Search" on the top right and type “1099-R”
2. Click on “Jump to 1099-R”
3. Click "Continue" and enter the information from your 1099-R
4. Answer questions until you get to “What Did You Do With The Money” and choose “I moved it to another retirement account”
5. 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"
6. On the "Your 1099-R Entries" screen click "continue"
7. Answer "yes" to "Any nondeductible Contribution to your IRA?"
8. Answer the questions about the basis, the total value of all traditional, SEP and SIMPLE IRAs, and enter the outstanding recharacterization amount.

Since you had pre-tax funds that you converted in 2021 part of your conversion will be taxable but part won't be taxable since you made nondeductible contributions. You can find this calculation on Form 8606. Any remaining basis on line 14 of Form 8606 will be carried forward to 2022.

You will find the value of all your traditional, SEP and SIMPLE IRAs on your year-end statement. But there is also a field to report the outstanding recharacterization of $800.