Complex Roth to Traditional recharacterization and conversions

[bobsmith]

Hello,

In 2019 I contributed $5,500 to my Roth IRA and $500 (after-tax) to my Traditional IRA.  I realized I was going to earn too much money for Roth IRA in December so I contributed by monthly $500 (after-tax) to Traditional IRA and filed for 8606 for $500 basis.  When preparing my 2019 taxes in early 2020, I recharacterized the amount that I was over the limit based on my income per TurboTax's calculations. 

In March 2020, I converted all my Traditional IRA to Roth IRA.  Additionally, throughout 2020, I contributed a total of $6,000 (after-tax) to my Traditional IRA and then also converted all $6,000 to Roth IRA in 2020 (i.e. backdoor Roth).  My form 2020 5498 shows the both the $6,000 (after-tax) contributions and the recharacterization of about $2,000.  

I received form 1099-R for my Roth IRA showing the distribution of the recharacterized amount of about $2,000 in Box 1 Gross Distribution and $0 in Box2a Taxable Amount.  I also received form 1099-R for my Traditional IRA showing total gross distribution of $20,000 (illustrative purposes number) in Box 1 Gross Distribution and $20,000 in Box 2a Taxable amount.  

My question is should I include the recharacterized $2,000 as basis of the Traditional IRA for conversion or just the $500 after-tax contribution that is on the Form 8606?  I am assuming part of the $20,000 distribution included the recharacterized $2,000 which was after-tax.  Or was this already considered with the $0 taxable amount on the Roth IRA 1099-R?

[DanaB27 · Accepted solution]

You will need to amend your 2019 tax return to report the recharacterization and include the amount on Form 8606. Please see How do I amend a 2019 return in TurboTax? . You will enter the Roth contribution with the steps below to report the recharacterization:

1. Click on "Search" on the top right and type “IRA contributions”
2. Click on “Jump to IRA contributions"
3. Select “Roth IRA”
4. Answer “No” to “Is This a Repayment of a Retirement Distribution
5. Enter the Roth contribution amount $6,000
6. Answer “Yes” to the recharacterized question on the “Did You Change Your Mind?” screen and enter the contribution amount $6,000 (no earnings or losses)
7. 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.
8. 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 and you only get a screen saying $0 is deductible)

You do not have to enter the 1099-R with code R since it will not do anything on your return. You can only report the recharacterization as motioned above.

On your 2020 tax return:

To enter the nondeductible contribution to the traditional 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 “traditional IRA”
5. Answer “No” to “Is This a Repayment of a Retirement Distribution?”
6. Enter the amount you contributed
7. Answer “No” to the recharacterized question on the “Did You Change Your Mind?” screen
8. Answer the next questions until you get to “Any Nondeductible Contributions to Your IRA?” and select “Yes” 
9. Enter the basis of $6,000
10. On the “Choose Not to Deduct IRA Contributions” screen choose “Yes, make part of my IRA contribution nondeductible” and enter the amount.

To enter the 1099-R distribution/conversion:

1. Login to TurboTax
2. Click on "Search" on the top right and type “1099-R”
3. Click on “Jump to 1099-R”
4. Click "Continue" and enter the information from your 1099-R
5. Answer questions until you get to “Tell us if you moved the money through a rollover or conversion” and choose “I converted some or all of it to a Roth IRA”
6. On the "Your 1099-R Entries" screen click "continue"
7. Answer "yes" to "Any nondeductible Contributions to your IRA?" if you had any nondeductible contributions in prior years.
8. Answer the questions about the basis and value

You can verify your entry by looking at Form 1040 line 4:

1. Click on "Tax Tools" in the left menu
2. Click "Tools"
3. Click "View Tax Summary" in the Tool Center window
4. Click on "Preview my 1040" on the left

[dmertz]

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@bobsmith wrote:

My question is should I include the recharacterized $2,000 as basis of the Traditional IRA for conversion or just the $500 after-tax contribution that is on the Form 8606?  I am assuming part of the $20,000 distribution included the recharacterized $2,000 which was after-tax.  Or was this already considered with the $0 taxable amount on the Roth IRA 1099-R?

---

The $2,000 is basis carried into 2020 from 2019.  Your 2019 Form 8606 should have this amount present on Form 8606 line 1 and falling through to line 14 for carryover to line 2 of your 2020 Form 8606 to be added to the $6,000 on line 1.  If your 2019 Form 8606 does not show this $2,000 you must amend that Form 8606 (or file it if none was previously filed).

If you began your 2020 tax return by transferring in your 2019 tax return that included $2,000 on line 14, TurboTax will have already included the $2,000 on line 2 of your 2020 Form 8606.  Otherwise you'll need to correct the line 2 amount by clicking the Continue button on the page that lists the Forms 1099-R that you've entered, then enter $2,000 as the basis for years prior to 2020.

[bobsmith]

Hello,

When preparing my 2021 tax return, I have "additional tax" related to excess Roth IRA contributions.  Tracing through the documentation, it comes from the 2020 tax return "additional tax" for excess Roth IRA contributions. This is related to a $2000 excess contribution made in 2019 but was recharacterized for tax year 2019 in February 2020 prior to filing the 2019 tax return.

At the end of the day, I believe I should not be assessed an additional tax in 2020 or 2021 because after the timely recharacterization there was no excess contribution. How do I fix this?

Thanks,

Ryan

[macuser_22]

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@bobsmith wrote:

Hello,

When preparing my 2021 tax return, I have "additional tax" related to excess Roth IRA contributions.  Tracing through the documentation, it comes from the 2020 tax return "additional tax" for excess Roth IRA contributions. This is related to a $2000 excess contribution made in 2019 but was recharacterized for tax year 2019 in February 2020 prior to filing the 2019 tax return.

At the end of the day, I believe I should not be assessed an additional tax in 2020 or 2021 because after the timely recharacterization there was no excess contribution. How do I fix this?

Thanks,

Ryan

---

You probably failed to enter the recharacterization in the IRA contribution section on your 2019 tax return so it carried forward.

Go to the IRA contribution and select Roth contribution for you.   You need not enter any amount for a new contribution, just click through for the excess questions.    The carry forward excess should automatically show and you can zero it out to eliminate it.