Contributed to Roth- shouldn't have

[Random_Bunny]

Hello-

I contributed to Roth IRA on 12/31/2019 but later realized that I did not meet the eligibility criteria since I exceeded the income threshold. After realizing this mistake, I then re-characterized Roth contribution to traditional IRA on 03/25/2020 and a couple of days later, followed with backdoor conversion back to Roth. So, I no longer have what would be considered excess contribution in Roth from direct contribution. 

Now, as part of 2019 tax return, I am wondering how I should be reporting the above transactions. Should I be only reporting contribution to traditional IRA on 03/25/2020 (for year 2019)  and the subsequent backdoor conversion to Roth? How do I do this in TurboTax?

Appreciate the help.

-Random

[macuser_22 · Accepted solution]

You should receive a 2020 1099-R with a code R in box 7 for the recharacterization and a 1099-R with a code 1 or 7 in box 7 for the rollover/conversion.

The code 1 or 7 will be reported on your 2020 tax return and the code R on your 2019 (amended) tax return.   Since you converted to a Roth then you will probably want the Traditional IRA contribution to be non-deductible.

A 2020 1099-R with a code R in box 7 (Recharacterized IRA contribution made for 2019 and recharactorized in 2020) will tell you that you must amend 2019.

A code R 1099-R does nothing whatsoever if entered into the 1099-R section of an amended 2019 return. It does not get sent to the IRS and nothing goes on the tax return at all. The only purpose of the 1099-R is to report the recharacterization to the IRS, but it still must be reported on your 2019 tax return.

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.

The proper way to report the recharacterization and earnings which is to enter the 2019 IRA contribution in the IRA contribution interview section and then say yes to "Did you switch from a Roth to a Traditional IRA - recharacterize".

The amount The amount of the original Roth contribution must be entered - not any earnings or losses.

Then TurboTax will ask for an explanation statement where it should be stated that the original $xxx.xx plus $xxx.xx earnings (or loss) were recharactorized.

There is no tax or penalty on the before-tax earnings since the earning were simply switched into the recharactorized account.

That is the only way to prepare and attach the proper explanation statement for a code R 1099-R.

Enter IRA contributions here:
Federal Taxes,
Deductions & Credits,
I’ll choose what I work on (if that screen comes up),
Retirement & Investments,
Traditional & Roth IRA contribution.

OR Use the "Tools" menu (if online version under My Account) and then "Search Topics" for "ira contributions" which will take you to the same place.

Since the after-tax Roth contribution is now a Traditional IRA contribution it can be either a before-tax deduction if your MAGI allows a deduction which might result in an additional 2019 refund, or it will be an after-tax contribution reported on a 8606 form (line 1 & 14) as a "basis" in the Traditional IRA that will reduce the tax of future distributions.

The "backdoor Roth" only works if at the end of 2020 you have no value in ANY Traditional IRA account.

[Random_Bunny]

This is great- I am trying to digest and will need to re-read it a couple of times. Thank you so much @macuser_22, you are an angel.

A couple of follow up questions though.

• I am assuming your advice to amend 2019 tax filing is for 2020 tax year when I actually get 1099-R, which I will get next year. But, what do I do for my 2019 tax filing that I am preparing right now? 
• This is all after tax contributions as I do not meet the income threshold to contribute to Traditional IRA to get any tax deductions. Additionally, when the re-charaterization was made- there were no earnings to report, there was a very small loss-- like less than $20. 

It looks like this is not that horrible, I was getting really nervous if I had committed a big mistake that was going to trigger a penalty. This applies to both my partner and I since we file jointly and we both made these incorrect Roth contributions because collectively our income is above the threshold limit. 

Here is a different question still somewhat related because I read this also triggers 1099-R

• My partner made excess deferral to 401K accidentally. This was from the job switch in September of 2019. We already informed the new employer in January 2020 and the employer paid back this excess contribution back in March 2020. Now, how do I report this? Someone said I would get 1099-R with P code in box 7 next year- but I should still report this on my 2019 return that I am in process of filing- as if I already have 1099-R.

Looks like I will be getting several 1099-R from these mistakes. Lesson learned- never make a mistake until you do the next time 🙂

Thank you again. 

[macuser_22]

---

@Random_Bunny wrote:

• I am assuming your advice to amend 2019 tax filing is for 2020 tax year when I actually get 1099-R, which I will get next year. But, what do I do for my 2019 tax filing that I am preparing right now? 
• This is all after tax contributions as I do not meet the income threshold to contribute to Traditional IRA to get any tax deductions. Additionally, when the re-charaterization was made- there were no earnings to report, there was a very small loss-- like less than $20. 

#1 - If you report the recharactorization now on your 2019 tax return then just ignore the 1099-R with a code R when  it comes.   Like I said, a code R does nothing and does not need to be entered.  The explanation statement is all that is needed.

#2 - Say you "switched" (recharactorized) the entire amount of the contribution, not adjusted for the loss.  Just mention the loss in the explanation statement.

#3 -

"My partner made excess deferral to 401K accidentally. This was from the job switch in September of 2019. We already informed the new employer in January 2020 and the employer paid back this excess contribution back in March 2020. Now, how do I report this? Someone said I would get 1099-R with P code in box 7 next year- but I should still report this on my 2019 return that I am in process of filing- as if I already have 1099-R."

Unless you are married, your partner files their own tax return.

You do not need to wait for a 1099-R next year that will probably require you to amend your 2019 tax return to report the excess on line 1 of your tax return - it can be entered this way and then ignore the 2020 1099-R with a code P in box 7 when it comes.

There are two methods to do this and they both do exactally the same thing.   I prefer the 2nd way because there is less room for error filling out a dummy 1099-R incorrectly or choosing the wrong year:

1) Enter a 1099-R with the returned contribution amount (not including earnings) in box 1 & 2a, and a code "P" in box 7. When asked what year 1099-R say 2020.

or 2)
Excess 401(k) deferrals should be reported in:
(There are several screens to click through to get to the right place)

Miscellionious Income ->
Other Income not reported on a W-2 ->
Other wages (yes) ->
House Hold employee (Continue) ->
Sick Pay (Continue) ->
Other earned income (yes) (Includes excess salary deferrals)->
Source of income (other) ->
Any other income - enter the amount of the excess deferral and an explanation.

This will add the returned excess to your 2019 wages on line 1 exactly the same way that the 1099-R would. The only information that is sent to the IRS is the line 1 amount.

[Note: If there were any earning that were returned in 2020 then the earnings will be reported on a separate 2020 1099-R with a code 8 that goes on your 2020 tax return - do not enter the earnings here.]

Both methods will add the returned excess to your 2019 wages on line 1 exactly the same way that the 1099-R would. The only information that is sent to the IRS is the line 1 amount.

For information see IRS Pub 525 page 10
https://www.irs.gov/pub/irs-pdf/p525.pdf

Report a loss on a corrective distribution of an excess deferral in the year the excess amount (reduced by the loss) is distributed to you. Include the loss as a negative amount on Schedule 1 (Form 1040), line 21, and identify it as “Loss on Excess Deferral Distribution.”

Enter as:
Miscellionious Income ->
Other reportable Income ->
Any Other Taxable Income (yes) ->
Description (enter "Loss on Excess Deferral Distribution" and amount as a negative number).

[Random_Bunny]

Ok continuing with the excess deferral theme, I did what you suggested (method # 2) in Turbotax and obviously that increased our (yes we are married) tax liability. But, then when we looked at the small calculation the plan administration shared with us as corrective distribution- it looks like they withheld 10% towards federal tax.

Where do I enter this tax they have already withheld which should apply against the tax liability Turbotax is calculating on our total income (line 1) which now includes corrective distribution against the excess deferral?

Thanks again

[macuser_22]

---

@Random_Bunny wrote:

Where do I enter this tax they have already withheld which should apply against the tax liability Turbotax is calculating on our total income (line 1) which now includes corrective distribution against the excess deferral?

---

A recharacterization is never subject to tax and no tax should ever be withheld.    This sounds more like the financial institution dis a return of contribution and withheld tax n the taxable earnings and not a recharacterization.   You need to talk the the financial institution as to exactally what they did.

And the term "corrective distribution" is used with a "return of excess contribution" and not with a recharacterization which are two totally different things  and reported in different ways.

[Random_Bunny]

I was mixing two separate topics. 

So coming back to the main topic. I think I understood what you said as to how I can report re-characterization in Turbotax. This is where I will report re-characterized after tax ROTH contribution to Traditional IRA.

How do I report the back-door conversion from Traditional IRA back to ROTH? I have already completed this transaction in my Vanguard account- meaning I have already completed the back door conversion and I have no value in my Traditional IRA. How will I report this in Turbotax?

{In a nutshell this is the order of transactions I am trying to reflect in Turbotax. (1) Incorrect contribution to Roth in 2019 December. (2) Re-characterization to Traditional IRA in January 2020. (3) Back-door conversion from Traditional IRA to Roth}

Thank you

[macuser_22]

See below for a backdoor Roth.   You will report that next year on your 2020 tax return if converted in 2020 change the dates in the method to 2020 since that procedure was for a 2019 conversion.

This so-called “back-door Roth” method ONLY works if you have NO OTHER Traditional IRA accounts.  If you do, then the non-deductible part must be spread over ALL accounts and cannot be withdrawn by itself.  Only if you started with NO Traditional, SEP & SIMPLE IRA and ended up with a zero amount in ALL Traditional, SEP & SIMPLE IRA accounts will this Roth conversion not be taxable.

First you must enter your Traditional IRA contributions (if there were 2019 contributions).

IRA contribution
Federal Taxes,
Deductions & Credits,
I’ll choose what I work on (if that screen comes up),,
Retirement & Investments,
Traditional & Roth IRA contribution.

Be SURE to answer the follow up that the are choosing to make this contribution NON-DEDUCTIBLE - if that screen comes up. (DO NOT say that you moved (recharacterized) the money to a Roth) – this is a conversion, not a recharactorazition.

Then enter the 1099-R that shows the distribution.

Federal Taxes,
Wages & Income
I’ll choose what I work on (if that screen comes up),,
Retirement Plans & Social Security,
IRA, 401(k), Pension Plan Withdrawals (1099-R).

Answer the follow-up questions answer the question that you moved the money to another retirement. The screen will open up with choices of where it was moved. Choose you converted it to Roth IRA.

When asked if you have made any non-deductible contributions say " "yes" if you did then enter the non-deductible contributions made for tax years before 2019.     (Usually zero unless you also made a 2018 or earlier non-deductible contribution. If you do have prior year basis then enter the last filed 8606 line 14 value.).

Enter the 2019 year end value of your Traditional IRA a "0" (zero) - if it is in fact zero - this tax free Roth conversion will not work if it is not zero.

[If you had any other Traditional IRA at the end of 2019, then the nondeductible "basis" must be pro-rated over the current distribution and the total IRA value and only a portion of the Roth conversion will be non taxable and part will be taxable, with the remaining non-deductible basis carrying forward for future distributions. You can never only withdrew the nondeductible basis as long as the IRA exists and has a value more than zero.]

The non-deductible amount of your contribution will be subtracted from the taxable amount of the conversion on then 8606 form and enter on line 4a of them 1040 form and a zero taxable amount on line 4b if you did it right.

Also see this TurboTax FAQ:
https://ttlc.intuit.com/questions/4350747-how-do-i-enter-a-backdoor-roth-ira-conversion

[Random_Bunny]

Hello again @macuser_22 

I am sorry I am still getting stuck. Again to summarize, I contributed to ROTH on Dec 31, 2019 by mistake since I realized I was not eligible to contribute>> In January 2020 after realizing the mistake, I re-characterized ROTH to Traditional IRA >> In a back to back transactions, I did backdoor conversion to move from Traditional back to ROTH.

Following your guidance, I decided to report re-characterization on 2019 now and ignore 1099-R that I will get for 2020 with R in box 7 later on.

I went in through "Traditional IRA and ROTH IRA" screen.

• TurboTax asked me to enter my "contribution to Traditional IRA even if later you transferred to ROTH IRA". I said entered the amount. (Is this correct?- or should I be using some other screen to say I actually contributed to ROTH and later re-characterized to Traditional)
• It asked me "Tell us if you switched from traditional to ROTH". I said NO. (Should I be saying YES- I did switch, although I did it in 2020? I know you said this backdoor would be reported on 2020 return- but can I already report it on 2019?)

So you see, I did not get the screen that you called out that asks "Did you switch from ROTH to Traditional IRA- re-characterize".  

I am doing something wrong. Please will you help? Thank you.

[macuser_22]

You did NOT contribute to  Traditional IRA - you contributed to a *Roth* IRA and then switched that to a Traditional IRA.      You are doing it backwards  .

[Random_Bunny]

AWESOME!

Got it... and just fixed it. Looks like everything looks good now.

One final question, this backdoor conversion back to ROTH- can I simply report it now although I did this in 2020? One less thing to remember next year if I just do this now. Or is this simply not allowed?

[macuser_22]

No.   You do not convert in 2019.   You converted in 2020 so it can only be reported on a 2020 tax return next year.

[goyal_raj]

Hi,

I have a similar situation where in I contributed 6000 to Roth directly (not sure how that happened) on 2/21/20. I realize now that I wanted to contribute to a non deductible IRA but may have made a mistake. I am not allowed to contribute to traditional IRA as I am over the income limit so i usually do a non deductible contribution and convert to Roth.

I believe that I can now recharacterize my Roth amount of 6000 plus earnings of 1700 after a proportionate calculation (i have more than 6000 in my Roth account) to my traditional IRA as non deductible and then convert it back to Roth.

If the above is correct, I have to specify that i made a Roth contribution in 2020 and then select that I recharacterized the contribution plus proportionate earnings and that should be it. My 8606 should show it as non deductible contribution for 2020.  And my 1099-R received in 2022 would show the conversion to Roth. 

However, when i enter 7757 as recharacterization in Turbo tax it says that i have 1757 excess contribution. So I believe i need to withdraw the earnings amount and pay tax on it and also a penalty on only the earnings.

IS that right?

Thanks,

[MarilynG1]

Yes, tell TurboTax that the excess (due to earnings) has been removed so a penalty is not applied and the excess does not carry forward.

You will receive a 1099R in 2022  to report your 2021 tax year. The 1099R will show the amount of the total Distribution plus the excess earnings amount in Box 1 and then show just the taxable amount of the distribution in Box 2A, which should just be the excess earnings amount.

Click this link for more info on Excess Roth IRA Contribution.