Contributed to Roth- shouldn't have

Forum|Forum|6 years ago
June 16, 2020
1 reply
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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

TurboTax Self Employed Online

Best answer by macuser_22

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.

macuser_22

Answer

Alumni - Champ

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.

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**

R

Random_BunnyAuthor

Level 4

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

Alumni - Champ

@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).

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**