Excess 2019 Roth IRA contribution recharacterized and then converted in 2020

[user123456781]

I am trying to understand how to report the recharacterization and conversion of excess Roth IRA contributions.

Here is an overview of the situation:

October 2019 - made $6000 contribution to my Roth IRA, and $6000 to my spouse's Roth

March 2020 - discovered we are over the income limit for Roth contributions. We recharacterized each contribution to a traditional IRA and converted each one back into a Roth; this process was completed before filing our taxes for 2019. However, we did NOT report the original Roth IRA contribution because we thought we "reversed it" and could therefore ignore it.  We expected to report the recharacterization and conversion on our 2020 taxes.

Feb 2021 - We received 2 1099-Rs for the recharacterizations (one for me, one for my spouse), and 2 1099-Rs for the conversions.

For the recharacterizations, the 1099-Rs look like this:

Box 1- $6131.97 (me), $6006.32 (spouse)

2a- $0

4- $0

7- R

16- $6131.97 (me), $6006.32 (spouse)

For the conversions, the 1099-Rs look like this:

Box 1- $6158.03 (me), $6508.41 (spouse)

2a- $6158.03 (me), $6508.41 (spouse)

2b- taxable amt not determined (checked)

4- $0

7- 2; IRA/SEP/SIMPLE (checked)

16- $6158.03 (me), $6508.41 (spouse)

Our broker opened 2 traditional IRA accounts for the recharacterizations (we did not have one before this, so all of the money deposited was post-tax dollars), and the traditional IRAs had a value of $0 after the conversion.

I am having trouble figuring out how to report this series of transactions. As far as I can tell, none of this should be taxable or incur excess contribution penalties. However, the permutations I have tried in TurboTax have resulted in 1) taxes being withheld on post-tax dollars, or 2) a message saying that I owe penalties on the conversion amount that's above $6000. Any idea what I'm doing wrong? Also, will I need to amend my 2019 return to report the original Roth contribution, even though it was recharacterized?

Thanks for your help! Much appreciated!

[DanaB27]

Yes, you will need to amend your 2019 tax return to report the recharacterization. Please see How do I amend a 2019 return in TurboTax? . You will delete the traditional IRA contribution and enter the Roth contribution with the steps below to report the recharacterization:

1. Open return
2. Click on "Search" on the top right and type “IRA contributions”
3. Click on “Jump to IRA contributions"
4. Select “Roth IRA”
5. Answer “No” to “Is This a Repayment of a Retirement Distribution
6. Enter the Roth contribution amount $6,000
7. 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)
8. 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.
9. 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:

1. Open your return
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 “What Did You Do With The Money” and choose “I moved it to another retirement account”
6. 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"
7. On the "Your 1099-R Entries" screen click "continue"
8. Answer "yes" to "Any nondeductible Contribution to your IRA?"
9. Answer the questions about the basis ($6,000) and value

Only the gain will be taxable. You can verify your entry on line 4.

[user123456781]

Thank you for your reply! This is very helpful. The 2019 amended return instructions worked beautifully, and I only hit a snag on the very last item in the 2020 instructions.

A couple of follow-up questions:

1) On the 2020 return, you said :

1. Answer "yes" to "Any nondeductible Contribution to your IRA?"
2. Answer the questions about the basis ($6,000) and value

1) The recharacterized money was deposited into a new traditional IRA account that was opened in March 2020, so there was no basis on Dec 31, 2019 because the account did not exist. Does this matter? Is the basis still $6000 because it was for the 2019 tax year, even though the account was opened in 2020?

2) All of the money in the traditional IRA was converted a week after it was opened, so the value of the traditional IRA on Dec 31, 2020 was $0. Should I enter the total amount converted instead, since there was a small amount of earnings before the conversion (conversion amounts: $6158.03 me, and $6508.41 spouse)? When I do this, the gains are taxed.

3) Do I need to re-import my amended 2019 return into TurboTax for preparing my 2020 return? We did not report the erroneous Roth contributions when we filed in 2019.

Thank you so much for your help!

[DanaB27]

1)Yes, the basis is still $6,000 because it was for the 2019 tax year.

2)No, do not enter the total amount converted for the value. You have to enter the value on December 31, 2020, in your case $0. Yes, it is correct that the gains are taxed since any earnings you had will be taxable in a conversion.

3)No, you do not need to re-import the 2019 amended return to prepare your 2020 return.