Excess Contribution to both Roth and Traditional with Backdoor Conversion to Roth

[jaspinal]

Have gotten myself into a good mess with my Roth (and Backdoor Roth) contributions for tax year 2020 I’m hoping to get help with. Have outlined everything below as detailed as possible including what I think needs to be done. Thank you in advance for your collective help and insight. 

• 1/2/2020 - contributed $6K to Roth IRA
• Early 2021, while filing taxes, realized I made too much to contribute to Roth for tax year 2020
• 3/3/2020 - removed $8K (original $6K contribution + net income from interest) with 24% tax withholding
• 3/3/2020 - recharactericized full amount (probably should have just been $6K...) to Traditional IRA
• 3/4/2020 - removed the above contribution from Traditional IRA
• 3/4/2020 - converted full amount $8K  to Roth IRA (backdoor Roth contribution)

Outstanding Questions

• How do I correct the excess amount contributed to the Traditional IRA (and subsequent conversion to Roth IRA as part of Backdoor IRA)?
• Can I no longer convert the excess from the Roth back to the Traditional IRA (and subsequently withdraw?) if not, will this be “absorbed” for tax year 2021 and I’ll pay a 6% penalty for tax year 2020?
• What exact tax forms do I need to properly file net income on the interest from the excess contributions?
• What does the 24% tax withholding do exactly?

[DanaB27]

To clarify, you took the excess contribution and earnings out on 3/3/2020 and therefore told your bank to withdraw excess contribution and earnings or did you tell the bank to recharacterize the Roth contribution to a traditional IRA? Because if you took the excess contribution and earnings out then there would be no 2020 Roth contribution to recharacterize. Or did you recontribute the whole amount again to the Roth before you recharacterized the amount as a traditional IRA? Or just made a new contribution to the traditional IRA? It might be best to check with your bank how they handled the situation.

To verify all the withdrawal, recharacterization and conversion happened in 2021 and not 2020? All dates were 2020?

No, you cannot reverse the conversion to put the money from the Roth back into the traditional IRA.

If you still had an excess contribution because you recontributed the amount withdrawn back to the Roth to be able to recharacterize it then if you leave it in your can pay the 6% penalty for 2020 and then apply it to next years contribution on your tax return. When you file your 2021 tax return TurboTax will ask if you had prior year excess contribution and if you want to apply it to 2021. 

The 24% tax will be carried over to line 25b on your 2021 return and will be credited to any tax due on your 2021 tax return.

To enter a recharacterization (you told the bank to switch a Roth contribution to a traditional contribution) please follow these steps to enter this in TurboTax:

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 “Roth IRA”
5. Answer “No” to “Is This a Repayment of a Retirement Distribution
6. Enter the Roth contribution amount 
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 did a withdrawal of excess contribution and earnings then you will get a 1099-R 2021 in 2022 which will have to be included on your 2020 tax return. This will report the earnings from the excess contribution. To create a 1099-R in your 2020 return please follow the steps below:

1. Login to your TurboTax Account 
2. Click on the Search box on the top and type “1099-R”
3. Click on “Jump to 1099-R”
4. Answer "Yes" to "Did you get a 1099-R in 2020?"
5. Select "I'll type it in myself"
6. Box 1 enter total distribution (contribution plus earning)
7. Box 2 enter the earnings
8. Box 7 enter P and J 
9. Click "Continue"
10. On the "Which year on Form 1099-R" screen say that this is a 2021 1099-R.

[jaspinal]

Appreciate the response. Please see below for some clarifications

- The original contribution was 1/2/2020. The recharacterization occurred on 3/3/2021 (not 3/3/2020, thank you for catching that error). 

- I told the bank to recharacterize the Roth contribution to a Traditional IRA which occurred on 3/3/2021

- On 3/4/2021, that recharacterization was converted from the Traditional IRA back to a Roth IRA (back door)

- So since I cannot reverse the conversion, I'll pay the 6% penalty for 2020 and claim prior year excess contribution on my 2021 tax return (for the 2020 tax year)? Assuming yes, then no further money transfers to occur now and it will sort itself out when I complete 2021 taxes. Is that all correct?

Thank you again.

[DanaB27 · Accepted solution]

Thank you for the clarification. 

No, you will not have any excess contribution since you recharacterized your Roth contribution as a traditional IRA contribution. You do not have to pay the 6% penalty.  Also, there is no tax or penalty on the earnings since the earning will be simply switched into the recharacterized account. 

You will enter the recharacterization when you enter the contribution to the Roth IRA and make the contribution nondeductible (if you have a work retirement account and are above the limit it will be automatically nondeductible and TurboTax will tell you your deduction is $0):

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 “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"

You will get two 1099-R in 2022 for 2021.

One 1099-R will be for the conversion and will be entered next year on your 2021 tax return:

1. Login to your TurboTax Account 
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?" 
8. Answer the questions about the basis

The second 1099-R will be for the recharacterization with code R-Recharacterized IRA contribution made for 2020 and this belongs on the 2020 return. But a 1099-R with code R will do nothing to your 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.

Since you did not make an actual withdrawal of excess contribution you will not get a 1099-R with codes P and J and you can ignore the instructions in the previous post.