Excess Roth IRA contribution clarification needed

[MadelineL]

Dave, this is the best clearest answer found after hours of research. Although I did return excess contributions for last year, before this years due date, this year i received the earnings, so will report them as earnings this year

[richardk19]

Hi Everyone,

I've never found myself in this situation before and would really appreciate any help/suggestions.

I made a $6000 contribution to my 2021 tax year ROTH IRA in March of 2021. I am working on my 2021 taxes now (March 2022), and my MAGI is too high (for the first time) for me to have been able to contribute to a ROTH IRA in 2021. I spoke to my financial institution (where the ROTH account was created) today, and they have recharacterized my excess contribution into a traditional IRA (I've never had a traditional IRA before). I plan to convert the traditional IRA that I just created into a backdoor ROTH as soon as the money is available to convert, in a few days.  ( My Traditional IRA contribution is non-deductible.)

The $6,000 that I put into the ROTH IRA account in March of 2021 is actually only worth $5500 now, so there are no earnings that I will need to pay taxes for - I lost about $500.

I completed all of the steps on Turbotax to recharacterize my Roth contribution as a traditional IRA contribution, including the Roth IRA Explanation Statement.

My question is: Do I need to take any other steps on my 2021 taxes before I file on April 15th? I know that I will receive a 1099-R for the recharacterization (from excess ROTH contribution to traditional IRA) and another 1099-R for the conversion from the traditional IRA to backdoor ROTH IRA, but I will not receive these 1099-Rs from my financial institution until early 2023.

Do I need to "create" a 1099-R and enter it in my 2021 taxes for the recharacterization of the $6000 excess ROTH contribution into a traditional IRA? If so, which figures should I use for the 1099-R? Or do I need to wait until I receive the paperwork in early 2023 and amend my 2021 taxes at that point (which I'd like to avoid)?

I'd like to do whatever I need to do now, and avoid amending tax returns if possible, but I'm confused if I need to "create" a 1099-R form for my 2021 taxes or if I only needed to complete the steps in Turbotax (below).  I had no earnings from the excess ROTH contribution - I actually had a loss.

Thanks for any help and advice!

Here are the steps I followed in Turbotax:

To recharacterize your Roth contribution as a traditional IRA contribution in TurboTax, follow these steps:

1. Sign in to your TurboTax account and open (continue) your return
2. Select Search in the top right of your screen. Search for IRA contributions and select the Jump to link in the search results
3. Select Roth IRA and select Continue
4. Answer Yes on the screen Did you make a Roth IRA contribution for 2021? 
5. Answer No on the screen Is This a Repayment of a Retirement Distribution? 
6. On the next screen, enter your Roth contribution amount
7. Answer Yes on the screen Switch from a Roth To Traditional IRA?
8. On the next screen, Tell Us How Much You Transferred, enter the excess contribution amount (don't include earnings or losses)
9. On the screen Roth IRA Explanation Statement, enter the original amount plus the amount of earnings or loss that were recharacterized.

[macuser_22]

---

@richardk19 wrote:

Hi Everyone,

I've never found myself in this situation before and would really appreciate any help/suggestions.

I made a $6000 contribution to my 2021 tax year ROTH IRA in March of 2021. I am working on my 2021 taxes now (March 2022), and my MAGI is too high (for the first time) for me to have been able to contribute to a ROTH IRA in 2021. I spoke to my financial institution (where the ROTH account was created) today, and they have recharacterized my excess contribution into a traditional IRA (I've never had a traditional IRA before). I plan to convert the traditional IRA that I just created into a backdoor ROTH as soon as the money is available to convert, in a few days.  ( My Traditional IRA contribution is non-deductible.)

The $6,000 that I put into the ROTH IRA account in March of 2021 is actually only worth $5500 now, so there are no earnings that I will need to pay taxes for - I lost about $500.

I completed all of the steps on Turbotax to recharacterize my Roth contribution as a traditional IRA contribution, including the Roth IRA Explanation Statement.

My question is: Do I need to take any other steps on my 2021 taxes before I file on April 15th? I know that I will receive a 1099-R for the recharacterization (from excess ROTH contribution to traditional IRA) and another 1099-R for the conversion from the traditional IRA to backdoor ROTH IRA, but I will not receive these 1099-Rs from my financial institution until early 2023.

Do I need to "create" a 1099-R and enter it in my 2021 taxes for the recharacterization of the $6000 excess ROTH contribution into a traditional IRA? If so, which figures should I use for the 1099-R? Or do I need to wait until I receive the paperwork in early 2023 and amend my 2021 taxes at that point (which I'd like to avoid)?

I'd like to do whatever I need to do now, and avoid amending tax returns if possible, but I'm confused if I need to "create" a 1099-R form for my 2021 taxes or if I only needed to complete the steps in Turbotax (below).  I had no earnings from the excess ROTH contribution - I actually had a loss.

Thanks for any help and advice!

Here are the steps I followed in Turbotax:

To recharacterize your Roth contribution as a traditional IRA contribution in TurboTax, follow these steps:

1. Sign in to your TurboTax account and open (continue) your return
2. Select Search in the top right of your screen. Search for IRA contributions and select the Jump to link in the search results
3. Select Roth IRA and select Continue
4. Answer Yes on the screen Did you make a Roth IRA contribution for 2021? 
5. Answer No on the screen Is This a Repayment of a Retirement Distribution? 
6. On the next screen, enter your Roth contribution amount
7. Answer Yes on the screen Switch from a Roth To Traditional IRA?
8. On the next screen, Tell Us How Much You Transferred, enter the excess contribution amount (don't include earnings or losses)
9. On the screen Roth IRA Explanation Statement, enter the original amount plus the amount of earnings or loss that were recharacterized.

---

Nope. That is it.  But be sure that you told TurboTax that you recharactorized the exact amount as your original contribution not accounting for any gain or loss.    If a gain or loss then that should be part of the explanation. And if a gain it would be moved to the Trad IRA and no tax paid until you take a distribution.

That should have produced a 2021 8606 form showing the now Traditional IRA contribution on line 1,3 and 14 as a non deductible contribution.    You can ignore the 1099-R for the recharactorization which shroud have a code "R" in box 7 when it comes.   The code R 1099-R will be ignored by TurboTax since it's only purpose it to for the IRA custodian to tell the IRS - it is simply information to you and does not get entered.   The only way for yiur to report it is as you did - your explanation is how you report it.

You will need the 2021 8606 line 14 amount for the backdoor Roth.

[richardk19]

Hi,

My brokerage recharacterized my excess ROTH contribution into a traditional IRA. I thought they would recharacterize the current market value, about $5,500, showing a loss from the original $6,000 contribution. But instead, my brokerage recharacterized about $6,500 ($5,500 from the original $6,000 contribution from one fund, and an additional $1,000 from another fund in my ROTH IRA brokerage account). 

My brokerage firm said because I had lost $500 from my original $6,000 contribution, they had to recharacterize an additional $1,000 from another ROTH fund to ensure that the $6,000 original contribution was recharacterized into my Traditional IRA. They said the reason that my Traditional IRA value is now $6,500 and (not $6,000) is because the calculations on gains/losses are based on my entire ROTH IRA portfolio.

1) Does this change anything that I need to enter for my 2021 taxes? I had written in the explanation statement of Turbotax:

1. Answer Yes on the screen Switch from a Roth To Traditional IRA?
2. On the next screen, Tell Us How Much You Transferred, enter the excess contribution amount (don't include earnings or losses) $6,000 (the amount I contributed in March 2021 for 2021 Tax Year)

On the screen Roth IRA Explanation Statement, enter the original amount plus the amount of earnings or loss that were recharacterized. I wrote: I recharacterized $6000 minus losses of $500 = $5500.      

Am I still telling Turbotax that I recharacterized the exact amount as original contribution, not accounting for any gain or loss?

When I convert the traditional IRA into a backdoor ROTH (as soon as possible), will I avoid paying taxes (whether I had gains or losses) because I will have no distributions?

2) Does this change anything that I need to do for my 2022 taxes? Will I report the backdoor Roth on my 2021 taxes, or on my 2022 taxes? 

Thank you!

[macuser_22]

---

@richardk19 wrote:

Hi,

My brokerage recharacterized my excess ROTH contribution into a traditional IRA. I thought they would recharacterize the current market value, about $5,500, showing a loss from the original $6,000 contribution. But instead, my brokerage recharacterized about $6,500 ($5,500 from the original $6,000 contribution from one fund, and an additional $1,000 from another fund in my ROTH IRA brokerage account). 

My brokerage firm said because I had lost $500 from my original $6,000 contribution, they had to recharacterize an additional $1,000 from another ROTH fund to ensure that the $6,000 original contribution was recharacterized into my Traditional IRA. They said the reason that my Traditional IRA value is now $6,500 and (not $6,000) is because the calculations on gains/losses are based on my entire ROTH IRA portfolio.

1) Does this change anything that I need to enter for my 2021 taxes? I had written in the explanation statement of Turbotax:

1. Answer Yes on the screen Switch from a Roth To Traditional IRA?
2. On the next screen, Tell Us How Much You Transferred, enter the excess contribution amount (don't include earnings or losses) $6,000 (the amount I contributed in March 2021 for 2021 Tax Year)

On the screen Roth IRA Explanation Statement, enter the original amount plus the amount of earnings or loss that were recharacterized. I wrote: I recharacterized $6000 minus losses of $500 = $5500.      

Am I still telling Turbotax that I recharacterized the exact amount as original contribution, not accounting for any gain or loss?

When I convert the traditional IRA into a backdoor ROTH (as soon as possible), will I avoid paying taxes (whether I had gains or losses) because I will have no distributions?

2) Does this change anything that I need to do for my 2022 taxes? Will I report the backdoor Roth on my 2021 taxes, or on my 2022 taxes? 

Thank you!

---

That would indicate that the entire IRA (not individual funds in the IRA) had an increase in value of  $500 attributed to the $6,000 contribution.   That means that the $6,000 contribution plus $500 of gains were moved to the Tradition IRA account.  

Assuming that this was a 2021 contribution recharactorized in 2021---

The proper way to report the recharacterization and earnings which is to enter the 2021 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 2020 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.

[dmertz]

"They said the reason that my Traditional IRA value is now $6,500 and (not $6,000) is because the calculations on gains/losses are based on my entire ROTH IRA portfolio."

Yes, that is what is required by the tax code.  Your contribution is to the IRA, not to any particular investment in the IRA (even though you use the contributed cash to purchase particular investments within the IRA).  You have a $500 taxable gain attributable to your $6,000 contribution, not a loss:

https://www.law.cornell.edu/cfr/text/26/1.408-11

[richardk19]

1) Am I correct that for my 2021 Turbotax explanation statement, I'm writing: "The original $6000 contribution plus $500 earnings were recharacterized." I'm writing this because, as you said, the entire IRA (not individual funds in the IRA) had an increase in value of $500 attributed to the $6,000 contribution.

2) To clarify, this is for a 2021 excess ROTH contribution recharacterized in March 2022 but before I have sent in my 2021 taxes. Does this change how I report the recharacterization and earnings?

3) Am I reporting on my 2021 taxes that I converted this $6500 from the traditional IRA into a backdoor ROTH IRA in March 2022? If so, how do I note this on my 2021 tax forms? Or do I enter the information about my backdoor ROTH IRA conversion on my 2022 taxes?

Thanks @macuser_22 and @dmertz !

[macuser_22]

---

@richardk19 wrote:

1) Am I correct that for my 2021 Turbotax explanation statement, I'm writing: "The original $6000 contribution plus $500 earnings were recharacterized." I'm writing this because, as you said, the entire IRA (not individual funds in the IRA) had an increase in value of $500 attributed to the $6,000 contribution.

2) To clarify, this is for a 2021 excess ROTH contribution recharacterized in March 2022 but before I have sent in my 2021 taxes. Does this change how I report the recharacterization and earnings?

3) Am I reporting on my 2021 taxes that I converted this $6500 from the traditional IRA into a backdoor ROTH IRA in March 2022? If so, how do I note this on my 2021 tax forms? Or do I enter the information about my backdoor ROTH IRA conversion on my 2022 taxes?

Thanks @macuser_22 and @dmertz !

---

#1)  That is correct.

#2)  No,It was a 2021 contribution so it is reported on yiur 2021 tax return only.    It is the explanation statement that actually report it to the IRS.   When you receive a 1099-R next year with a code R you can ignore it as a code R is ignored by TurboTax and the 1099-R is only issued to inform the IRS.

#3 Noting goes on 2021 tax since the conversion was done in 2022,  Be sure that when entering the 2021 recharacterization that if the question comes up that you say you want the now Traditional IRA contribution non-deductible if not automatically non-deductible because income too high to deduct.   Either way there should be a 8606 form as part of 2021 tax return with the non-deductible amount on line 1 and the total of all nondeductible contribution on line 14.   You will need the line 14 amount for reporting the backdoor Roth next year.

Also be sure you understand how the so called "Backdoor Roth" works.  Since you already have $500 earnings and many more, then it will be partly taxable.

The "Backdoor Roth" does not exist in tax law. It is a procedure used by some to take advantage of a quirk in tax law that allows making a non-deductible contribution to a Traditional IRA when one cannot contribute to a Roth IRA, and the immediately converting the Traditional IRA to a Roth IRA, thereby getting the money into the Roth via "backdoor" tax free. [Congress has been talking about changing the tax law to prohibit this but has not yet done so.]

That "procedure" can only work of all these requirements are met:
1) No Traditional IRA account whatsoever can exist (that includes any SEP or SIMPLE IRA accounts) at the start. If existing IRA's contain any before-tax money or earnings then it will be partly taxable.
2) The Tradition IRA contributions must be reported on a 8606 form as non-deductible.
3) The conversion to a ROTH must be shortly after the contribution to avoid taxable gains.
4) The entire Traditional IRA value must be zero that the end of the year of conversion.

Otherwise the conversion will be partly taxable.

[richardk19]

Thank you. Can you please clarify what you meant by "and many more" when you said "Also be sure you understand how the so called "Backdoor Roth" works.  Since you already have $500 earnings and many more, then it will be partly taxable."

My understanding is that since I am only converting the $6500 from Traditional IRA to backdoor ROTH (my original contribution of $6000, plus the increase in value of $500 attributed to the $6,000 contribution), that only the $500 would be a taxable gain.

Can you confirm that I am understanding correctly? Thanks!

[macuser_22]

---

@richardk19 wrote:

Thank you. Can you please clarify what you meant by "and many more" when you said "Also be sure you understand how the so called "Backdoor Roth" works.  Since you already have $500 earnings and many more, then it will be partly taxable."

My understanding is that since I am only converting the $6500 from Traditional IRA to backdoor ROTH (my original contribution of $6000, plus the increase in value of $500 attributed to the $6,000 contribution), that only the $500 would be a taxable gain.

Can you confirm that I am understanding correctly? Thanks!

---

"Many" was a typo and spell check changed what was suppose to be "maybe" to many.    So at least $500 will be taxable.    For a backdoor roth to work the value of all  Traditional IRA accounts must be zero at years end so you need to convert whatever is in the IRA including taxable earnings that the IRA might have by the time you convert it.