Federal tax goes up after adding Roth IRA contribution

[tnanaihsoj]

Hello,

I know similar question was asked for 2022 tax year by josepnyc76

I'm in similar situation for 2023 tax year. I contributed max possible amount to both Roth IRAs (self and wife). Now it turns out we both are allowed only $1000 contribution to our Roth IRAs. 

To make matter worse, we also contributed full permissible amount for 2024 to same Roth IRA accounts.

I'm thinking of opening two new traditional IRA accounts for both of us and transfer amount in excess of $1000 to them.

So our 2023 tax year situation will be - $1000 to Roth, Rest to Traditional. And out 2024 tax year situation will be all to Traditional.

Does this make sense?

Thanks

[DanaB27 · Accepted solution]

Yes, you can recharacterize the excess Roth IRA contribution as a traditional IRA contribution if your Roth IRA contribution is limited by your Modified Adjusted Gross Income (MAGI).

Request the recharacterization with your financial institution.  You will enter the recharacterization on your 2023 tax return when you enter the contribution to the Roth IRA:

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 ‘Yes” on the “Roth IRA Contribution” screen
6. Answer “No” to “Is This a Repayment of a Retirement Distribution
7. Enter the Roth contribution amount 
8. Answer “Yes” to the recharacterized question on the “Switch from a Roth To a Traditional IRA?” screen and enter the contribution amount (no earnings or losses) on the next screen.
9. 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.
10. On the screen "Choose Not to Deduct IRA Contributions" answer "Yes" if you are thinking about doing a backdoor Roth. Otherwise select "No". (If you have a retirement plan at work and are over the income limit it will be nondeductible automatically and you only get a warning and then a screen saying $0 is deductible)

You will get a 2024 Form 1099-R  for the recharacterization with code R-Recharacterized IRA contribution made for 2023 and this belongs on the 2023 return. But a Form 1099-R with code R will do nothing to your return. You can only report it as mentioned above. Therefore, you can ignore the Form 1099-R with code R when you get it in 2025.

Please see What happens if I made an excess Roth IRA contribution for additional information.