Fix excess Roth IRA contribution 2020: using both recharacterization AND timely removing excess before tax filing

You will need to request a recharacterization with your bank by the due date of your return. They will move the contribution and earnings into a traditional IRA.  There is no tax or penalty on the earnings since the earning will be simply switched into the recharacterized account. You will receive a 1099-R for the recharacterization.

Please follow these steps to enter your contribution:

1. Login to your TurboTax Account 
2. Click on the Search box on the top and type “IRA contributions”
3. Click on “Jump to IRA contributions"
4. Answer "yes" to "Switch from a Roth To a Traditional IRA?".
5. The $6,000 of the original Roth contribution must be entered - not any earnings or losses.
6. 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 recharacterized.

If you are considering recharacterizing, it doesn't seem to make much sense not to just recharacterize the entire excess contribution.  If you contributed $6,000, you recharacterize $6,000 and the $6,000 adjusted for any attributable investment gain or loss is transferred to to the traditional IRA.  If the gain is $500, you still just recharacterize $6,000 and $6,500 is transferred.

But to answer the question that was asked, yes, you can do a combination of recharacterizing and return of contribution.  The order in which you perform these and and how you split the excess between recharacterizing and return of contribution don't matter (except perhaps for slight differences that would result from investment gain or loss incurred between these two transactions, if any).

Thank you. I misunderstood that the recharacterized amount needs to be equal to or less than the contribution limit ($6000 in this case).  I will just recharacterize the whole thing instead of recharacterizing and then doing the distribution. 

thank you very much!

The amount of contribution to be recharacterized (the unadjusted amount) must be less than or equal to the amount contributed, the amount that must be transferred to effect that recharacterization might not be.  Unless there was no gain or loss, the amount that must be transferred will be greater or less than the amount recharacterized.  When TurboTax asks how much was recharacterized, TurboTax is not asking how much was transferred.

Thank for the explanation. 

so in my example

contribution to Roth ira 2020: $6000

actual contribution allowed in 2020: $0 (due to the extra income received in the latter part of 2020)

net income from the excess contribution: $500

So I should recharacterize only the contribution of $6000, and transfer $6500 from Roth ira to a traditional ira?

is my understanding correct? 

Thank you so much. 

Generally the IRA custodian does the net-income-attributable calculation and the IRA custodian needs to do the transfer so that it's reported correctly on Form 1099-R.  You should not do it yourself other than doing the calculation yourself to verify that the IRA custodian did the correct calculation.

I am in the same boat as bareli as extra payout made me not eligible to contribute to my ROTH IRA but both my wife and I have contributed $7000 each at the beginning of the year.   I also contributed $7,000 for 2021.   Now I need to remove $21,000 from our accounts.   I am trying to contact Charles Schwab to initiate withdrawal.  What other  steps should I do now?  Please advise.

Yes, you will need to contact to either withdraw the excess contribution plus earnings or to recharacterize the contribution before the due date.  Please see What happens if I made a ROTH IRA contribution but my modified adjusted gross income exceeds the limit? for details.

@SLYKTAX

I had to recharacterize contributions from Roth to Traditional due to limitations.  I followed TurboTax prompts, entering as Roth and providing info from 1099R.  I am not seeing TurboTax treat these as deductible contributions to a traditional IRA.  Are these recharacterized contributions tax deductible, even if I take the standard deduction?  If so, where would they show up?  Thank you.

It depends, the deduction to a traditional IRA may be limited if you or your spouse is covered by a retirement plan at work and your income exceeds certain levels. Please see IRA deduction limits for details. If it is deductible it will show on Schedule 1, line 19.

You will enter the recharacterization 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 “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 (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 "No" (Answer "yes" if you are thinking about doing a backdoor Roth. 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)

@cjax55

THanks for the quick response.  I'm single and do not have a retirement plan with my employer.  I originally made the contribution as a Roth IRA but due to wage limits, had to recharacterize it as Traditional.  My understanding is that the traditional would be deductible but I'm not seeing that applied in Turbo Tax.  Is there any other reason TT would make it non-deductible?  I was thinking it should now be entered as Traditional but the note in TT says NOT to include recharacterized contributions and instead, list them as Roth.  Still confused :(

Dear @DanaB27 

I am in the same boat as @bareli and I filled the recharacterization as you (@DanaB27) described above . You mentioned we will be getting a 1099-R, I assume it will be in 2022.

Do I have to amend my 2020 return next year (in 2022) or simply ignore the 1099-R.

Or do I have to report it in my 2021 returns, because the transaction occurred in 2021?

Thank you in advance.

Please check Schedule 1, line 19 if it shows the deduction. When you enter the recharacterization do you get the question in step 9 (see above)? Or do you only get a screen saying $0 is deductible? 

If not then please double check your W-2 that the box 13 retirement plan is not checked:

1. Login to your TurboTax Account 
2. Click on "Search" on the top right and type “W-2”
3. Click on “Jump to W-2”

@cjax55

Yes, if you recharacterized the 2020 contribution in 2021 then you will get the 2021 1099-R in 2022 with code R. You can ignore the 1099-R with code R, since you reported the recharacterization on your 2020 return. The 1099-R with code R will do nothing on your return, you can only report the recharacterization as mentioned above.

@kvkeee

I asked the following questions and got half answered by someone earlier.  As I am trying to file my 2020 before May 17, I need someone to help. Here are the questions.

My AGI is over the limit. I have my 2020 ROTH contribution return with gain.  Since I won't be getting a 1099-R until January or February next year.  I am now creating a substitute 1099-R for my 2020 tax return according to DianeC958’s instruction. 

 I am 70, so what is the code for the Box  7?   I had a guy from Schwab said PJ.  Doesn't look like it.  P is Return of contribution taxable in 2019 - but mine is taxable 2020.  And J is early distribution which I believe is for those under 59 1/2 and subject to 6% penalty. 

My wife also contributed to her 2020 ROTH and was also returned. She made $5,000 contribution in 2020 and $2000 in 2/1/2021. Schwab said the earning for $5000 contribution is to be reported in 2020 Tax Return only.   As it takes days for Schwab to respond to a question. Another guy I talked to didn't understand the split. 

So the question on my wife’s 1099-R is: The total earing given is $514.30.  That means the Total Return Distribution with gain made this year is $7,514.30.  I split the earing by proportion.  That is earning for 2020 & 2021 are  $367.36 and $146.94 respectively.

So for her substitute  2020 1099-R which I am creating  :  Is Box 1, Gross distribution $7,7514.30 or $5,367.36 or $5,514.30?  As I believe Box 2  Taxable Amount is $367.36 as $146.94 is for 2021 Tax Return.  Please advise.

Yes, it will be code PJ for the 1099-R since it isn't a qualified distribution but you are able to enter the age exception during the interview to avoid the 10% early withdrawal penalty. Also, on a 2021 1099-R  code P would mean taxable in 2020. TurboTax will ask after you enter the 1099-R what year it says on the 1099-R.

1. Click on the "Search" on the top right and type “1099-R”
2. Click on “Jump to 1099-R”
3. Answer "Yes" to "Did you get a 1099-R in 2020?"
4. Select "I'll type it in myself"
5. Box 1 enter total distribution (contribution plus earning)
6. Box 2a enter the earnings
7. Box 7 enter P and J 
8. Click "Continue"
9. On the "Which year on Form 1099-R" screen say that this is a 2021 1099-R.
10. After you enter all 1099-Rs on the "Your 1099-R Entries" screen click "continue"
11. On the screen "Did you use your IRA to pay for any of these expenses" use "another reason" and enter the taxable amount from box 2a.

A contribution made in 2021 for 2020 is deemed to be have made on the last day of 2020 and therefore all earnings from a withdrawal of excess contribution should be reported on the 2020 tax return. 

@SLYKTAX 

Thanks Dana for the answer and steps to do the 1099-R.

So, I will create two 2021 1099-R one for myself and another for my wife with TurboTax.  After creating them, will TT automatically insert the numbers from the 1099-Rs into my 1040-SR Line 4a & Line 4b or I have to do it manually?

Correct, TurboTax will automatically carry the correct amounts to line 4a and 4b after you enter the 1099-R information and answer the follow-up questions during the interview.

@SLYKTAX

I forgot to ask the 1099-R I created for return of my 2020 Roth contribution done in 2021 is for 2021 1099-R or 2020 1099-R?

You will select it is a 2021 1099-R when TurboTax asks.

Hi,

I was doing my 2021 taxes and found out in the process that I made an excess contribution in 2020 for my ROTH IRA because I got married that year and filed "married filing separately".  On my 2021 taxes, there is a question asking if I made an excess contribution prior to 2021 and I noted yes and the amount.  Now, I see a decrease in my tax return.  Is this the 6% penalty>

Also, when I take those funds and recharacterize them into a traditional IRA, does that count as a 2021 trad IRA contribution or a 2020 contribution, or none at all?  
Do I need to do anything else?  Please help.  

You can only recharacterize your 2021 contribution until the due date of the 2021 return. You cannot recharacterize your 2020 contribution because the due date has passed.

You will have to pay the 6% penalty for 2020 and 2021 since you haven’t removed the excess by December 31, 2021.  You seemed to have entered the correct information on your 2021 tax return since you are seeing the penalty.

To remove the 2020 excess contribution and avoid further penalties you will take a regular distribution (without earnings) by December 31, 2022 since it is after the due date of the 2020 tax return. This distribution will be reported on your 2022 tax return but will not be taxable since you are withdrawing a Roth contribution.

@bgal