How do I enter recharacterization of excess Roth contribution and subsequent backdoor Roth contribution?

[sfoksn]

I realized that my income was going to be over the limit for contribution for 2019 after I had already contributed, so ended up recharacterizing $3000 + gain of 268 from my Roth IRA to Traditional IRA in December 2019 and I contributed additional $3000 into my Traditional IRA to fill up $6000 contribution limit for 2019, then I converted total of $6268 from my Traditional IRA to Roth IRA.  How do I enter this information on TurboTax?

[macuser_22]

You should have a 1099-R with a code N for the recharactorization.

A 2019 1099-R with a code N in box 7 (Recharacterized IRA contribution made for 2019 and recharactorized in 2019) .

A code N 1099-R does nothing whatsoever if entered into the 1099-R section.  It does not get sent to the IRS and nothing goes on the tax return at all. The only purpose of the 1099-R is to report the recharacterization to the IRS, but it still must be reported on your 2019 tax 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.

The proper way to report the recharacterization and earnings which is to enter the 2018 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 N 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 2018 refund, or it will be an after-tax contribution reported on a 8606 form (line 1).    That will be used for the backdoor Roth 1099-R.

[sfoksn]

@macuser_22  Thanks for reading my post and for your input!

I have 2 1099-Rs, one for my T IRA and one for R IRA.

Since recharacterization and conversion was done before 2019 was over, I already received them.

Roth IRA 1099-R:

Box 1: $3286

Box 2a: $0

Box 2b: nothing checked

Box 7: "N"

IRA/SEP/SIMPLE: box NOT checked

Traditional IRA 1099-R:

Box 1:$6286

Box 2a: $6286

Box 2b: Taxable amount not determined and total distribution both checked

Box 7: "2"

IRA/SEP/SIMPLE: box checked

I really want to do this right so please bear with me as I explain the steps I am thinking of taking to record this properly:

First, to enter the recharacterization/contribution: 

1. Go to Deductions&Credits

2. Traditional and Roth IRA Contributions

3. I check only Traditional IRA (since I had contributed $3000 first into Roth IRA directly which was then recharacterized to Traditional IRA along with taxable gains, then I had added $3000 more into Traditional IRA then converted whole thing over for backdoor full Roth contribution for 2019)

4. "Is this a repayment of a retirement distribution?" No

5. "Tell us how much you contributed" Total 2019 traditional IRA contribution 6000 (gains are supposed to be left out here, right?), nothing contributed between January 1, 2020 and April 15, 2020 since all this was done in 2019.

6. "Tell us how much you transferred" 0, since this is asking whether or not I "recharacterized" any of my traditional IRA contributions to Roth IRA, which doesn't apply for me since I am "converting" the full amount.

7. "Any Excess IRA contributions before 2019?" No

8. "Any nondeductible contributions to William's IRA?" Yes, since all 6000 I contributed to traditional IRA Is non deductible as I will be converting to Roth

9. "Let's fine your IRA basis" I actually have $1000 on line 14 on 2018 Form 8606 because I had recharacterized $1000 in 2018 as well due to similar problem...

10. "Tell us the value of all your traditional IRA accounts" 0, since the conversion was complete before December 31, 2019 and at that time the account was already empty.

11. "Choose not to deduct IRA contributions" I select "Yes, make part of William's IRA contribution non deductible" and I put whole 6000 since all of it will be converted to Roth.

12. "Your IRA deduction summary" $0

To enter the conversion:

1. Go to Income/Expenses

2. Select IRA, 401k, Pension Plan WIthdrawls (1099-R)

3. Just to confirm, am I supposed to enter both 1099-R for my Roth IRA and Traditional IRA? I was under the impression only Traditional IRA 1099-R needs to be entered.. is that right? 

In that case, I have 2 1099-R's to enter. I have 1099-R for recharacterization and conversion of $1000 that was done in 2/2019 for 2018 tax year  (I was late on conversion for this year), and another 1099-R for Tax year 2019's conversion which was done before 2019 was over. 

4. I put in Traditional IRA 1099-R data, it tells me "Good News, you don't owe extra tax on this money" which makes sense since I didn't take deduction on it.

5. "Did XXX inherit the IRA from XXX brokerage?" No

6.  "What did you do with the money from XXX brokerage?" I choose "I moved the money to another retirement account" and "I converted all of this money to Roth IRA account"

I apologize for the long text, I just want to make sure I am doing things correctly.  I really appreciate your help! @macuser_22 

[sfoksn]

P.S. After entering both 1099-Rs for Tradtional IRA, "Total Withdrawals" add up to $7286, $1000 from 2018 tax year conversion and $6286 from 2019 tax year conversion.

[dmertz]

[Deleted]

[macuser_22]

Your step 3 is incorrect.  This was a *Roth* contribution, not a Traditional IRA contribution.  You recharactorized the Roth *to* a Traditional IRA, not the other way around.  That will add the $3,286 to the Traditional IRA.

After you do the Roth recharacterization, then you can go back and check the Traditional IRA box and add the $3,000 as a *new* Traditional IRA contribution.

I suggest, going back and uncheck all boxes and then press "Continue" to remove what you entered, then re-enter.

(I am not sure if your method came up with the same result or not, but your method would not add the required recharacterization statement for the Roth that the IRS needs to properly treat it.)

After that then the total 2019 Traditional IRA contribution on the 8606 line 1 should be $3,286 + $3,000 = $6,286.

"3. I check only Traditional IRA (since I had contributed $3000 first into Roth IRA directly which was then recharacterized to Traditional IRA along with taxable gains, then I had added $3000 more into Traditional IRA then converted whole thing over for backdoor full Roth contribution for 2019)"

[dmertz]

Why wasn't your Roth conversion $7,286?  It appears that the total amount that was in traditional IRAs and was converted to Roth in 2019 was $1,000 from the recharacterization of a portion of your 2018 Roth contribution, $3,286 from the recharacterization of your $3,000 Roth IRA contribution for 2019 and $3,000 contributed directly to your traditional IRA for 2019.  Where is the missing $1,000?

[macuser_22]

---

@dmertz wrote:

Why wasn't your Roth conversion $7,286?  It appears that the total amount that was in traditional IRAs and was converted to Roth in 2019 was $1,000 from the recharacterization of a portion of your 2018 Roth contribution, $3,286 from the recharacterization of your $3,000 Roth IRA contribution for 2019 and $3,000 contributed directly to your traditional IRA for 2019.  Where is the missing $1,000?

---

Good point.

@sfoksn In 2018 did you also convert that $1000 to a Roth and failed to enter the $1,000 recharacterization as above, so that the $1,000 of non-deductible basis could be applied to the 2018 conversion?   T

   You might need to amend 2018 to straighten it out.

[sfoksn]

@macuser_22 @dmertz   Thank you so much for your input. I apologize for repeat questions, I should have compiled it into one thread but I had more questions as I read into this situation.

I honestly do not remember what I exactly did for 2018 but that for that year I was walked through with a CPA with screenshare so I hope everything was done correctly. I do remember having to look up a sample statement for recharacterization and putting a statement in there so I believe this was done correctly.  Is there a way to check this on my 2018 return?

On my Form 8606 for 2018:

Line 1: $1000

Line 2: 0

Line 3: 1000

Line 14: 1000

All other lines are blank. 

Reason why there are 2 different 1099's for conversion is because for tax year 2018, I was with a different brokerage and I had done $1000 recharacterization and conversion in 2/2019, and for tax year 2019, the current brokerage issued another set of forms for this year's recharcterization and conversion.  Had I stayed with same broker, I believe the total conversion amount would show $7286 on one set of 1099...

I had no idea my Step 3 was wrong, thank you for catching my mistake!  I have just removed all the entries and now am going to add Roth IRA first, and then Traditional IRA as @macuser_22 mentioned.

 Checked Roth IRA box ONLY

1. "Tell us the Value of All your traditional IRA accounts on December 31, 2019" 0, since all the funds were converted by that time

2. "Did you make a Roth IRA contribution for 2019?" Yes

3. "Is this a repayment of a retirement distribution?" No

4. "Enter your roth IRA contribution" 3000, since that was the amount originally put in then was recharacterized along with gains

5. "Switch from a Roth to a traditional IRA?" YES

6. "Tell us how much you transferred" 3000, gains are not put here, right?

7. I put in statement explaining the situation of recharacterization and conversion "On 11/25/2019, I recharacterized $3268 ($3000 original contribution + $268 gain since original contribution date) from my Roth IRA to Traditional IRA. I contributed $3000 additionally into my Traditional IRA to meet maximum annual contribution limit of $6000. On 12/5/2019 I converted the full amount of the $6268 in my Traditional IRA ($6000 contribution, $268 gain) back into my Roth IRA"

8. "Let us track your Roth IRA basis" Yes

9. "Withdraw from your Roth IRA before 2019?" No

10.  "Enter Prior year Roth IRA contributions" 21000, since I have contributed 2015, 2016, 2017, 2018 (5500 * 4) 

11. "Any Roth IRA Conversions before 2019?" Yes

12. "Tell us the years" 2018, for the $1000 that had to be converted

13. "Enter 2018 Conversions" 2018 Taxable conversion is 0, and 2018 Nontaxable conversion is 1000, right? Since I've already paid tax on that 1000 that I had originally contributed into Roth?

14. "Adjust Roth IRA due to divorce?" No

15. "Any Excess Roth Contributions?" No

16.  "Choose Not to deduct IRA contributions" Yes, make part of IRA contribution nondeductible, and I put 6000, since I contributed additional 3000 to my traditional IRA on top of the conversion to fill up annual contribution limit and converted whole 6286 (6000 contribution and 268 gains) to Roth IRA

17. "Your IRA Deduction Summary" 0 deduction applied

Then I went back into the IRA data input and I found both Traditional and Roth IRA boxes checked. I clicked continue and:

1. "Did you contribute to Traditional IRA?" Yes

2. "Is this repayment of a retirement distribution?" No

3. "Tell us how much you contributed" only 3000, since the instruction says "do not enter roth contributions even if you later recharacterized them to traditional IRA,", and 0 of it was contributed between january 1, 2020 and April 15, 2020

4. "Tell us how much you transferred" 0, since this is asking for recharacterization, not conversion

5. "Any excess IRA contributions before 2019?" No

6. "Any non deductible contributions to my IRA" Yes

7. "Let's find your IRA basis" 1000, per line 14 for 2018 Form 8606

8.  "Tell us the value of all my traditional IRA accounts as of December 31, 2019" 0

9. "Is this repayment of a retirement distribution?" No

10. "Choose not to deduct IRA contributions" I selected Yes, make part of IRA contribution non deductible, and here I put whole 6000, right? 

I believe now things are correctly put in for the Deduction and Credits section. It shows $6000 for 2019.

Now for Income and Expense section, I need to enter the 1099-Rs for the distribution and conversion for tax years 2018, 2019...  What makes it more confusing is that I have 2 sets of 1099-Rs because I was with another brokerage for the recharacterization/conversion for 2018 than for 2019 as explained earlier... Am I supposed to enter only the Roth IRA 1099-Rs or both of them?  

Once again, thank you @macuser_22 and @dmertz for your help... I really appreciate your time reviewing my question.

[dmertz]

11. "Any Roth IRA Conversions before 2019?" Yes

12. "Tell us the years" 2018, for the $1000 that had to be converted

13. "Enter 2018 Conversions" 2018 Taxable conversion is 0, and 2018 Nontaxable conversion is 1000, right? Since I've already paid tax on that 1000 that I had originally contributed into Roth?

No!  You said in your other question that your conversion of the $1,000 was in January 2019.  Where is the 2019 Form 1099-R reporting this conversion?  Where is this $1,000 now?

[sfoksn]

@dmertz   

I see!  So I should put No for 11. since my 2018 tax year conversion, although it was for 2018 tax year, it was done in January 2019! Thank you!

I received the  2019 1099-R for $1000 recharacterizatin/conversion for tax year 2018 about a month ago along with 2019 tax year's $3000 recharacterization/conversion.  That $1000 was already converted to Roth IRA as of January 2019.

These are the values listed on my 1099-Rs:

For 2018 conversions from Broker A:

Roth IRA 1099-R:
Box 1: 1000

Box 2a: 0

Box 2b: nothing checked

Box 7: R

IRA/SEP/SIMPLE: not checked

Traditional IRA 1099-R:

Box 1: 1000

Box2a: 1000

Box 2b: Taxable amount not determined checked

Box 7: 2

IRA/SEP/SIMPLE: checked

For 2019 conversion from Broker B

Roth IRA 1099-R:

Box 1: $3286

Box 2a: $0

Box 2b: nothing checked

Box 7: "N"

IRA/SEP/SIMPLE: box NOT checked

Traditional IRA 1099-R:

Box 1:$6286

Box 2a: $6286

Box 2b: Taxable amount not determined and total distribution both checked

Box 7: "2"

IRA/SEP/SIMPLE: box checked

Should I be inputting all 4 1099-R's onto this year's tax return or just Roth IRA 1099's?

[dmertz]

As I said in response to your other question, Roth conversions are made in a particular year not for a particular year.  The code 2 2019 Form 1099-R from Broker A is reportable on your 2019 tax return, not on your 2018 tax return.

[sfoksn]

@dmertz Thank you very much.  That's true, that's why I just received1099-Rs for my 2018 tax year conversion in 2/2020, since the conversion was done in 1/2019.

I will make sure to correct my entry from step 11 in my previous reply.  

Do rest of my steps look OK? And for reporting the 1099-Rs under Income&Expense section, should I be reporting the 1099-R for Roth IRA or Traditional IRA, or both?    It appears that the Roth IRA 1099 has code "R" or "N" depending on the corresponding tax year and Traditional IRA 1099 has code "2."  

Thanks again, @dmertz 

[macuser_22]

---

@sfoksn wrote:

@dmertz Thank you very much.  That's true, that's why I just received1099-Rs for my 2018 tax year conversion in 2/2020, since the conversion was done in 1/2019.

You are repeating your error.  It is NOT a 2018 conversion.   2018 conversions had to be completed before Dec 31, 2018.  If converted in 2019 it is a *2019* conversion.  You could not receive a 2018 1099-R for a conversion done in 2019 - it must say 2019 on it.

You are confusing the rule that allows *contributions* for the prior tax year up to April 15 of the follow year.  That does NOT apply to  distributions/conversions that are reported in the year distributed/converted.

[sfoksn]

@macuser_22  Thank you!  

I guess I'm not being clear enough about my statement - yes, the conversion/recharacterization was done in 2019 and I did receive 1099-R for 2019 corresponding for that conversion. I was just referring to it as 2018 tax year conversion because the $1000 that was recharacterized and converted was for 2018 contribution.  

So I guess I should rephrase by saying that I have total of $7268 2019 conversion, $6268 of which was regarding 2019 tax year contribution and $1000 was regarding 2018 tax year contribution. 

Besides the error that @dmertz  pointed out in my step 11, do rest of my input seem adequate?  And should I be inputting both Roth IRA and Traditional IRA 1099's?   It seems like Roth IRA 1099 is coded with "early distribution, exception applies" and Traditional IRA 1099 is coded with "recharacerization."

Thanks for your help!