I exceeded the income limits for a Roth IRA in 2016, so in January 2017 I recharacterized those contributions into a Traditional IRA. Do I file Form 8606 now with my 2016 taxes or later with my 2017 taxes?

[mbPB1921]

For my Roth IRA I contribution in 2020 was $6,000.  When I went to recharacterize it, it had grown to $8126.29.  The entire amount of $8126.29 was converted in 2021.  This is the amount on the 1099-R that has code R.  In the same 2021 year, I contributed $7000 to an Traditional IRA and it was converted over to the Roth IRA right away (within days) and when you combine the 2 years, $15,162.35.  This is the amount on the other 1099-R with codes 2 & X.  2b has an X.  My wife has the same issue with her Roth IRA.  Turbo Tax is not helping me put the numbers in the correct places.

[DanaB27]

On your 2020 tax return

You will have to report the recharacterization of the 2020 Roth IRA contribution on your 2020 tax return and make it nondeductible. TurboTax will create a 2020 Form 8606 with the $6,000 basis on line 14 for each of you. This will be entered into TurboTax during the interview when asked about tracking prior nondeductible contributions. You can ignore Form 1099-R with code R.

To enter your recharacterization on the 2020 tax return:

1. Click on "Search" on the top right and type “IRA contributions” 
2. Click on “Jump to IRA contributions"
3. Select “Roth IRA”
4. Answer “No” to “Is This a Repayment of a Retirement Distribution
5. Enter the Roth contribution amount 
6. Answer “Yes” to the recharacterized question on the “Did You Change Your Mind?” screen and enter the contribution amount (no earnings or losses)
7. 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.
8. On the screen "Choose Not to Deduct IRA Contributions" 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 automatically and you only get a warning and then a screen saying $0 is deductible)

It seems your wife made recharacterization of her 2020 traditional IRA contribution (since she has an X next to IRA/SEP/SIMPLE on Form 1099-R with code R) and then made a withdrawal of the Roth excess contribution plus earnings for 2020 and 2021. The Form 1099-R with codes PJ (for the 2020 excess Roth contribution) will have to be entered on the 2020 tax return and the Form 1099-R with codes 8J  (for the 2021 excess Roth contribution) will go on your 2021 tax return. Only the earnings are taxable and subject to the 10% early withdrawal penalty if your wife is under 59 1/2. It seems your wife did not make a Roth conversion in 2021.

To enter your wife's recharacterization on the 2020 tax return:

1. Click on "Search" on the top right and type “IRA contributions” 
2. Click on “Jump to IRA contributions"
3. Select “traditional IRA”
4. Answer “No” to “Is This a Repayment of a Retirement Distribution
5. Enter the traditional IRA contribution amount 
6. Answer “Yes” to the recharacterized question on the “Did You Change Your Mind?” screen and enter the contribution amount (no earnings or losses)
7. 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.

To enter Form 1099-R code PJ on the 2020 tax return:

1. Click on the "Search" on the top right and type “1099-R” 
2. Click on “Jump to 1099-R”
3. Enter the Form 1099-R
4. Click "Continue"
5. On the "Which year on Form 1099-R" screen say that this is a 2022 Form 1099-R.
6. Click "Continue" after all 1099-R are entered and answer all the questions.
7. Continue until "Did you use your IRA to pay for any of these expenses?" screen and enter the amount of earnings under "Another reason" if you are over 59 1/2 (if you are under 59 1/2 click "Continue")

Please be aware, code P will say in the drop-down menu "Return of contribution taxable in 2020" you can ignore that since the follow-up question will tell TurboTax that it will be taxable in 2021.

On your 2021 tax return

To enter your nondeductible traditional IRA contribution on your 2021 tax return:

1. Click on "Search" on the top right and type “IRA contributions” 
2. Click on “Jump to IRA contributions"
3. Select “traditional IRA”
4. Answer “No” to “Is This a Repayment of a Retirement Distribution?”
5. Enter the amount you contributed $7,000
6. Answer “No” to the recharacterized question on the “Did You Change Your Mind?” screen
7. Answer the next questions until you get to “Any Nondeductible Contributions to Your IRA?” and select “Yes” if you had a nondeductible contribution before this tax year.
8. Enter your $6,000 basis in the Traditional IRA from your 2020 Form 8606 line 14 
9. On the “Choose Not to Deduct IRA Contributions” screen choose “Yes, make part of my IRA contribution nondeductible” and enter the amount (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).

To enter the 1099-Rs for conversion and withdrawal of excess contribution on your 2021 tax return: 

1. Click on "Search" on the top right and type “1099-R”  
2. Click on “Jump to 1099-R”
3. Click "Continue" and enter the information from your 1099-R (code 2)
4. 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”
5. On the "Review your 1099-R info" screen click "Add Form 1099-R" and add your wife's Form 1099-R with codes 8J
6. On the "Review your 1099-R info" screen click "continue"
7. Answer "yes" to "Any nondeductible Contributions to your IRA?" if you had any nondeductible contributions in prior years.
8. Answer the questions about the basis from line 14 of your 2020 Form 8606 and the value of all traditional, SEP, and SIMPLE IRAs

@mbPB1921

[mbPB1921]

Thank-you for the detailed info!

So if I have a 1099-R with code R entered in Turbo Tax can I just delete it?

Thanks.

[DanaB27]

You can delete it but you don't have to since the code R will not enter anything on any forms.

If you want to delete it:

1. Click on "Search" on the top right and type “1099-R”  
2. Click on “Jump to 1099-R”
3. Click on the "Trash icon" to delete Form 1099-R with code R

@mbPB1921 

[mbPB1921]

So all the 2020 tax return things I need to do, can I just open Turbo Tax 2020 (i have on my lab top) and make these changes?

So do I need to do them before I do any of the 2021 return?

Mark

[DanaB27]

Yes, you will open the 2020 TurboTax software and select to amend your tax return. See How do I amend my 2020 return? for more detailed instructions.

No, you can finish and file your 2021 return as long as you enter your correct basis in the interview from the 2020 Form 8606 line 14 (should be the amount you contributed for 2020).

@mbPB1921

[mbPB1921]

For me, the 2020 contribution of $6000 that gained $2,162.29 that was all recharacterized ($8,162.29) would all get entered on my 2020 Tax return with explanation of contribution + gain.  Do I pay taxes on the $2,162.29?

Mark

[DanaB27]

Yes, your basis would be the $6,000 and the $2,162.29 would be a taxable gain. When you recharacterize a contribution then the earnings are deemed to have been earned in the traditional IRA.

@mbPB1921 

[mbPB1921]

My wife's three 1099-R do not an R code.  What would be the reason for that?

[DanaB27]

Can you please clarify what you mean? You stated previously your wife has one Form 1099-R with code R in box 7 and X next to IRA/SEP/SIMPLE box. Now you say she doesn’t have a Form 1099-R with code R?

@mbPB1921

[mbPB1921]

Sorry, I miss read that.  On her 1099-R it has a code 2 and the IRA/SEP/SIMPLE checked with an X.

[mbPB1921]

I just entered in the explanations for recharacterization.  Turbo Tax is asking "if we can reduce your early withdrawal penalty."  It is telling me that I took out money early from a retirement plan.  I did not take any money out.  Is there somewhere I can go to correct this issue?

Mark

[mbPB1921]

The previous message only showed a tax of $31 due to the money that was gained on my wifes IRA.

After the explanations, it is asking for an explanation of a Return of Contribution.

"You told us that Mark recieved a return of an IRA contribution before April 18th, 2022.  Not sure where I would have stated that.  I'm not sure what to put for the explanation.

Mark

[DanaB27]

It seems she didn't make a recharacterization. She only withdrew the 2020 and 2021 excess contributions and earnings (the two Form 1099-Rs, one with PJ and one with 8J). Did she make a new contribution to the traditional IRA? I'm assuming the Form 1099-R with code 2 and the IRA/SEP/SIMPLE checked with an X is for a conversion (traditional IRA to Roth).

If she made a direct contribution to traditional IRA then you will have to enter it in the IRA contribution section and make it nondeductible. 

@mbPB1921

[mbPB1921]

This is from out financial person.

5-5-21 -- $7000 transferred from TOD to IRA for 2020 (Non-deductible IRA contribution)

5-5-21 -- $7000 transferred from TOD to IRA for 2021 (Non0deductible IRA contribution)

5/12/21 - $14,000 Roth conversion from IRA into Roth IRA (Roth IRA conversion - contribution from IRA).

Does this help explain?

Mark