I re-characterized 2020 Roth IRA contributions to Traditional IRA (submitted form 8606). I want to know how I can reverse that and contribute those funds towards YR 2022

[vemurisrinu]

I read somewhere that a statement explaining re-characterization need to be attached, which I did not when I filed taxes for 2020 but just filled Form 8606. I need to use those funds currently in Traditional IRA to contribute towards 2022 Roth IRA without taxation as I did not get tax advantage in 2020 due to re-characterization.

[Anonymous_]

@dmertz can most likely answer your question. Stay tuned.

[dmertz · Accepted solution]

Nothing about your 2020 traditional IRA contribution can be changed in 2022 or 2023.  It's too late to provide any explanation of your 2020 recharacterization unless the IRS specifically requests an explanation.

Perhaps you want to make a traditional IRA contribution (maybe nondeductible) for 2022.  You have until April 17, 2023 to make that contribution for 2022, provided you have compensation from which to make the contribution.  This would have nothing to do with your 2020 IRA contribution except that your 2022 Form 8606 would include on line 2 the amount from line 14 of your 2020 Form 8606 (assuming that you did no transactions in 2021 that would have required you to file a 2021 Form 8606).

Perhaps you are asking about doing a Roth conversion from your traditional IRA.  Any Roth conversion performed in 2023 would be reported on 2023 Form 8606 with your 2023 tax return, not anywhere on your 2022 tax return.

[vemurisrinu]

Hi dmertz,

Thanks for your response. My concern is as follows:

I initially contributed towards Roth IRA (post tax $$) during the tax year (yr2020) but later while filing taxes the following year (yr2021), I understood my MAGI is beyond the limit and the contributions are subject to penalty. So, as per the responses given for other posts I read on Turbotax, I did the re-characterization to Traditional IRA. Even thought these funds don't qualify for deductions, contributions to Traditional IRA are tax-deferred (pre pre-tax $$) basis.

My question is,

(1) After re-characterization from Roth to Traditional IRA, I'm expecting to receive a tax portion for the contribution I made refunded back to me. Is my understanding right and is there a way to get that refund ?

OR

(2) Is there a way to convert this Traditional IRA to Roth IRA without having to pay Federal/State tax ? Coz if I have to pay taxes after conversion, that means I'm subjected to double taxation, which doesn't make sense.

Please advise. Thanks.

[dmertz]

"Even thought these funds don't qualify for deductions, contributions to Traditional IRA are tax-deferred (pre pre-tax $$) basis."

False.  A nondeductible traditional IRA contribution becomes after-tax basis in your traditional IRAs.  Your 2020 tax return should have included Form 8606 Part I reporting on line 1 a nondeductible traditional IRA contribution.

1.  There is nothing to refund.  If your 2020 tax return already included Form 8606 with the contribution on line 1 (flowing through to line 14), there is nothing to amend with regard to 2020.  If your 2020 tax return did not include this From 8606, you must amend your 2020 tax return to add it.

2.  You can convert some or all of your traditional IRAs to Roth whenever you want.  Any Roth conversion you perform in 2023 will be reportable on your 2023 tax return.  Assuming that you do such a conversion in 2023, your 2023 tax return will include Form 8606 Parts 1 and II with the amount on line 14 of your 2020 Form 8606 carrying forward to line 2 of your 2023 From 8606 to reduce the taxable amount of the Roth conversion.  The amount of the basis on line 2 that will be applied to reduce the taxable amount of the Roth conversion will depend on whether or not you have any other funds in traditional IRAs.  If you convert all of your traditional IRAs in 2023, all of your basis will be applied and none will continue to be carried forward.