I talked to Schwab, and they said I can recharacterize for 2020 and 2021. They asked me to work with a tax advisor for amending my returns. I've only used TurboTax for the last 4 years. Does Turbotax provide this service?
Yes, you can amend your 2019 return to report the excess contribution. Please see How do I amend a 2019 return in TurboTax? for instructions. You will enter the Roth IRA contribution and TurboTax will calculate the 6% penalty on Form 5329 on the 2019 tax return.
You will have to pay the 6% penalty on the 2019 excess contribution on the 2020 tax return since this excess contribution was not withdrawn by December 31, 2020. When TurboTax asks if you had any prior excess contributions in the IRA contribution section you will enter the 2019 amount and TurboTax will calculate the penalty on Form 5329.
You will have to request to withdraw the 2019 excess contribution amount as a regular distribution before December 31, 2021 to avoid future penalties (no need to withdraw the earnings because it is after the due date of the 2019 return).
Please follow these steps to enter the recharacterization on your 2020 tax return (you will repeat this on your 2021 tax return):
You will get a 1099-R 2021 will be for the recharacterization with code R-Recharacterized IRA contribution made for 2020 and this belongs on the 2020 return. But a 1099-R with code R will do nothing to your return. You can only report it as mentioned above.
The second 1099-R 2021 will have a code N Recharacterized IRA contribution made for 2021 and this belongs on the 2021 return. You will still have to report it as mentioned above.
If you need more help then you can also use a TurboTax Live Expert. Please see What is TurboTax Live?
Hi Dana,
Really appreciate your reply.
I called TurboTax and they wanted to charge me $150 for each year to amend, so I will look to try to do this on my own.
I've already filed my taxes for 2020 a few weeks ago (prior to realizing this Roth IRA mistake). So I think I need to be amending 2019 and 2020. Per my talk with Schwab, they said I should be able to recharacterize 2021 to a traditional IRA, so shouldn't have any issues. (Let me know if your understanding is the same).
I will follow your steps below to review my 2019 and 2020 contributions. Do let me know if you have any additional tips/input on this. It is much appreciated.
Thanks.
Best person to help here is @dmertz
You want to be cautious in recharacterizing it as a traditional IRA. The funds will still be non-deductible, and mixing deductible and non-deductible funds in a traditional IRA creates a paperwork problem you will have to keep track of every year for the rest of your life. It may be the best thing to do but maybe not. You have until April 15 to do the withdrawal of excess contributions and not be penalized on your 2020 return, although you will still have to amend if you filed already. But you may have to amend the 2019 return first in order to have the correct information to include on your 2020 return.
Recharacterizing your Roth IRA contributions for 2020 and 2021 will correct those excess contributions. Since you've already filed your 2020 tax return you'll need to amend that to show the resulting traditional IRA contribution.
Correcting the excess contribution for 2019 requires that you obtain a regular distribution of the amount of the 2019 excess with no adjustment for earnings. Your 2021 tax return will included Form 5329 showing that this regular distribution in 2021 eliminates the excess for 2021.
You'll file a 2019 Form 5329 to calculate and pay the excess-contribution penalty for 2019. Your amended 2020 tax return will include Form 5329 to again report and pay the excess-contribution penalty on the 2019 excess not corrected before the end of 2020.
Hi @dmertz,
Thanks for the reply.
To clarify and confirm:
-2020/2021 have no issues once I recharacterize with Schwab (my brokerage)
Will this affect my 2020/2021 tax returns in any way? Since this is already-taxed money. I plan to just roll it into a traditional IRA.
-2019 is my bigger issue. Do you mean I should by withdrawing the $6K I contributed and take a 10% hit? For the Form 5329, is this something that will automatically be captured in my 2021 filing? Or I need to follow up and remember this transaction?
For the 2019 Form 5329, is this something that can be done in Turbo Tax? Or I need to hand-calculate?
Most of the money in the IRA account are already invested into stocks. Does this change anything?
@AT25 wrote:
Hi @dmertz,
Thanks for the reply.
To clarify and confirm:
-2020/2021 have no issues once I recharacterize with Schwab (my brokerage)
Will this affect my 2020/2021 tax returns in any way? Since this is already-taxed money. I plan to just roll it into a traditional IRA.
-2019 is my bigger issue. Do you mean I should by withdrawing the $6K I contributed and take a 10% hit? For the Form 5329, is this something that will automatically be captured in my 2021 filing? Or I need to follow up and remember this transaction?
For the 2019 Form 5329, is this something that can be done in Turbo Tax? Or I need to hand-calculate?
Most of the money in the IRA account are already invested into stocks. Does this change anything?
If you contributed $6000 excess in 2019, you need to file an amended 2019 return that reports this fact. You will be assessed a 6% penalty on the excess amount (you will have to send a check with your 2019 amended return).
For 2020, you can recharacterize your 2020 contribution before April 15, 2021. However, you will still pay another 6% penalty on the $6000 excess contribution from 2019 that is still in the account. You will need to file an amended 2020 return to report the contribution to the traditional IRA and the 6% penalty, and include a check for the penalty with your amended return.
If you made contributions in 2021, you also need to recharacterize those, and the deadline is April 15, 2022. You will also withdraw the $6000 excess from 2019 as a regular withdrawal during 2021. You will get a 1099-R for this in January 2022, but withdrawals of Roth IRA contributions are not taxable, and removing the money during 2021 will remove the 6% penalty from your 2021 return.
What will remain in the account will be the earnings from the 2019 excess contribution. These can stay in the account, or if you withdraw them and close the account before age 59-1/2, you will pay income tax plus a 10% early withdrawal penalty.
@Opus 17 wish there was a way to communicate instead of this forum, but appreciate everyone's responses so far.
Is there a sequence of events I need to follow? I am in the process of filling out my forms to recharacterize the 3 years and roll it into a traditional IRA. Do I need to do something else first?
Like I mentioned, the money is now tied into stocks. And those stocks in my roth IRA have appreciated since. Do I need to sell everything in this account before I do anything?
You can’t re-characterize your excess 2019 contributions. They are dealt with via a different process.
[Note that I have edited the parts of this answer to correct them]
step one is to file an amended tax return for 2019 that reports the excess (disallowed) Roth contribution for 2019 and calculates and pays a 6% penalty tax.
step two is to re-characterize your 2020 contributions. This means that you have to take the money out of the Roth IRA along with its earnings, and then put the money into a traditional IRA. You can do an in-kind re-characterization, which means moving the investment instruments rather than cashing them out first. However, you have to move the correct amount of money, and I imagine that you may have to sell at least a small amount to create cash to make up any uneven numbers. You may not be able to do an in-kind transfer if you are also changing brokers.
step three is to file an amended 2020 tax return. On the amended 2020 tax return, you will report the non-deductible traditional IRA contribution that resulted from the re-characterization, and you will also calculate in pay a 6% penalty on the excess 2019 contribution that is still in the Roth IRA.
step four is to re-characterize any excess 2021 contributions to the Roth IRA. You will withdraw the amount of the contribution plus its earnings and move it to the IRA. Again, an in-kind transfer may be possible, but you may have to sell some of your assets to create cash to make up the correct dollar values.
step five is to make a regular withdrawal of $6000 from the Roth IRA, representing the excess contribution from 2019 (if $6000 is the correct amount).
step six is to file your 2021 tax return. On your 2021 tax return, you will report the 2021 recharacterization as a traditional IRA contribution. Your 2021 tax return will not include an additional 6% penalty going back to the 2019 excess contribution because will you have removed it by making a regular withdrawal.
at the end of 2021, you should find that your Roth IRA only contains the earnings from the 2019 excess contribution. That money can stay in the Roth IRA if you wish.
@Opus 17 thanks for the reply.
I just got off the phone with Schwab (after being on hold for two hours) to get another point of view. They mentioned I had a potential option to transfer the entire 18K + appreciating for CY2019-2021 into a traditional IRA, via non-taxable rollover. Not sure if anyone has experience with this.
I definitely know I need to amend my Tax for 2019 and 2020. Does TurboTax give me the option to amend for 2019? Or do I need to go through a different route.
Again, this was another point of view. The Schwab rep did misspeak a lot, so I may need to call another rep to confirm later and maybe talk with a financial consultant at Schwab to ensure what they're saying is true...
There is no early-distribution penalty on a regular distribution of $6,000 because it's a distribution of Roth IRA contribution basis even though it was an excess contribution. In addition to the $6,000 appearing on Part IV of your 2021 Form 5329 the $6,000 will appear on Part III of your 2021 Form 8606 to calculate a taxable amount of $0. Since the taxable amount is $0, there is no early-distribution penalty either.
I don’t understand this statement. I never said there would be a 10% early withdrawal penalty, but shouldn’t there be an ongoing 6% penalty on the excess contributions from 2019 until they are removed?
I believe that if you filed using TurboTax online for 2019, the online program now includes an option to file an amended return. It used to be that you had to download a special amending version of the software to install on your own computer. https://ttlc.intuit.com/community/amending/help/how-do-i-amend-my-turbotax-online-return/00/27577
I don’t believe that doing a straight rollover cures the excess contribution problem. At a minimum, you would have to file an amended return for 2019 that reports the excess contribution and pays a 6% penalty. You would also have to file an amended 2020 return and pay 6% penalty on the cumulative excess contributions. I don’t know what happens to your 2021 excess contributions if you have rolled over the money into a traditional IRA but I imagine there must be some penalty. The purpose of doing the 2020 recharacterization is to get the money into an IRA without paying the 6% penalty.
Whoever at Schwab told you that is misinformed (to say it politely). I would ignore whatever such a misinformed person said. That person was indicating that you can still recharacterize the excess contribution made for 2019, despite the tax code not permitting this.
Opus 17, I was referring back to AT25's mention of a possible 10% early-distribution penalty on a $6,000 distribution, which I failed to address in my earlier response.
Can you elaborate? What do you mean the tax code doesn't permit? Like there is a rule that states I can't recharacterize in 2019?
To provide a bigger context:
-2018: 4,500
-2019: 6,000
-2020: 6,000
-2021: 6,000
Total contributions: 22,500
In 2018, I made a contribution which was allowed under my income limits. Since then, I've been contributing when I shouldn't have based on my increased income. I made stock purchases starting in 2019 which combined my 2018 contribution. Since then, my total roth IRA has appreciated to ~$28K. So I've made ~$5.5K, which I'm sure makes my situation a little more tricky....
So based on your guys' input, it seems like I can only recharacterize 2020 and 2021? Can you advise why that is? I'll have a very pleasant call with Schwab with the person previously telling me incorrect information...:)
All in all, I'm looking for the most cost efficient and quick way to resolve my mistakes. Appreciate all of your responses so far. Please excuse my lack of knowledge on this stuff 😕
@dmertz do you have any recommended sequence of actions I take, different/similar than @Opus 17
Moving a contribution from a Roth IRA to a traditional IRA is a recharacterization of the contribution. Section 408A(d)(6)(A) of the tax code sets the deadline for recharacterizing a contribution as the due date of the tax return, including extensions, for the year that the contribution was made. With respect to a contribution made for 2019, that was October 15, 2020, which as passed. Therefore, the 2019 contribution cannot be moved to a traditional IRA, it's too late to do so by 5 months.
It would obtain the $6,000 regular distribution of the 2019 after doing the recharacterizations of the contributions made for 2020 and 2021. This makes it slightly easier for Schwab to calculate the net income attributable to the 2020 and 2021 contributions.
Yeah, that seems to be the plan. I was on another call with Schwab to go over the re-characterization forms.
2019, 6K will be pulled out and moving to another brokerage account
2020 and 2021, $12K roth contributions will recharacterize as traditional ira
Regarding tax amendments now (which I have no idea how to do):
For 2019, do you or anyone else have experience amending with TurboTax? My assumption is that I think Schwab will give me a tax form for 2019 and I will need to make some adjustments. Just have no idea how to do it.
For 2020, amendments are pretty easy to do right? Since I filed already, I'm going to guess I need to go back and update with whatever Schwab forms they give me.
Appreciate any step-by-step walk through on the amendments. Thanks everyone for the help so far!
Nothing that Schwab gives you has anything to do with your 2019 tax return. Your 2019 tax return just needs to include Form 5329 to report the excess contribution made for 2019. Although you could use TurboTax, amending 2019 might be most easily done simply using 2019 Form 1040-X and 2019 Form 5329 downloaded from the IRS.
For 2020 you'll need to amend by entering the code PJ 2021 Form 1099-R that you anticipate receiving near the end of January 2021.
Regarding amending using TurboTax:
For 2021 you'll already have the code 8J 2021 Form 1099-R by the time you prepare your 2021 tax return.
@dmertz Thanks for the details.
Because the cash in each of the years is tied into stocks, am I putting just the fixed qty of $6K each year on the tax forms? Or do I wait for Schwab to calculate the removal of excess and recharacterization, likely more than $6K due to appreciation of stocks?
Regarding your statement:
For 2020 you'll need to amend by entering the code PJ 2021 Form 1099-R that you anticipate receiving near the end of January 2021.
Can you provide some more info? Will look into these forms and codes later today. Jan'21 has already passed, is this form something Schwab provides? Sorry for my lack of knowledge.
The type of investment is irrelevant. The amount you are distributing for 2019 is $6,000. The amount of your 2020 and 2021 contributions that you are recharacterizing is also each $6,000 regardless of the investment performance. The investment performance attributable to your 2020 and 2021 contributions only determines the adjusted amount that gets transferred to the traditional IRA.
There are no Forms 1099-R related to any of this to be entered on your 2020 tax return. Your 2020 tax return should only include an explanation statement describing the recharacterized 2020 contribution.
@dmertz Understood on the contributions for 2020 and 2021 since they are going into traditional IRA accounts anyway.
What about 2019? Once Schwab helps me calculate what the $6K contribution equates to, do I need to do anything about the appreciation? Or is it because it is a Roth account, that the money will just transfer to a regular brokerage account.
Regarding your statement on the 2020 tax return needing an explanation statement. Where exactly do I do that? Is that in TurboTax? Or is this something I need to send to the IRS?
What about 2019? Once Schwab helps me calculate what the $6K contribution equates to, do I need to do anything about the appreciation?
No! Schwab has no business doing any calculations in regard to the 2019 excess contribution. The corrective distribution for the $6,000 excess contribution for 2019 is a regular distribution of exactly $6,000. In fact, the safest thing to do to avoid Schwab mistakenly doing any calculations in regard to the 2019 excess contribution is to simply request a regular $6,000 distribution with no mention that it is to correct an excess contribution. They don't need to know why you are making a regular distribution.
Of course for the returns of the 2020 and 2021 contributions, Schwab does need to know that these are to be returns of contributions before the dues dates of your 2020 and 2021 tax returns, respectively, and they will need to do the gain/loss calculation separately for each of these.
Your last step, after all the corrective distributions, is to take a regular distribution of $6000 from the Roth IRA. That represents the removal of the excess from 2019. You have to take it as cash, you can't take it in-kind. What you do with it after that is an entirely separate issue (put it in a bank, or regular broker account, or buy rare Air Jordan sneakers, it doesn't matter).
For the amended 2019 return, you need to report the 2019 Roth contribution. If, based on your income and other situations, the contribution is considered excess, then Turbotax will ask you if you plan to remove the excess by April 15, 2020 (because the software is still stuck in 2019). You will say "no", and Turbotax will calculate the 6% penalty on form 5329. You won't get anything from the broker for this.
In fact, it seems you did not report the contribution originally on your 2019 return or this would have been caught already.
For the amended 2020 return, when you report the 2020 contribution, the program should warn you it is excess and will ask if you plan to remove it before April 15, 2021, you will say yes, and when it asks how much you will remove, you will indicate the entire $6000. (This is what will be reported on your 1099-R when you get it.). You don't report the appreciated amount removed, just the principle amount removed. On your 2020 return you should also be asked if you had excess from a prior year that was not corrected, you will report the $6000 from 2019, and Turbotax will calculate another 6% penalty of that amount. (Normally this would carry forward but it won't in your case since you already filed a 2020 return and you can't link the form 5329 from the amended 2019 to the amended 2020, so you will have to enter that information manually.)
Here are the amending instructions
https://ttlc.intuit.com/community/amending/help/how-do-i-amend-my-turbotax-online-return/00/27577
https://ttlc.intuit.com/community/amending/help/how-do-i-amend-my-return/01/27439
Thanks for both your inputs.
For 2019, when I talked to the Schwab consultant yesterday, they said that I would still fill out their forms to remove the excess in 2019. Like I mentioned, the 2019 contribution was $6K, but has appreciated since they've been in stocks. Supposedly, if I go their route, Schwab will be determining what the 2019 $6K amounted to, then will move it to my regular brokerage account.
Does that make sense? Or do I need to question the consultant as well since Schwab might not have it together lol. I don't think I can just take $6K out of my Roth. I don't think its apples to apples like that since I already invested it in stocks. Again, appreciate your inputs. I'll have more time to review this weekend.