I realized that I've contributed to a roth IRA for the last 2 years, when I am technically not allowed to, due to the income limits. How do I fix my 2019 returns?

[AT25]

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?

[DanaB27]

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to pay the 6% penalty on the 2019 excess contribution on the 2020 tax return since this excess contribution was not withdrawn by December 31, 2020.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):

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 "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 say $0 is deductible)

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?

[AT25]

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.

[Opus 17]

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. 

[dmertz]

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.

[AT25]

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?

[Opus 17]

---

@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.  

[AT25]

@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?

[Opus 17]

@AT25 

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.

[AT25]

@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...

[dmertz]

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.

[Opus 17]

@dmertz 

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?

[Opus 17]

@AT25 

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.

[dmertz]

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.

[dmertz]

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.