IRA recharacterization

[TAXSRP]

I originally contributed to Traditional IRA then found I could still contribute to Roth. Had funds recharacterized with the profit and now being told I have an excess contribution. Do I resolve it by taking a withdrawal from the Roth?

[DanaB27]

Please make sure you only enter the contribution amount as switched over do not include the earnings.

You will enter the recharacterization when you enter the contribution to the traditional IRA

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 “Traditional IRA”
5. Answer “No” to “Is This a Repayment of a Retirement Distribution
6. Enter the 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.

Yes, you can avoid the 6% excess contribution penalty by requesting with your bank the withdrawal of excess contribution and earnings by the due date of your 2020 tax return.

You will get a 1099-R 2021 in 2022 with codes P and J for the withdrawal of excess contribution and earnings . This 1099-R will have to be included on your 2020 tax return and you have two options: 

• You can wait until you receive the 1099-R  2021 in 2022 and amend your 2020 return or
• You can report it now in your 2020 return and ignore the 1099-R when it comes unless there is Box 4 Federal Tax withholding and/or Box 14 State withholding. Then you must enter the 2021 1099-R into the 2021 tax return since the withholding is reported in the year that the tax was withheld. The 2021 code P will not do anything in 2021 tax return but the withholding will be applied to 2021.

To create a 1099-R in your 2020 return please follow the steps below:

1. Login to your TurboTax Account 
2. Click on the "Search" on the top right and type “1099-R”
3. Click on “Jump to 1099-R”
4. Answer "Yes" to "Did you get a 1099-R in 2020?"
5. Select "I'll type it in myself"
6. Box 1 enter total distribution (contribution plus earning)
7. Box 2a enter the earnings
8. Box 7 enter P and J 
9. Click "Continue"
10. On the "Which year on Form 1099-R" screen say that this is a 2021 1099-R.

[TAXSRP]

Thank you for you help.  

I'm going to have to make sure the IRA Trustee marked the document correctly.

I found example #5 answered the question but not address having to take a withdrawal. The second part of your answer indicates that I will have to take a withdrawal.

Example 5.
The facts are the same as example 4, except that the $3,000 has earned 10%, or $300. To recharacterize, Carolyn transfers $3,300 from "IRA Trustee" to "Roth Trustee" in 2021. The amount recharacterized is $3,000, the amount of the original contribution, not the $3,300 amount that was transferred.

Carolyn receives a 2021 Form 1099-R from "IRA Trustee" showing $3,300 in box 1, no amount in box 2a, code "R" in box 7, and the IRA/SEP/SIMPLE box may or may not be checked.

Carolyn enters the transaction as follows:

Even though the Form 1099-R she received is the 2021 version, the recharacterization applies to a 2020 contribution. Therefore, she must enter the Form 1099-R on her 2020 tax return. She enters the Form 1099-R, lines 1 through 15 as they appear on the printed form she received. She must then indicate that the 1099-R is a 2021 form.

Since this 2021 Form 1099-R is reported on her 2020 tax return, Carolyn will not report it on her 2021 tax return.

Carolyn enters the traditional IRA contribution of $3,000 as a "Regular contribution" on the "Traditional IRA Contributions" screen. She then enters $3,000, not $3,300 as the "Recharacterized contribution." Carolyn also completes the explanation statement. The statement should say that $3,300 was transferred from the traditional IRA to the Roth IRA, and $3,000 was the original contribution and that $300 was earnings. She makes no entry on the "Roth IRA Contributions" screen or the "Recharacterize to a Traditional IRA" screen.

[TAXSRP]

To specify a little more: I made a traditional IRA contribution into a money market account on 4/12/21. One week later I wanted to recharacterize the 7000 contribution. I was told by my trustee that the recharacterization would be the 7000 plus the profit made on the entire IRA, not the 7000, resulting in the excess.

[DanaB27 · Accepted solution]

No, when TurboTax asks about the amount recharacterized you only enter the contribution amount, in your case the $7,000. The earnings are only entered on the explanation statement. The trustee might have been confused because you move the contribution and earnings to the Roth IRA.

It seems that you fixed the issue and therefore no longer have an excess contribution. Therefore, you can ignore the withdrawal instructions. 

[SS62]

Hi ! 

I am running into a similar problem. My wife contributed $7000 to traditional IRA for 2021 and within a week recharacterized (i.e., transferred) it to her Roth IRA. Yet TurboTax 2021 flags this as excessive contribution into Roth IRA due to income limits. As I understand it, income limits do not apply to Roth IRA recharacterization.  Could you please clarify? Thanks!

[RobertB4444]

There are contribution limits for a Roth IRA.  For 2021 the limit is $208,000 if you are married filing jointly.

The recharacterization is not income limited so that means you have probably entered it wrong and the program is thinking she contributed to a Roth.  Check these steps against what you've done and se if there is someplace you need to correct.

Here are the steps

[SS62]

All the checks given in the link pass.

Yet TurboTax gives the message that $7000 is excess contribution.

Let me give you some more details. The 1099-R has $14000 in Box 1 because she contributed to the traditional IRA for both 2020 and 2021 in the year 2021. And then recharacterized both of them immediately to Roth. Could this be the reason for the TurboTax error? How do I get around this?

[RaifH]

You cannot recharacterize a 2020 contribution on your 2021 tax return, even if it was made in the year 2021. That would have had to be done by the due date of a 2020 extension, October 15, 2021. 

You can convert your existing Traditional IRA into a Roth for 2020. It has essentially the same effect, but it is not entered into the IRA contribution screen. 

Enter your characterization of $7,000 as you did before. For the $7,000 from the 2020 contribution, this will be marked on your 1099-R as a conversion when you enter the distribution from the Traditional IRA:

1. Search for 1099-R and select the Jump to link in the search results.
2. Continue through the screens to import or enter your 1099-R form.
3. Confirm if the IRA/SEP/SIMPLE box is checked.
4. When asked Did you move this money from a 401(k) to a Roth 401(k) select Yes, I moved the money to a Roth and Continue.
5. Enter that $7,000 was converted to a Roth. The other $7,000 was already re-characterized on the other screen.

When it all shakes out, you should not be paying any over-contribution penalties or any early withdrawal penalties. You will have to pay tax on the income since you are converting it to a Roth which is funded with after-tax dollars. 

[SS62]

Just tried your steps. TurboTax still complains about excess contribution. I think it would help if someone could look at my return in real-time - should be quite easy to figure out.

[SS62]

Basically line 23 "Disallowed Roth IRA conversions" under Roth IRA Contributions in the IRA Contributions Worksheet has $7000. I suspect this is causing issues. I have no idea why TurboTax made that change.

Hope this helps!

[SS62]

Please ignore above message.

The excess contributions comes from line 23 of Form 5329. 

[kP35]

Hello my question is on the same topic.

I contributed $6000 in Roth IRA in 2021. I got the message that my contribution was in excess for the year based on the annual income. In order to avoid penalty, I recharacterized twice from my Roth IRA to Traditional IRA. I recharacterized $1200 in Jan 2022 and $800 in Feb 2022.

My question is where on TurboTax Deluxe do I enter the two recharacterization amounts and dates? I see only one input box where I can put the recharacterization amount. Should i add the recharacterization amounts and enter that?

[RobertB4444]

Yes, add them together and enter that amount.

[SS62]

After struggling with TurboTax Support for more than an hour and going nowhere, I found the mistake I was making.  I was confusing recharacterization and conversion.  In my case, the recharacterized amount is 0 and the converted amount is $14000. That solved the problem. Posting this in case someone else mixes up recharacterization and conversion.