IRA recharacterization

Forum|Forum|5 years ago
April 24, 2021
1 reply
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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?

Best answer by DanaB27

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.

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.

DanaB27

Level 15

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

Login to your TurboTax Account
Click on "Search" on the top right and type “IRA contributions”
Click on “Jump to IRA contributions"
Select “Traditional IRA”
Answer “No” to “Is This a Repayment of a Retirement Distribution
Enter the contribution amount
Answer “Yes” to the recharacterized question on the “Did You Change Your Mind?” screen and enter the contribution amount (no earnings or losses)
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:

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

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TAXSRPAuthor

Level 2

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.