Non Deductable Traditional IRA to ROTH IRA Recharacterization by mistake

[keaang]

I contributed $6,000 to a traditional IRA (non-deductable) for tax year 2020.  I wanted to do a backdoor Roth IRA conversion but due to some confusion/bad advice from the retirement account  custodian, they had me fill out a recharacterization form where the traditional IRA (non-deductable) was recharacterized to a Roth IRA.  Fast forward to 2022, doing my tax filing for Tax year 2021, I realize the mistake with doing the recharacterization. So I essentially contributed to a Roth IRA for tax year 2020, even though my MAGI for  2020 was too high do a regular Roth IRA contribution.  I'm trying to see if the custodian will reverse this transaction on the backend as I think they're the one that gave me the bad advice and the wrong form to fill out, but I'm not sure if I will be able to prove it is their mistake or it was solely my mistake.  How do I fix this?  Can I recharacterize it back to the traditional IRA account?  If I can't recharacterize it back, what are the penalties?  Can I just withdraw the $6,000 from the Roth IRA account or what is the best method to resolving this with the least amount of consequences?

Thanks,

keaang

[DanaB27]

It would be too late to recharacterize a 2020 contribution. You will have to pay the 6% penalty on the excess contribution for 2020 and 2021. You can request a regular distribution (without earnings) to remove the excess since it is after the due date of the 2020 tax return.

On your 2020 tax return, you will enter the Roth contribution and TurboTax will calculate the 6% penalty. Please see How do I amend my 2020 return?

On your 2021 tax return:

1. Click on "Search" on the top right and type “IRA contributions”
2. Click on “Jump to IRA contributions"
3. Select “Roth IRA”
4. On the "Do you have any Excess Roth Contributions" answer "Yes"
5. On the "Enter Excess Contributions" screen enter the total excess contribution from 2020 (if it wasn't carried over).

[bktan1]

@DanaB27 - Let say that one puts in an excess of $6k as the starting amount in the Roth account (no previous contribution) and that $6k is already used to invest in stocks.  But, unfortunately, the stocks are losing money and if one sold them, they would result in less than $6k.  How does one handle such a situation?  Thank you!

[DanaB27]

If this was after the due date you would have to withdraw $6,000 and use other funds in the IRA since you ignore gains and losses. If that was your only contribution to the IRA then you will withdraw everything. Then TurboTax will enter the full $6,000 on line 20 Form 5329 as distributed according to the line 20 instructions. TurboTax will ask you for the value in the Roth IRA.

Also please be aware, the 6% penalty is calculated as the smaller of line 16 or the value of your traditional IRAs on December 31, 2021 (including 2021 contributions made in 2022).

If it was before the due date then you would enter the full $6,000 as withdrawn before the due date on the the penalty screen during the IRA contribution interview.

@bktan1