Question about Roth recharacterization to traditional, then backdoor roth on for 2021 filing/ backdoor roth for 2022 filing

[jan4251]

Hi, I am looking for help on the following situation.

While I was doing my taxes in early 2022 for tax year 2021- I realized that my husband and I made too much to be contributing to a Roth IRA directly after we got married. We recharacterized our Roths to traditional IRAs and then performed a backdoor IRA. This year we contributed post-tax dollars to the traditional IRAs and performed the Roth conversion immediately to avoid the recharacterization step. The time line for my IRA looks like this:

1. 2021- contribute $6000 to Roth IRA

2.  February 2022- start doing taxes, realize we made too much now we are married for direct roth IRA contributions

3.February 2022- Contact vanguard, recharacterize $6000 plus $705.75 in gains ($6,705.75 total)

4. February 2022- Convert to Roth IRA ($6,670.64- lost some money during conversion period apparently)

5. February 2022- File taxes via TurboTax with explanation of recharacterization and form 8606 is generated with Line 1= 6000; Line 2= empty, Line 3= 6000; Line 14=6000

During the year I made automatic contributions to a traditional IRA with post-tax dollars and converted to Roth on a monthly basis. A few times I forgot to login right away to convert to Roth, so money sat in the traditional for a few weeks which might have led to very small amounts of dividends. However I got it all done by the end of the year and the traditional IRA balance was $0 at the end of 2022.

This month, I received two the 1099-R's, one for traditional and one for the Roth IRA.  In the traditional 1099 box 1 is listed as $12,672.44. How do I report this in my taxes for this year? 

On the Roth 1099, $6,705.75 is in box 1 and the R code is in box 7. What do I do with this form?

Thanks

[dmertz]

[Ignore the first paragraph of this post.  See follow-up post below which provides a correction.]

It seems that you have mistakenly reported this as a nondeductible traditional IRA contribution for 2022 instead of for 2021, resulting in an incorrect 2022 Form 8606.

The Roth contribution and it's recharacterization were reportable on your 2021 tax return, not on your 2022 tax return, and the explanation included with the 2021 tax return.  This is what the code R means.  The result should have been a traditional IRA contribution on your 2021 tax return, either deductible on Schedule 1 line 20 or nondeductible on Form 8606 line 1.  If nondeductible, the amount on line 14 of your 2021 Form 8606 carries forward to line 2 of your 2022 Form 1099-R to be used in calculating the taxable amount of your 2022 Roth conversion.

The Form 1099-R for the Roth conversion would have code 2 or code 7 depending on your age.

[jan4251]

Hi, 

Thanks for the response- to clarify, I received 2 1099-R forms this year. One for the traditional and one for the Roth. The traditional account has the following box information:

1.    Gross distribution $12,672.44

2a.   Taxable amount $12,672.44

2b.   Taxable amount not determined (X)

          Total distribution (X)

7.     Distribution code(s) 2

          IRA/SEP/SIMPLE (X)

16.   State distribution $12,672.44

The second 1099-R, for the Roth IRA looks like this:

1.    Gross distribution $6,705.75

2a.   Taxable amount $0.00

2b.   Taxable amount not determined ( )

         Total distribution ( )

7.    Distribution code(s) R

        IRA/SEP/SIMPLE ( )

16.   State distribution $6,705.75

My 2021 8606 form has line 14 as 6000, as I reported the roth to traditional IRA recharacterization I performed earlier this calendar year for tax year 2021. Is this not correct?

[dmertz]

So you also made a nondeductible traditional IRA contributions for 2022 and converted those as well.

I believe I mistakenly inferred that the Form 8606 you mentioned in your original question was your 2022 Form 8606.  I now understand that you were describing your 2021 Form 8606, which would be correct.  As long as $6,000 from line 14 from the 2021 Form 8606 carried forward to line 2 of your 2022 Form 8606 and line 1 of your 2022 Form 8606 shows the $6,000 nondeductible contribution you made for 2022, everything should be correct.  As long as you had no other traditional IRAs at the end of 2022, the taxable amount of your Roth conversion should be $672 on line 18 of the 2022 Form 8606.

[DanaB27]

To add to dmertz excellent answers please see the instructions below on how to enter these transactions into TurboTax.

To enter the nondeductible 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 amount you contributed
7. Answer “No” to the recharacterized question on the “Did You Change Your Mind?” screen
8. Answer the next questions until you get to “Any Nondeductible Contributions to Your IRA?” and select “Yes” since you had a nondeductible contribution before this tax year.
9. Enter your basis in the Traditional IRA from your 2021 Form 8606 line 14 ($6,000) if it hasn't carried over.
10. On the “Choose Not to Deduct IRA Contributions” screen choose “Yes, make part of my IRA contribution nondeductible” and enter the amount (if you have a retirement plan at work and are over the income limit it will be nondeductible automatically and you only get a warning and then a screen saying $0 is deductible).

To enter the Roth conversion (Form 1099-R with code 2): 

1. Click on "Search" on the top right and type “1099-R” 
2. Click on “Jump to 1099-R”
3. Click "Continue" and enter the information from your 1099-R
4. Answer questions until you get to “Tell us if you moved the money through a rollover or conversion” and choose “I converted some or all of it to a Roth IRA”
5. On the "Review your 1099-R info" screen click "continue"
6. Answer "yes" to "Any nondeductible Contributions to your IRA?" since you had any nondeductible contributions in prior years.
7. Answer the questions about the basis from line 14 of your 2021 Form 8606 and the value of all traditional, SEP, and SIMPLE IRAs

You can ignore Form 1099-R with code R since you reported the recharacterization correctly on your 2021 return.

@jan4251