Backdoor IRS mistake report (Roth to Traditional to Roth)

[morhie]

Hello-

I made some mistakes when I tried to do backdoor IRA, and am desperately looking for some advices to report the situation correctly. Here is what happened:

1. In March 2022, I opened a Roth IRA account for the first time and put $3,000 for last year, 2021.

 
2. However, soon I found my husband and my combined gross income (MAGI) was over the Roth IRA qualification limit. So, I transferred (recharacterization) of the $3,000 from the Roth IRA account to a new Traditional IRA account for backdoor IRA (we filed the tax last year already, so believe this is after tax-income).

3. Then, to complete the backdoor IRA, I re-transferred (conversion) the money back to the Roth IRA account for 2021. I didn't put the money into any investment plan, so there was no gain.

I am preparing my tax filing for 2021 and trying to report this situation. However, I am not sure if I can use Turbotax to report this and how to do so to avoid any penalties or issues in the future. Can you please help how I should report this?

Thank you very much in advance.

[Opus 17]

What do you mean "transfer"?

Did you "recharacterize" the Roth contribution to traditional IRA?  Did you specifically use the term with the cudstodian?  Or did you do it in some other way?

When you tried to move the money from the traditional IRA back to a Roth, did you ask them to do a "conversion" or a rollover?  Or did you tell them something else?

The exact terminology is important here. 

[morhie]

Thank you for your help! 

I recharacterized the contribution from the Roth to the Traditional. Then, I did a conversion from the Traditional to the Roth. 

[DanaB27 · Accepted solution]

You will enter the recharacterization when you enter the contribution to the Roth IRA 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. Answer “No” to “Is This a Repayment of a Retirement Distribution
5. Enter the Roth contribution amount 
6. Answer “Yes” to the recharacterized question on the “Did You Change Your Mind?” screen and enter the contribution amount (no earnings or losses)
7. 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.
8. On the screen "Choose Not to Deduct IRA Contributions" answer "Yes" (since 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 automatically and you only get a warning and then a screen saying $0 is deductible)

You will get Form 1099-R  for the recharacterization with code R-Recharacterized IRA contribution made for 2021 and this belongs on the 2021 return. But a Form 1099-R with code R will do nothing to your return. You can only report it as mentioned above. Therefore, you can ignore the Form 1099-R with code R when you get it in 2023. The box 1 on the 1099-R will report the total recharacterized amount (contribution plus earnings) but it does not separately report the earnings and box 2a must be zero.

The conversion happened in 2022 and you will have to enter it on your 2022 tax return when you get Form 1099-R. You will have to enter the basis from your 2021 Form 8606 line 14.

Next year on your 2022 tax return:

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?" if you had any nondeductible contributions in prior years.
7. Answer the questions about the basis from line 14 of your 2020 Form 8606 and the value of all traditional, SEP, and SIMPLE IRAs

[morhie]

Thank you very much for your help, DanaB27. I really appreciate it!

There were few extra steps that I had to click through that made me confused if I was following your instruction correctly. I hope I did everything right. I'm sharing the entire steps I went through for people who might be going through the same problem as me:

1. Under Retirement and Investments, Traditional and Roth IRA Contributions > Click “Start/Update”
2. Traditional IRA and Roth IRA > Select “Roth IRA” and "Continue"
3. Roth IRA Contributions, Did you make a Roth IRA contribution for 2021 > “Yes”
4. Is This a Repayment of Retirement Distribution > “No”
5. Enter Your Roth IRA Contributions > “3000” and "Continue"
6. Tell us How Much You Transferred, Amount Switched from a Roth To a Traditional IRA > “3000” and "Continue" (I had no earning or loss)
7. Roth IRA Explanation Statement > Date of the Original Contribution: 01/10/2022, Date of the Recharacterization: 02/10/2022, The Amount Recharacterized: $3000 (no earning or loss), Reason for the Recharacterization: Removing excess Roth IRA contribution for 2021, which I accidentally made. Recharacterizing $3,000 from Roth IRA to Traditional IRA. and "Continue"
8. Did You Open a Roth IRA Before 2021? > “No”
9. Income Too high to deduct an IRA contribution > “Continue”
10. Your IRA Deduction Summary - $0 > “Continue”

[DanaB27]

Yes, you entered everything correctly.

@morhie

[morhie]

Thank you very much. I really appreciate it.