backdoor roth with rechar and conversion - multiple years

[koswami]

@dmertz 

Hello, I need some help with entering this in turbo tax premier on mac. It's multiple year backdoor ira scenario, the first year we had to recharacterize since we just found out about the rules.

Here is the activity timeline:

• May 2019: $3000 to roth ira for tax year 2019
• Jan 2020: $3000 to roth ira for tax year 2019
• Feb 2020: recharacterized all $6000 from tax yr 2019. (found out about income rules)
• March 2020: converted all $6000 back to roth for tax year 2019.
• Nov 2020: add $6000 to trad, then converted to roth for tax yr 2020

Here are the forms I got:

• 1099R Trad IRA: $12,xxx.  - code 2
• 1099R Roth IRA: $6,xxx. - code R

I only ever contributed $12k between the IRAs, but turbo tax thinks its $18k based on the 1099R's.  2019's return I did indicate on 8606 $6000 non deductable amount.

[dmertz]

Here is how I interpret your timeline:

• May 2019: Roth IRA contribution of $3000 for tax year 2019
• Jan 2020: Roth IRA contribution of $3000 for tax year 2019
• Feb 2020: recharacterized all $6000 from tax yr 2019. (found out about income rules)
• March 2020: converted all $6000 back to roth in tax year 2020.
• Nov 2020: traditional IRA contribution of $6000 for 2020, then converted to roth in tax year 2020

Your Forms 1099-R reflect this.  You converted $12,000 in 2020 (code 2 Form 1099-R) and in 2020 you recharacterized $6,000 of Roth IRA contributions to be traditional IRA contributions instead.

Ignore TurboTax's summary of "income" and look at your 2020 Form 8606 and Form 1040 line 4b.

You indicated that your 2019 tax return reported the resulting $6,000 nondeductible traditional IRA contribution for 2019 on Form 8606, so line 14 of the form should show $6,000.  That transfers to line 2 of your 2020 Form 8606.  Your 2020 Form 8606 should have:

• Line 1 = $6,000
• Line 2 = $6,000 (from line 14 of 2019 Form 8606)
• Line 3 = $12,000
• Line 6 = $0 (I assume that you had no money in traditional IRAs on December 31, 2020)
• Line 8 = $12,xxx
• Line 13 = $12,000
• Line 14 = $0 (or blank)
• Line 16 = $12,xxx
• Line 17 = $12,000
• Line 18 = $xxx

Lines  6 and 8 will be blank and asterisks will be next to lines 13 and 15 if TurboTax chooses to use Worksheet 1-1 from IRS Pub 590-B, but the taxable result should be the same.

Form 1040 line 4b should show $xxx.

[koswami]

Thanks @dmertz .  Would I have to pay federal tax on the amount of capital gain from the time it was in traditional account to before moving to roth?.  In my example total contributed was $12k.  when converted to roth, it was $12,579. So I need to pay tax on $579?

[dmertz]

Correct.

[koswami]

@dmertz 

Thank you.  It worked out.

I have one more scenario on my spouse's account side.  Same backdoor but a little more complicated since it includes 2018 tax year as well.

Here is the timeline of events:

• April 2019, before tax deadline:  contributed $5500 to Roth IRA for tax year 2018
• April 2019, after tax deadline:  contributed $6000 to Roth IRA for tax year 2019
• Jan 2020: contributed $6000 to Roth IRA for tax year 2020
• Feb 2020: just found out about income limits and recharacterized $5633 and $6078, the two amounts from 2019 tax year and 2020 tax year (net of capital gain/loss).  Couldn't do anything about 2018 contribution (took the $5500 back to my bank, amended the previous return,  paid tax on gain/loss ) 
• March 2020: Converted $10709 (the amount above minus loss) back to roth.

The forms I received:

• 1099-R from Traditional: $10709, code 2
• 1099- R from Roth: $5500, code J 
• 1099- R from Roth: $5633, code N
• 1099- R from Roth: $6078, code R

What I filed last year:

• 8606 - with $6000 non deductible amounts.
• 5329 - line 18: $4890, line 25: $293

Amended return from 2018:

• 1040X line 10: $293 

How should I enter all this on my 2020 return? Thank you.

[dmertz · Accepted solution]

The excess $5,500 contribution for 2018 is subject to 6% excess accumulation penalties on your 2018 and 2019 tax returns, so if those tax returns did not each include Form 5329 Part IV with the $330 penalty for each year, you must file those and pay the penalties.

Do not enter the code R Form 1099-R anywhere.  Just make sure that your 2019 tax return shows the resulting $6,000 traditional IRA contribution either as deductible on Schedule 1 line 19 or on Form 8606 line 1.  Amend 2019 if necessary to correct this.

Enter the code 2 Form 1099-R and indicate that this amount was converted to Roth.

Enter the code J Form 1099-R and indicate that  you cashed it out.

The code N Form 1099-R reports a rrecharacterization in 2020 of the $6,000contribution made in January for 2020.  Apparently the Roth IRA investments had dropped in value, so recharacterizing $6,000 resulted in a transfer to the traditional IRA of $5,633  In addition to entering the code N Form 1099-R into 2020 TurboTax (which will actually be ignored by TurboTax)  you must enter the original $6,000 Roth IRA contribution under Deductions & Credits and indicate that you changed the $6,000 to be a traditional IRA contribution instead.  TurboTax will then prompt you to enter an explanation statement regarding the details of this recharacterization.

Make sure that after entering all Forms 1099-R (except the code R Form 1099-R) into 2020 TurboTax that you click the Continue button on the Your 1099-R Entries page TurboTax shows your Total Basis [in nondeductible contributions] as of December 2019 as $6,000 and your Roth IRA Contributions prior to 2020 as $5,500.  Also make sure that you enter as your excess contributions the $5,500 excess carried into 2020 from 2018.

TurboTax will prepare 2020 Form 5329 Part IV to show that your code J distribution has eliminated the excess contribution that had been made for 2018.  TurboTax will also prepare Form 8606 Parts I and II showing that the code 2 Roth conversion is nontaxable and Part III to show that the code J distribution is nontaxable.  Form 1040 line 4a will show $21,842 of reportable transactions and line 4b will have $0 showing that none of this is taxable.

With $12,000 of basis in nondeductible traditional IRA contributions from the 2019 and 2020 contributions, the $10,709 Roth conversion will be nontaxable (assuming that the December 31, 2020 balance in traditional IRAs was zero), calculated on Form 8606 Parts I and II.

[koswami]

@dmertz you're the best. you solved what turbo tax live CFPs couldn't understand.  Thanks again.

[koswami]

@dmertz 

I e-filed today, but got this message:

Your federal tax return was rejected.

FED_Taxable_Inherited_IRA - There is a potential issue with the calculation of your Taxable Inherited IRA..

I didn't have any inherited IRAs. What should I do before refiling?

[dmertz]

It appears that any tax return that includes Form 8606 Part I is being intercepted because those who do have Form 8606 Part I and a distribution from an inherited IRA will have a calculation error on the form.  It seems that all tax returns that include Form 8606 Part 1 are being intercepted because the information in the e-filing is insufficient to know if the tax return includes a distribution from an inherited IRA or not, even though that information is in the TurboTax tax file.

[koswami]

@dmertz 

will I need to paper file?  When I tried to fix in turbo tax, I couldn't find anything to fix.

[dmertz]

If you want to file before e-filing of Form 8606 is again allowed, you'll need to paper file.  The notice apparently indicates that a resolution will be available in the next update on March 5.

[rohitg]

Hi @koswami 

I'm in the exact same situation as you are and am quite confused on how to enter into the system that 6K was 2019 contributions and other 6K was 2020 (the turbo tax dialogs only seem to ask for 2020 contributions).

Any chance you could share the steps you did in your case?

Thank you

[dmertz]

The $6,000 traditional IRA contribution for 2019 was required to have been reported on your 2019 tax return.  If nondeductible, 2019 TurboTax would prepare the required 2019 Form 8606.  Basis from the 2019 contribution carries forward from line 14 of the 2019 Form 8606 to line 2 of the 2020 Form 8606 to be used in calculating the taxable amount of any traditional IRA distributions or Roth conversions made in 2020.

[rohitg]

Thanks @dmertz. Actually I ended up posting a new question with more details  https://ttlc.intuit.com/community/retirement/discussion/backdoor-roth-ira-conversion-multiple-years/... before I saw your response here. If you don't mind let me respond to you on the new thread to avoid extending this closed thread.