Can I recharacterize excess contribution of ROTH IRA and gain to traditional IRA?

[gf123]

I intended to do a backdoor Roth IRA contribution in 2019, but made a mistake. Our AGI is over $200K. Here are the timelines:

3/1/2019 Contribute after-tax $6,000 to a Roth IRA account directly.

7/23/2020 Found the mistake. Moved $6,200 (original contribution and gain) to a traditional IRA through recharacterization.

01/2021 Received a 1099-R of $6,200, with R in box7 . 

My questions:

1) When the $6,200 was recharacterized to a traditional IRA, was the gain ($200) considered as excess contribution? 

2) If the answer to Q1 is yes, what shall I do now? 

3) If the answer to Q1 is no, can I move the money back to a ROTH IRA? The total amount is $6,500 now. What tax shall I pay? 

[DanaB27 · Accepted solution]

1) No, the gain is not excess contribution.

3) Yes, you can convert the money. If the traditional IRA contribution was nondeductible and filed Form 8606 on your 2019 tax return, then only the earnings would be taxable (assuming you didn't have any other traditional IRA with deductible contributions).

You can ignore the 1099-R with code R if you entered the recharacterization on your 2019 return like this:

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" (if 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 and you only get a screen saying $0 is deductible)

If you didn't report it like this, then you will have to amend your 2019 tax return. Please see How do I amend my 2019 return?

[gf123]

Thank you for the answer. It clears my confusion about how to deal with the gain. I will file a 2019 amendment, and convert the $6K+gain to ROTH IRA later this month (05/2021). A follow-up question: When I convert it to ROTH on 05/2021, do I pay the tax on my 2021 tax return? In other words, I don't need to worry about the tax for the recharacterization in 2020, do I?

Thanks for the help!

[DanaB27]

Yes, if the conversion happened in 2021 you will report it on your 2021 tax return (you will receive a 1099-R).