Excess Contribution Penalty from Recharacterization and Backdoor Roth

[dannytran01]

Hello,

I am trying to figure out why I am having an excess contribution of $7,216 and am wondering if I have entered my information correctly OR if what I did was not considered eligible for Backdoor Roth IRA.

To provide context, this chart below shows my deposit, re-characterization, and conversion history between the Roth IRA and Traditional IRA accounts performed in the year 2021 after I discovered that I no longer qualified for the Roth IRA 2020 tax year limit contributions.

I have received two 1099-R where one is for the re-characterization of "$4,216.04" and the other for "$13,218.90".

In Wage & Income, for the 1099-R input of "$13,218.90", I wrote the "Amount converted to a Roth IRA account" as "13,218.90".

Under Deductions & Credits, for traditional IRA, I entered 9,000, NO recharacterized, NO Excess IRA, 0 basis, and 0 "Value of your traditional IRAs on December 31, 2021".

For Roth IRA contribution, I wrote "3,000" with the amount switched from a Roth to a traditional IRA as "4,216" with the statement below:

I marked "No excess roth IRA contribution".

To me, I see it as I have performed the Backdoor Roth IRA for 2021 to its year limit.

I have also fixed my 2020 issue in the 2021 tax year by re-characterizing and contributing to the limit for the Backdoor Roth IRA (2020 tax year limit). 

Any pointers? 

Thanks!

[FangxiaL]

It looks like you have taxable earnings of $1,218.90 in the conversion.

You have a $6,000 basis in your 2020 Traditional IRA contribution and $6,000 in your 2021 Traditional IRA contribution. 

Follow the two-step process to properly enter your backdoor Roth conversion:

Step 1: Enter the Non-deductible contribution to a Traditional IRA:

1. Open your return if it's not already open
2. Inside TurboTax, search for ira contributions and select the Jump to link in the search results
3. Select Traditional IRA on the Traditional IRA and Roth IRA screen and Continue
4. Answer No to Is this a Repayment of a Retirement Distribution?
5. On the Tell Us How Much You Contributed screen, enter the amount contributed and continue
   • Enter $6,000 for Your total 2021 traditional IRA contributions
6. Answer No on the Did You Change Your Mind? screen
7. Answer No on Any Excess IRA Contributions Before 2021?
8. Answer Yes, I made and tracked nondeductible contributions to my IRA, or No, I did not make and track nondeductible contributions to my IRA. If you don't have any other Traditional IRA accounts, you can answer Yes
9. Enter $6,000 for Total Basis as of December 31, 2020 on next screen
10. Answer the questions on the following screens, until you reach Choose Not to Deduct IRA Contributions. Select Yes, make part of my IRA contribution nondeductible and enter $6,000 in the box. 

Step 2: Enter the Conversion from a Traditional IRA to a Roth IRA

 Inside TurboTax, search for 1099-r and select the Jump to link in the search results

1. Answer Yes to Did you get a 1099-R in 2021?, then Continue
   • If you land on Your 1099-R Entries screen, select Add Another 1099-R
2. Select how you want to enter your 1099-R (import or type it in yourself) and follow the instructions
3. Answer None of these apply when you reach the screen Do any of these situations apply to you?
4. Select I converted some or all of it to a Roth IRA on the Tell us if you moved the money through a rollover or conversion screen
5. Next, choose Yes, all of this money was converted to a Roth IRA
6. Continue answering questions until you come to the Your 1099-R Entries screen

To check the results of your backdoor Roth IRA conversion, see your Form 1040:

1. On the left side of your screen, select Tax Tools, then Tools
2. Under Tool Center, select View Tax Summary
3. On the left side of your screen, select Preview my 1040
   • Your backdoor Roth IRA amount should be listed on Form 1040, Line 4a  as IRA distributions
   • Taxable amount should be $1,218.90
   • Schedule 1, Line 20 IRA deduction, should be blank
4. Select Back on the left side of your screen to return to where you left off in TurboTax

[dannytran01]

Hi @FangxiaL!

Thank you for the response! A follow up question from step 1. Even though I did the recharacterization for the 2020 tax year in Feb 09, 2021, it would be correct to NOT write on this 2021 tax year that I had any roth and recharacterization. Is that right?

Instead, I'll go and file an amended 2020 tax form regarding this re-characterization, right?

Lastly, for my 2021 tax year, in Form 8606 line 14, is my "total basis in traditional IRAs for 2021 and earlier years" supposed to be 0? (Because I have converted my nontaxable distribution to the Roth IRA account, right?)

Thanks!

[MarilynG1]

You can enter the Roth Conversion in your 2021 return, you don't need to Amend your 2020 return.  You would have a Basis on Form 8606 for Traditional IRA of 6K as of 12/31/20 and a basis as of 12/31/21 of $0, with a Roth Basis of 6K.  

The screenshots you posted are both correct at $0.

Follow the steps as outlined in How to Enter a Back-Door Roth Conversion, or as outlined by @FangxiaL above.  You enter your 1099-R first, then indicate the conversion in the follow-up questions. 

Click this link for more info on Roth Conversions.