How do I enter the $7,000 2020 Roth IRA contribution which I recharacterized to a traditional IRA in 2021 and then withdrew entirely as it was an excess contribution?

[ddickhudt1]

I recharacterized my 2020 contribution of $7,000 plus $1,500 in earnings in 2021 before the filing deadline for my 2020 taxes.  It's confusing as I recharacterized from Roth IRA to traditional IRA, but now I'm withdrawing the entire amount from the traditional IRA as an excess contribution plus earnings.

[DanaB27]

It seems you entered something wrong that you get the excess contribution warning. You should not have an excess contribution from the recharacterization. You will only enter the earnings on the explanation statement, in the other fields please enter only the contribution amount.

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 “Roth IRA”
5. Answer “No” to “Is This a Repayment of a Retirement Distribution
6. Enter the Roth contribution amount %7,000
7. Answer “Yes” to the recharacterized question on the “Did You Change Your Mind?” screen and enter the contribution amount of $7,000 (no earnings or losses)
8. 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.

You will get a 2021 1099-R with code R for the recharacterization which belongs on the 2020 tax return. But you can ignore since you reported the recharacterization.

Did you withdraw anything yet? If you did, then the earnings will be taxable income in your 2020 return and if you are under 59 1/2 you will have to pay the 10% early withdrawal penalty on the earnings.

You will get a 2021 1099-R in 2022 with codes P and 1 (if you are under 59 ½, otherwise it will be P and 7). This 1099-R will have to be included on your 2020 tax return and you have two options: 

• You can wait until you receive the 2021 1099-R in 2022 and amend your 2020 return or
• You can report it now in your 2020 return and ignore the 1099-R when it comes unless there is Box 4 Federal Tax withholding and/or Box 14 State withholding. Then you must enter the 2021 1099-R into the 2021 tax return since the withholding is reported in the year that the tax was withheld. The 2021 code P will not do anything in the 2021 tax return but the withholding will be applied to 2021.

To create a 1099-R in your 2020 return please follow the steps below:

1. Login to your TurboTax Account 
2. Click on the Search box on the top and type “1099-R”
3. Click on “Jump to 1099-R”
4. Answer "Yes" to "Did you get a 1099-R in 2020?"
5. Select "I'll type it in myself"
6. Box 1 enter total distribution (contribution plus earning)
7. Box 2 enter the earnings
8. Box 7 enter P and 1 (if you are under 59 ½, otherwise enter P and 7)
9. Click "Continue"
10. On the "Which year on Form 1099-R" screen say that this is a 2021 1099-R.

[ddickhudt1]

Many thanks for the reply.  I did not get a warning about the excess contribution, but rather I know that our income exceeds the level for which any Roth IRA contribution at all is allowed.  I recharacterized my Roth IRA contribution into my Traditional IRA, where it would have been treated as a nondeductible contribution and then I decided that if it is nondeductible, I would rather just have the cash back in my hands.

I presume I will need to create two 1099-R's -- one for the recharacterization from the Roth to the Traditional IRA and then a second 1099-R for the withdrawal of the recharacterized "excess" nondeductible contribution to the Traditional IRA?  Do I have that right?  And I had the luck to have earnings on both the recharacterization ($1500) and further earnings when I withdrew the excess contribution ($317) from the Traditional IRA.  I should report these two earnings amounts separately, right? The $1500 on the Roth recharacterization and then the $317 on the removal of the excess contribution from the Traditional IRA?  Many thanks again!

[DanielV01]

Correct.  The growth is taxable.  But it's kind of a shame that you caught this when you did and just pulled the money out.  There actually is a way for you to contribute to a Roth when you are above the threshold to make a direct contribution.  It's termed a "back-door" Roth:  you first contribute to a nondeductible Traditional IRA and immediately convert the contribution to a Roth IRA.  While there's extra reporting involved, this does get around the contribution limit.  

[ddickhudt1]

Thank you for the suggestion on the back door Roth contribution.  I found the back door Roth is not attractive for us as 95% or so of the funds in my traditional IRA are from deductible contributions.  So if I use the back door the $7,000 into my Roth IRA I will wind up paying regular income tax again on all but $350 of the contribution/Roth conversion.  So it seems to me the back door is really not attractive given our situation.  I would rather just use the $7,000 to pay the tax on a larger Roth conversion.  Or is there something I am not understanding about how the back door works?

[ddickhudt1]

I followed your good instructions on entering the 2021 1099-R for my recharacterization from Roth to traditional and then my withdrawal of the excess contribution from my traditional IRA, but now I am in the Deductions & Credits part of TT and I am wondering how to answer the interview questions there on my Roth IRA, specifically the interview question on whether I made an excess contribution to my Roth IRA.  Do I answer Yes to this question or no?

On the one hand the answer is now "No" as the excess contribution was first recharacterized and is now withdrawn, but originally it was an excess contribution.  If I answer No it gives me the warning/error message to say our income is too high to make a Roth contribution.  So how should we answer these questions?

[DanaB27]

You are correct that a backdoor Roth contribution only works well if you do not have any deductible traditional IRA accounts since with each distribution/conversion an amount would be allocated to the basis (nondeductible) and the rest would be taxable because the contribution was deductible.

For the backdoor Roth to work well you need to make all contribution nondeductible and complete the conversion soon after the contribution to avoid having taxable gains.

Please, be aware that you can ignore the 1099-R with code R which belongs on your 2020 return since it will not do anything to your return. The only way to report the recharacterization is by following these steps:

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 %7,000
6. Answer “Yes” to the recharacterized question on the “Did You Change Your Mind?” screen and enter the contribution amount of $7,000 (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.

Therefore, you only need to create one 1099-R on your 2020 tax return for the return of the contribution plus earnings.