How do I know if I have to addend last year's return if I did a roth IRA recharacterization and traditional IRA conversion?

[BUND]

In 2022, I realized I made over the MAGI in 2021 so I had to recharacterize my roth IRA to traditional IRA and then did a backdoor conversion a few days later. That was done in March of 2022 for TY 2021. I recorded that in my TurboTax that I recharacterized $3460 before the Tax deadline in April last year and also filed the 8606 last year as well.

This year, when I put in the numbers in TurboTax and the 1099, it is saying that I may have to addend my return. How do I find out whether I have to addend it or not?

Any help would be greatly appreciated!

[DanaB27 · Accepted solution]

No, if you reported the recharacterization on your 2021 tax return with the steps below then you do not need to amend your 2021 tax return. You will get 2022 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 below. Therefore, you can ignore Form 1099-R with code R.

To report the recharacterization (Roth IRA as traditional IRA) on your 2021 tax return:

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 ‘Yes” on the “Roth IRA Contribution” screen
6. Answer “No” to “Is This a Repayment of a Retirement Distribution
7. Enter the Roth contribution amount 
8. Answer “Yes” to the recharacterized question on the “Switch from a Roth To a Traditional IRA?” screen and enter the contribution amount (no earnings or losses) on the next screen.
9. 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.
10. 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 automatically and you only get a warning and then a screen saying $0 is deductible)

On your 2022 tax return to enter the conversion to Roth IRA:

1. Click "Federal Taxes" on the top and select "Wages & Income"
2. Click "I'll choose what to work on"
3. Scroll down and click "Start" next to "IRA, 401(k), Pension Plan (1099-R)" 
4. Answer "Yes" to the question "Did You Have Any of These Types of Income?"
5. Click "I'll Type it Myself"
6. Choose "Form 1099-R, Withdrawal of Money from 401(k) Retirement Plans, Pensions, IRAs, etc."
7. Click "Continue" and enter the information from your 1099-R
8. Answer questions until you get to “What Did You Do With The Money” and choose “I moved it to another retirement account”
9. Then choose “I did a combination of rolling over, converting, or cashing out money.” and enter the amount next to "Amount converted to a Roth IRA account"
10. On the "Your 1099-R Entries" screen click "continue"
11. Answer "yes" to "Any nondeductible Contribution to your IRA?" if you had any nondeductible contributions in prior years.
12. Answer the questions about the basis from line 14 of your 2021 Form 8606 and the value of all traditional, SEP, and SIMPLE IRAs

[BUND]

Thank you for your explanation @DanaB27 

Just wanted to confirm, you are including the instruction for the 2021 TY part for my reference. I already did that last year. which means I shouldn't need to do that again correct?

I was following your instruction to put in the 1099 for 2022 TY and after the disaster question, TurboTax asks this:

Any non-deductible contributions to your IRA?

Let us know if you made and kept track of any nondeductible contributions to your traditional IRA from 2021 or prior years (this is not common).

Should I answer Yes or No to this question? I recharacterized $3860 from roth to traditional in 2022 for the 2021 TY but I am not sure if this counts as non-deductible contribution from 2021.

Thank you very much again for your help.

[DanaB27 · Accepted solution]

Yes, the instruction for the 2021 TY was only for your reference. If you did that last year, then you don’t need to redo them.

Check your 2021 tax return for 2021 Form 8606 if you have a basis on line 14. If yes, then you made the contributions nondeductible. You can also check your Schedule 1 line 20 if you had an IRA deduction. If yes, then you made a deductible contribution and won’t have a basis.

@BUND 

[BUND]

Thanks again.

Apologize for my ignorance. Would you be able to explain to me what total basis means? Is that mean money left in the account? I was checking the IRA information worksheet and realized under traditional IRA there is a section called "Basis carryover as of 12/31/22". Would you be able to explain to me on how that was being calculated? I cleared out my Traditional IRA account to 0 balance by the end of 2022. But somehow TurboTax puts an amount of $1050 in that field. So I am quite confused about that and couldn't figure out how to make that field to 0. Or is it not supposed to be a 0?

Thanks a lot for your help!

@DanaB27

[DanaB27]

The total basis on line 14 of Form 8606 is the amount of nondeductible traditional IRA contributions for 2022 and earlier years that isn't used up.

Generally, if you convert the full amount and your balance is $0 then your basis will be $0 too since you used it all. But if you had a loss before the conversion and convert less than your original nondeductible contribution then you will have a basis left on Form 8606 line 14 to use in future years.

For example, you made a $6,000 nondeductible traditional IRA contribution but before you converted it you had a $500 loss and therefore you converted only $5,500 (all that is left in the traditional IRA account). Then you will have a $500 basis left on line 14 of Form 8606 (basis carryover).

If you didn't have a loss then you will have to review your entries. If you made the recharacterized amount nondeductible on your 2021 tax return then you should have the contribution amount as the basis on line 14 of the 2021 Form 8606 (assuming the full contribution amount was recharacterized). If your traditional IRA was empty on December 31, 2022, the value will be $0.  Don't enter anything for outstanding recharacterizations or outstanding rollover.

@BUND 

[BUND]

I see. If I understand you correctly, it doesn't really matter how much loss I had when I recharacterized the $6000 from roth to traditional IRA. Since the market loss quite a bit of value last year. The actual basis calculates the amount when I converted from traditional to roth ira as it became a realized loss. Hence I had balance left by the end of December 2022. Which it will carry over to my next tax year to deduct?

@DanaB27 

[fanfare]

basis stays in your IRA until you use it on some taxable event.

in some cases, it's possible to end up with some basis even if you draw the account down to zero.

PS
you can't do a backdoor Roth contribution, other than by rote, without understanding basis, 

@BUND 

[BUND]

Here's what I understand so far. Would you be nice enough to check and see if I am correct?

Basis is the amount I contributed to a particular IRA account.

Since I recharacterized $3000 (I am just going to round it up for easier math) in March 2022 from roth to traditional IRA for TY 2021, I have a basis of $3000 for my traditional IRA for TY 2021.

I also recharacterized $6000 from roth to traditional IRA for TY 2022, hence it brought my traditional IRA basis up to $9000 after the 2nd recharacterization (although it is the only recharacterization for TY 2022).

However, I had a loss from the date of original contribution to the date of recharacterization. Hence the actual amount that was recharacterized was $4000.

I then converted the $7000 from traditional IRA to Roth IRA as a backdoor IRA in August.

The conversion was a taxable event and therefore $7000 was minus from $9000.

Therefore my traditional IRA total basis by 12/31/22 is $2000. Although my traditional IRA account balance is 0 at that point.

The $2000 will be brought over to TY 2023 when I do another contribution and conversion again. and the math will work the same way as I mentioned above.

@DanaB27 

[DanaB27]

Yes, the basis is the amount you contributed to the Roth IRA. If you recharacterized the $3,000 Roth contribution amount but only $2,500 gets transferred because of a loss you still made a $3,000 contribution and therefore have a $3,000 basis.

Yes in your example, your basis would be $9,000 (the recharacterized contribution amount, not the actual amount transferred to the traditional IRA from Roth IRA).

Yes, if you had a $9,000 basis and converted the full balance of the traditional IRA ($7,000 because of losses) then you will have a $2,000 basis to use up in future years (will be carried over to 2023).

@BUND