How to input TurboTax Back Door Roth IRAs that were recharacterized

[mj543210]

Hoping someone might be able to help.

In December 2021, I opened a $7,000 IRA, then converted to regular IRA to a Roth IRA before January 1, 2022.

In January, 2022 my wife opened a $7,000 IRA then converted it to a Roth later.

On April 15th 2022, I discovered that we could not qualify for a Roth on the basis of bonus income, so I requested to our Financial Services Provider to undo our Roths -- but didn’t get it processed by the provider until April 18th  2022

In 2023, my wife, age under 59 1/2, received Two 1099R forms from our Financial Services Provider.  The first was for $6,489.37 for a Roth account, taxable amount = $0 Box 7 Distribution Code is 8J  (8 = Excess contributions plus earnings/excess deferrals (and/or earnings) taxable in 2022. (J = Early distribution from a Roth IRA, no known exception (in most cases, under age 59 ½).

Her other 1099R is for $7,000.01 for an IRA account taxable amount = $7000.01 Box 7 Distribution Code 2--Early distribution, exception applies (under age 59 ½). I only received one 1099R which showed a taxable amount of $280 which reflects the interest earned between January and April 2022. This would seem correct.

I called our Financial Services Provider and they say their 1099Rs are correct for my wife. My question is why did my wife receive 2 forms and I received only one? Hers seems to reflect an excess contribution that was subsequently rolled back into her taxable account.

When inputting all the 1099Rs into Turbo Tax, it said we owed distribution taxes on events that we/Fidelity undid. Am I not categorizing these events correctly? I am unsure on how I report the re-characterization in Turbo Tax

[tagteam]

Perhaps @dmertz can help with this.

[dmertz · Accepted solution]

This appears to be an unfortunate mess of multiple errors because, if you have described the original traditional IRA contributions and Roth conversions correctly, there were no excess Roth IRA contributions that needed correcting because nothing constituted a regular Roth IRA contribution.  Your 2021 tax return should have shown a traditional IRA contribution, probably nondeductible, and a Roth conversion on your Form 8606 and a traditional IRA contribution, probably nondeductible, on your wife's Form 8606.

And to be clear, you haven't mentioned anything involving recharacterization.

I suspect that the 2021 tax return needs amending because you probably did not report the traditional IRA contributions and your Roth conversion resulting in no 2021 Forms 8606 being filed.

Because the traditional IRA contributions and Roth conversions were permissible, it was improper to obtain returns of contribution from the Roth IRAs because there was nothing that constituted a regular contribution to a Roth IRA.  It seems to me that with your 2022 tax return you'll need to file substitute Forms 1099-R in place of the code J8 (maybe code JP in your case) showing the same amounts in box 1 but with a blank box 2a, box 2b Taxable amount not determined marked, and code J in box 7, thus reporting regular Roth IRA distributions, not returns of contributions.  (I assume that you both were under age 59½ at the time of the "corrective" distributions.  For either of you that was over age 59½ you would use code T instead of code J.)  If you did not originally report the code-2 2021 Form 1099-R that you should have received in January 2022, you'll also need to correct your Roth conversion basis in 2022 TurboTax to show the correct amounts for taxable and nontaxable conversions.  You wife's conversion basis will be established in 2022 TurboTax by the entry of the code-2 Form 1099-R.

[fanfare]

A conversion of a Traditional IRA to a Roth IRA cannot be reversed.

Your Financial Services Provider should know that.

So what did they really do?

Did they cheat and  fudge the records on your account in an attempt to unwind this?

@mj543210 

[dmertz · Accepted solution]

The requirement to follow the tax code ultimately falls to the individual.  When asked to perform a return of contribution on a converted amount, the Roth IRA custodian has to take the word of the individual since it's possible that the conversion was a failed conversion that came from funds were not permitted to ben in the traditional IRA, such as not having income to support the traditional IRA contribution or from an amount rolled over from an employer plan that failed ADP or ACP testing.  A failed conversion reverts to being a regular contribution to the Roth IRA (regardless of how it is reported on Form 5498), which didn't happen in this case, but it's not the Roth IRA custodian's responsibility to determine that.