How to report recharacterization from Roth to traditional IRA correctly

[rothquestionagain]

1) In July  2020, I made $ 6000 Roth IRA contribution for year 2020.  When I was working tax return 2020 in April 2021, I have realized I should not have done it because of my AGI .  I requested my financial institution to sell excess + earnings from roth so the excess gets nulled out.  Sell was completed on trade date May 17th, settlement May18th.  2021.  I have submitted tax for year 2020 with an answer " no " to the question " did you have any excess contributions.  

In March 2021,  I also contributed $ 6000 roth for year 2021.  I have requested this to be recharacterized from Roth to traditional in June 2021.   (total $ 6302.83 = $ 6000 + gain 302.83 )   

Now for the tax 2021, I have received two 1099-R.    One of them is showing gross distribution (box 1 ) 7,200 , taxable amount (box 2a ) 1200, and distribution code (box 7  ) PJ.    The other one is  gross distribution (box 1) 6302.83, taxable amount ( box 2a ) checked mark for 'taxable amount not determined'.  distribution code (box7 ) N.   

2) my husband also had the similar situation, except he only needed to withdraw excess from the roth account since he realized 2020 contribution was too much.  His financial institution executed Sell of contribution + excess on td  05/17/2021, settlement date 05/18/2021 just like mine.  He has  received one 1099-R, which shows box 1 and 2a and distribution code J. P.   

all of the 1099-R is showing year 2021 on the top and, I would assume all need to be added for 2021 tax form.   I believe I still need to submit amendment form for 2020.   and if so, how can I reflect these transactions correctly for both years?  Also, filing deadline was 05/17/2021 for tax return 2020.  My roth was sold on 05/17 but did not settle till 05/18.  Was I wrong to say "no" when Turbotax was asking a question about excess contributions?  ( should it be trade date or settlement date base ? ) 

please advise.  thank you very much 

[DanaB27]

No, you were correct to answer "no" to the question "did you have any excess contributions" since you removed the excess contribution plus earnings in time.

You will have to amend your 2020 tax return to include both 2021 Form 1099-Rs with codes J and P. Please see How do I amend my 2020 return?

1. Click on the "Search" on the top right and type “1099-R”
2. Click on “Jump to 1099-R”
3. Enter your 1099-R
4. Click "Continue"
5. On the "Which year on Form 1099-R" screen say that this is a 2021 1099-R.
6. Add the second 1099-R with the same steps
7. Click "Continue" after all 1099-R are entered and answer all the questions.
8. Continue until "Did you use your IRA to pay for any of these expenses?" screen and enter the amount of earnings under "Another reason" if you are over 59 1/2 (if you are under 59 1/2 click "Continue")

The 2021 Form 1099-R with code N belongs on the 2021 tax return:

1. Click on "Search" on the top right and type “1099-R”
2. Click on “Jump to 1099-R”

But you will also have to report the recharacterization in the IRA contribution section. You will enter the recharacterization when you enter the contribution to the Roth IRA:

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 of $6,000
7. Answer “Yes” to the recharacterized question on the “Did You Change Your Mind?” screen and enter the contribution amount of $6,000 (no earnings or losses)
8. TurboTax will ask for an explanation statement where it should be stated that the original $6,000 plus $302.83 earnings were recharacterized.
9. 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)

[rothquestionagain]

thank you for your guidance.  I really appreciate your answer for my questions. 

[rothquestionagain]

To amend 2020,  I have followed your steps but a couple questions. 

1.  Turbotax asks me " did you have any of these type of income in 2020?" .  that's where I am supposed to add my 1099-R ( with code P and J).  is that correct?  

2. also, I am under 59 1/2 and added my explanation by continue after the question " did you use your IRA to ay for any of these expenses " ( I did not put any amount there ).  Turbotax is showing me that I owe tax based the information I entered.  The amount is 10  % early withdrawal penalty and plus.  I removed excess contributions on time.  so why Turbotax is showing that I owe that money?  is there anything else I need to add more in my 2020 amendment return?  

Thank you again 

[DanaB27]

1. Yes, in the retirement section.

2. Yes that is correct you do not enter anything on the  "Did you use your IRA to pay for any of these expenses?" screen if you are under 59 1/2. Please be aware that the earnings are taxable income and they are also subject to the 10% early withdrawal penalty.

If you hadn't removed the excess you would have to pay the 6% excess tax on the excess contribution every year until you remove it.

No, there shouldn't be anything else you need to do on your amended return.

@rothquestionagain

[rothquestionagain]

What I am saying is that I took out excess contribution on td 05/17/2021 ( settlement date 05/18/2021 ).  As you mentioned previously, this means I took my excess contributions in time. 

So why should I get penalized by 10  % early withdrawal ?   I cannot back up calculation for the number given by Turbotax.  but for that same reason, I don't think "6% excess tax on the excess contribution every year until you remove it" is also not applicable for me either.   Am I thinking wrong?   Thank you very much for your help.  

[DanaB27]

Yes, you withdrew the excess contribution in time therefore you do not have to pay the 6% excess contribution penalty. I was just explaining what would happen if you didn't withdraw the excess contribution since you seemed upset about the 10% early withdrawal penalty. 

It is either withdraw the excess contribution and pay the 10% early withdrawal penalty on the earnings once (if you are under 59 1/2) or pay the 6% excess contribution penalty on the whole contribution for each year that the excess stays in an account. That is how the law is written.

For the future, for someone who has a lot of earnings, it might be beneficial to leave the contribution in until after the due date and then withdraw the excess between Oct 15 and Dec 31. Then they would pay the 6% for one year but then request a regular distribution (without earnings) because it was after the due date  Because you don't withdraw the earnings there wouldn't be the 10% early withdrawal penalty.

@rothquestionagain