I have doubts about whether TurboTax is properly handling simultaneous recharacterizations and conversions of multiple IRA accounts. Need help in navigating what numbers go where for proper calculation of taxes.

[nwardrip]

Situation: I have doubts about whether TurboTax is properly handling simultaneous recharacterizations and conversions of multiple IRA accounts. Need help in navigating what numbers go where for proper calculation of taxes.

2018 Info:

• Original 2018 contribution into both spouse's and my Roth IRA: $5500 on 8/2/2018
• Found out when filing 2018 taxes in March of 2019 that our MAGI disqualifies us for Roth IRAs
• Recharacterized both spouse's and my 2018 Roth IRA contributions to 2018 Traditional IRA contributions on 3/11/2019
• The recharacterization was for the total amount in the Roths: the original $5500 contribution and additional earnings of $64
• Both spouse's and my traditional IRA contributions were immediately converted to Roth contributions on 3/11/2019 via Backdoor Roth method

2019 Info:

• Original 2019 contribution into both spouse's and my Roth IRA: $6000 on 1/25/2019
• Found out when filing 2018 taxes in March 2019 that our MAGI disqualifies us for Roth IRAs
• Recharacterized both spouse's and my 2019 Roth IRA contributions to 2019 Traditional IRA contributions on 3/14/2019
• The recharacterization was for the total amount in the Roths: the original $6000 contribution and additional earnings of $208
• Both spouse's and my traditional IRA contributions were immediately converted to Roth contributions on 3/11/2019 via Backdoor Roth method

2020 Info:

• Received 1099-R's for
  • Both spouse's and my 2018 Roth to traditional recharacterization in the amount of $5564
  • Both spouse's and my 2019 Roth to traditional recharacterization in the amount of $6208
  • Both spouse's and my conversion from traditional to Roth in the amount of $11772 

What I have done:

• In my 2018 tax return last year, under Deductions & Credits - Retirement & Investments, I entered the recharacterization information (from Roth to traditional), but not the traditional to Roth conversion because the conversion did not happen in 2018
• In my 2019 tax return this year:
  • Under Wages & Income - Retirement Plans & Social Security, I entered all 6 1099-R's. Tax refund went down thousands of dollars because the taxable amount is reported as $11772 on the 1099-R for both of us
  • Under Deductions & Credits - Retirement & Investments, I entered the recharacterization information (from Roth to traditional). My refund increased nearly back to where it was, but not all the way due to the earnings of $544 that were made before the recharacterization and conversion.

Questions:

1. When I enter the 1099-R for the 2018 recharacterization, TurboTax says "It looks like you may need to amend your 2018 return. Here's why: Your 1099-R reports earnings ($64) on a contribution you made in 2018. This information needs to go on your 2018 return." Is it correct that I will need to amend both my federal and state returns? If so, what forms am I supposed to submit?
2. After filling out the questionnaires under Deductions & Credits for the Roth recharacterizations, I do not get all of the refund back from prior to entering the 1099-R's because line 4B of the 1040 reports taxable distributions of $544. This seems to come from lines 16 and 17 on form 8606 which are $11772 and $11500 for both my spouse and I (($11772 - $11500 = $272) * 2 = $544). Is the gain before the recharacterization from Roth to traditional really taxable? If not, what values do I need to update in TurboTax? Everything I have tried causes other errors reported in TurboTax, e.g. excess contributions, etc.

[dmertz · Accepted solution]

1.  As long as your 2018 tax returns already reflect the traditional IRA contribution, either as deductible on Schedule 1 line 32, or as a nondeductible contribution on From 8606 line 1, you do not need to amend.  2019 TurboTax's message about amending is only for those whose 2018 tax return does not already reflect the recharacterization.

2.  " Is the gain before the recharacterization from Roth to traditional really taxable?"  Yes.  The $272 (each) that became gains in the traditional IRA as a result of being gains transferred from the Roth IRA in the recharacterization, are taxable; the result is intended to be the same as if the original contributions were made directly to the traditional IRAs and the gains are treated as if earned in the traditional IRAs.  Your 2019 Forms 8606 are correct as long as you had no money in traditional IRAs at year-end.

[nwardrip]

Thank you so much for your very helpful response!

For #1, Yes, the 2018 tax return already reflects the recharacterized contribution as a nondeductible contribution in the traditional IRAs on line 1 of 8606.

For #2, It is surprising that I will need to pay tax on the gains because the recharacterized money in the traditional IRA was immediately converted back to a Roth IRA. But, what you have described is what TurboTax is doing, and there does not appear to be any spot on form 8606 to specify gains in the basis, so it unfortunately seems to be the correct thing to do.

[macuser_22 · Accepted solution]

---

@nwardrip wrote:

Thank you so much for your very helpful response!

For #2, It is surprising that I will need to pay tax on the gains because the recharacterized money in the traditional IRA was immediately converted back to a Roth IRA. But, what you have described is what TurboTax is doing, and there does not appear to be any spot on form 8606 to specify gains in the basis, so it unfortunately seems to be the correct thing to do.

---

You said the "gain" was in the Roth that was simply transferred to the Traditional IRA, but it is still a gain.

There is no such thing as a"gain in the basis".  The basis is only your own non-deductible contributions.  Gains (actually earnings) are taxable whether earned in the Roth and transfered to the Traditional IRA or earned in the Traditional IRA.