Recharacterization and conversion in different amounts and different years for same tax year

[ronir]

In 12/20 - I contributed $3K to a new Roth IRA for tax year 2020

In 3/21- after filing tax return, realized I exceeded income limits

In 3/21 - recharacterized this $3K from Roth to tIRA (received Form 1099R - Code R)

In 3/21 - contributed additional $4K to this same tIRA (to max out $7K contribution - over 50)

In 5/21 - did back door Roth conversion of $7K from tIRA to Roth IRA (received Form 1099R - Code 2)

In 5/21 - filled out Form 8606 manually to reflect total basis in traditional IRA's for 2020 of $7K, Part I only

In 2/22 - contributed $7K to tIRA for tax year 2021

In 2/22 - did back door Roth conversion of $7K from tIRA to Roth IRA for tax year 2021

Question: Do I owe 6% penalty on the $3K for over-contribution in 2020 even if I recharacterized in 2021?

Question: Do I still need to amend 2020 tax return for the recharacterization if I already submitted Form 8606 manually? If I need to amend, I'm not sure how to answer the questions in Turbo Tax to reflect a recharacterization of $3K but a total basis in traditional IRA's of $7K.

Question: for tax year 2021, should I report the $7K  contribution made in 2/22 on Form 8606 for 2021 to reflect a basis of $14K ($7K for 2020 + $7K for 2021), and then record the conversion in 2022?

I reviewed other postings to find similar situation, but could not find anything.  Any assistance would be greatly appreciated! 

[DanaB27]

No, you do not owe a 6% excess contribution penalty on your 2020 since you recharacterized the contribution and therefore do not have an excess contribution.

Yes, you will have to amend your 2020 tax return if you did not report the recharacterization. Please see How do I amend my 2020 return?

You will enter the $4,000 traditional IRA contribution and enter the recharacterization when you enter the contribution to the Roth IRA on your 2020 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 "traditional IRA" and “Roth IRA”
5. Answer “No” to “Is This a Repayment of a Retirement Distribution
6. Enter the traditional IRA contribution amount of $4,000
7. Answer “No” to “Is This a Repayment of a Retirement Distribution
8. Enter the Roth contribution amount of $3,000
9. Answer “Yes” to the recharacterized question on the “Did You Change Your Mind?” screen and enter the contribution amount of $3,000 (no earnings or losses)
10. TurboTax will ask for an explanation statement where it should be stated that the original $3,000 plus $xxx.xx earnings (or loss) were recharacterized.
11. On the screen "Choose Not to Deduct IRA Contributions" answer "Yes" (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).

 You will get Form 1099-R  for the recharacterization with code R-Recharacterized IRA contribution made for 2020 and this belongs on the 2020 return. But a 1099-R with code R will do nothing to your return. You can only report it as mentioned above. Therefore, you can ignore the 1099-R with code R. The box 1 on the 1099-R will report the total recharacterized amount (contribution plus earnings) but it does not separately report the earnings and box 2a must be zero. 

Yes, you will enter the $7,000 nondeductible contribution for 2021 on your 2021 tax return and will report a conversion on your 2021 and 2022 tax returns.

To enter the nondeductible contribution:

1. Click on "Search" on the top right and type “IRA contributions”
2. Click on “Jump to IRA contributions"
3. Select “traditional IRA”
4. Answer “No” to “Is This a Repayment of a Retirement Distribution?”
5. Enter the amount you contributed
6. Answer “No” to the recharacterized question on the “Did You Change Your Mind?” screen
7. Answer the next questions until you get to “Any Nondeductible Contributions to Your IRA?” and select “Yes” since you had nondeductible contributions before this tax year.
8. Enter your basis in the Traditional IRA from your 2020 Form 8606 line 14
9. On the “Choose Not to Deduct IRA Contributions” screen choose “Yes, make part of my IRA contribution nondeductible” and enter the amount (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).

To enter the 1099-R distribution/conversion on your 2021 tax return: 

1. Click on "Search" on the top right and type “1099-R”
2. Click on “Jump to 1099-R”
3. Click "Continue" and enter the information from your 1099-R
4. Answer questions until you get to “Tell us if you moved the money through a rollover or conversion” and choose “I converted some or all of it to a Roth IRA”
5. On the "Your 1099-R Entries" screen click "continue"
6. Answer "yes" to "Any nondeductible Contributions to your IRA?" if you had any nondeductible contributions in prior years.
7. Answer the questions about the basis from line 14 of your 2020 Form 8606 and the value of all traditional, SEP, and SIMPLE IRAs

[ronir]

Thank you very much! 

For the 2020 amendment - do I physically have to send an amended return for the recharacterization and provide an explanation for the amendment?

For the 2021 Form 8606 - I was assuming that Line 14 would have a total basis of $14,000 ($7K for 2020 and $7K for 2021 contributions).  I'm not sure if I answered something incorrectly, but line 14 is showing $7,000.  Is that correct?

[DanaB27]

Yes, you will have to print and mail your amended return.

Yes, it is correct because you converted $7,000 in 2021 therefore you have a basis of $7,000 left on line 14 of the 2021 Form 8606.