Recharacterization of 2019 contribution

[seren]

I've done quite some research here but still don't know how to report correctly given my situation below. Any help would be much appreciated! 

In February 2020 I made a contribution of $6,000 to Roth IRA but treated it as 2019 contribution. 

In March 2020, I recharacterized full contribution from Roth IRA to traditional IRA (trustee-to-trustee). Amount transferred was $5,500 due to a market loss of $500. 

When filling out TurboTax, I did the followings:

• I selected that I had made contribution to Roth IRA for tax year 2019.
• I selected that I recharacterized to a traditional IRA. 
• Amount contributed is $6,000 
• Amount transferred is $5,500
• Reason was due to modified adj. income above the limit

After I did the above, TurboTax is now showing that I still made an excess contribution of $500, for which I will incur a 6% penalty for that amount every year thereafter. Then it asked me if I made any contribution withdrawal.

My questions are:

1. Should I put "$500" or "$0" here for the withdrawal?   
2. Did I do anything incorrectly and if so how should I modify my answers above?
3. Why am I paying a penalty when I have an unrealized loss when making the recharacterization transfer? 

Thank you in advance for your help and advice. 

[hbl3973 · Accepted solution]

seren,

Very good questions.  Be sure to have a copy of IRS Publication 590-A and 590-B, which you can download from the IRS Forms link at their website.  (You can even order free paper copies there.)

Page 29 of 590-A says that after the transfer was complete, you then treat the $6,000 contribution "as having been made to the second IRA on the date it was actually made to the first IRA.  To wit, you effectively contributed the $6000 to the traditional IRA and it subsequently incurred the $500 loss.

So, in TurboTax your recharacterization transferred $6000 to the replacement IRA.  You need to go back and enter $6000 in the screen entitled "Tell Us How Much You Transferred" in order to get things right.  You would still enter the $5500 in the Roth IRA Explanation Statement dialogue.

[dmertz]

The page "Tell Us How Much You Transferred" is badly named.  As hbl3973 indicated, on this page TurboTax is actually asking for the amount recharacterized or switched, in this case $6,000, not the gain- or loss-adjusted amount transferred.

[seren]

Thank you, hbl3973. This clarifies my recharacterization questions. I'll make sure I adjust my responses and provide explanation accordingly. Much appreciated! 

[seren]

Thank you, dmertz. This is where I got confused as TurboTax first asked the contribution amount then "transferred" amount with earnings and loss. I'll adjust my responses accordingly and provide explanation in the form provided. Thanks!