Roth IRA Overcontribution and Recharacterization/Conversion --> How To File in TurboTax?

[benito1]

Hi everyone,

I have a question regarding an overcontribution I made to my Roth IRA account in 2020, the actions my brokerage took to correct this, and how I should handle it in my taxes.

I have done my best to lay out the entire scenario below. I sincerely appreciate your help!

Context:

• In April, I deposited the maximum $6k into my Roth IRA account

• I did some stock trading within my Roth IRA account using that $6k and ended up adding ~$4k more in gains.

• In early December I realized I would be over the income limit for Roth IRA contributions 2020, and as such I reached out to my brokerage's customer service to walk me through next steps for correcting this.

• The brokerage rep helped me to initiate a recharacterization of my $6k plus the gains, pushing this money into an empty Traditional IRA account. I can see that on one day in December 2020, my total balance in the Roth IRA account dropped by ~$10k (around the amount for the $6k + $4k gains) and flowed into the Traditional IRA

• A few days later I saw that the ~$10k was converted back into my Roth IRA account.

• My brokerage issued me two 1099-R forms: one for the Roth IRA account, and one for the Traditional IRA account.

• On my 1099-R for the Roth IRA, it shows:

  • $9624.49 Gross Distribution

  • $0 taxable amount

  • The "Taxable amount not determined" box is unchecked.

  • Distribution Code = N

• On the 1099-R for the Traditional IRA, it shows:

  • $9571.17 Gross Distribution

  • $9571.17 taxable amount

  • The "Taxable amount not determined" and "Total distribution" boxes are checked.

  • Distribution Code = 2. IRA/SEP/Simple is checked.

For each of these 1099-Rs, TurboTax asks me the following:

"Tell us if you moved the money through conversion:

• Option 1: I rolled over some or all of it to an IRA or other retirement account within the time limits (normally 60 days)

• Option 2: I converted some or all of it to a Roth IRA

• Option 3: I did a combination of rolling over and converting some or all of this money

• Option 4: I didn't rollover or convert this money"

My Question:

Based on your understanding of the recharacterizations/conversions I outlined above, how do you recommend I answer this question for the Roth IRA 1099-R and my Traditional IRA 1099-R? I am confused about whether I need to answer these questions for both my 1099-Rs, or just one, and how I should be answering.

Also, are there any other steps I will need to take within TurboTax to ensure I don't pay unnecessary taxes on the overcontribution that was fixed? 

Thank you so much for reading and providing your support!

[benito1]

@macuser_22 and @dmertz I have seen both of you be very helpful in other threads 🙂 do you mind offering your expertise here? I would appreciate it tremendously. This is the last hang-up I have before filing. If you do decide to lean in, thank you so much!

[macuser_22]

First you enter the recharactorization.

You should have received a 2020 1099-R with a code N in box 7 to report that.


A 2020 1099-R with a code N in box 7 (Recharacterized IRA contribution made for 2020 and recharactorized in 2020).

A code N 1099-R does nothing whatsoever if entered into the 1099-R section. It does not get sent to the IRS and nothing goes on the tax return at all. The only purpose of the 1099-R is to report the recharacterization to the IRS, but it still must be reported on your 2020 tax return.

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.

The proper way to report the recharacterization and earnings which is to enter the 2020 IRA contribution in the IRA contribution interview section and then say yes to "Did you switch from a Roth to a Traditional IRA - recharacterize".

The amount of the original Roth contribution must be entered - not any earnings or losses.

Then TurboTax will ask for an explanation statement where it should be stated that the original $xxx.xx plus $xxx.xx earnings (or loss) were recharactorized.

There is no tax or penalty on the before-tax earnings since the earning were simply switched into the recharactorized account.

That is the only way to prepare and attach the proper explanation statement for a code N 1099-R.

Enter IRA contributions here:
Federal Taxes,
Deductions & Credits,
I’ll choose what I work on (if that screen comes up),
Retirement & Investments,
Traditional & Roth IRA contribution.

OR Use the "Tools" menu (if online version under My Account) and then "Search Topics" for "ira contributions" which will take you to the same place.

Since the after-tax Roth contribution is now a Traditional IRA contribution it can be either a before-tax deduction if your MAGI allows a deduction which might result in an additional 2020 refund, or it will be an after-tax contribution reported on a 8606 form (line 1 & 14) as a "basis" in the Traditional IRA that will reduce the tax of future distributions.

Be sure to say you want the entire amount to be non-deductible of the question comes up.

The enter the 1099-R.  You converted all the  money to a Roth IRA.

Enter a 1099-R here:

Federal Taxes,
Wages & Income
(I'll choose what I work on - if that screen comes up)
Retirement Plans & Social Security,
IRA, 401(k), Pension Plan Withdrawals (1099-R).

OR Use the "Tools" menu (if online version left side) and then "Search Topics" for "1099-R" which will take you to the same place.

Be sure to choose which spouse the 1099-R is for if this is a joint tax return.
Be sure to pick the correct 1099-R type: Standard 1099-R, CSA-1099-R, CSF-1099-R, RRB-1099-R.

[NOTE: When you get to the "Your 1099-R Entries" screen where you can add another 1099-R, use "continue" to keep going as there are additional interview questions after that screen in most cases. You can always return as shown above.]

You will be asked of you had and tracked non-deductible contributions - say yes. The enter the amount from the last filed 8606 form line 14 if it did not transfer. Then enter the total value of any Traditional, SEP and SIMPLE IRA accounts that existed on December 31, 2020.

That will produce a new 8606 form with the taxable amount calculated on lines 6-15 and the remaining carry-forward basis on line 14.

NOTE: If there is an * next to line 15 then 6-14 will be blank and the calculations will be on the "Taxable IRA Distributions worksheet instead.

The 2020 8606 form should now show the $6K on line 1.    That should offset $6K of the taxable amount leaving the $3,571 gains as taxable.    (Assuming that it was all converted and the total value of all existing Traditional IRA's at the end of 2020 was zero).

[benito1]

Thank you @macuser_22 

One quick follow-up question from my end.

Do I do all this under the Roth IRA or under the Traditional IRA?

The initial question I received during the "interview" part is:

"Tell us if you moved the money through conversion:

• Option 1: I rolled over some or all of it to an IRA or other retirement account within the time limits (normally 60 days)

• Option 2: I converted some or all of it to a Roth IRA

• Option 3: I did a combination of rolling over and converting some or all of this money

• Option 4: I didn't rollover or convert this money"

You mentioned I should choose "Did you switch from a Roth to a Traditional IRA - recharacterize" -- but I don't see this option. Which option above is correct?

Thank you!

[macuser_22]

---

@benito1 wrote:

Thank you @macuser_22 

One quick follow-up question from my end.

Do I do all this under the Roth IRA or under the Traditional IRA?

The initial question I received during the "interview" part is:

"Tell us if you moved the money through conversion:

• Option 1: I rolled over some or all of it to an IRA or other retirement account within the time limits (normally 60 days)

• Option 2: I converted some or all of it to a Roth IRA

• Option 3: I did a combination of rolling over and converting some or all of this money

• Option 4: I didn't rollover or convert this money"

You mentioned I should choose "Did you switch from a Roth to a Traditional IRA - recharacterize" -- but I don't see this option. Which option above is correct?

Thank you!

---

Those options are in the 1099-R interview.   You enter the recharactorization in the *IRA contribution* interview as I posted in the first part of my reply.

[benito1]

Thank you. That part is clear to me now. So I will make sure to do the IRA contribution interview per your instructions.

But before that happens, I am still unclear -- do I need to select any of the options 1-4 which I listed in my post (which come up during the 1099-R interviews)? Which option should I select for my Roth 1099-R and my Traditional IRA 1099-R?

Thanks again @macuser_22 

[macuser_22]

As I said above the 1099-R with a code N does nothing and can be ignored -  yiu report the recharacterization  as above.

The 1099-R with the code 2 you said you converted that to a Roth so you say you converted it all to a Roth.