Recharacterization and Backdoor Roth IRA

[Ruthenium]

Hi, I'm having some trouble with reports a recharacterization and Backdoor Roth IRA.

So for background, in 2022, I initially contributed 6,000 directly to a Roth IRA in January. Many months later I learned that I was going to make above the limit that allows you to contribute directly to a Roth IRA so I made a recharacterization, effectively moving my money from the Roth to the traditional IRA. By the time I did that I had lost some money so it was down to the 4,600s so that's what ended up being recharacterized. My money sat in my traditional IRA for 1 or 2 days until I was able to do the Backdoor Roth IRA (effectively transferring my money from my traditional to my Roth IRA). The issue is that I think (but I'm not 100% sure) that my investments made some money (maybe a little over $100) while sitting in the traditional IRA which I understand would be taxable. I do not know how to confirm if I made any money and how much while my investments were in my traditional IRA and I called my brokerage firm and so far they have not being very helpful. I received two 1099-Rs and two 5498 forms. I will provide this information here:

Roth IRA form 1099-R

1. Gross distribution: 4641.97

2a. Taxable amount 0

7. N

Traditional IRA form 1099-R

1. Gross distribution 4762.75

2a. Taxable amount 4762.75

2b. both with check marks

7. 2, X on IRA/SEP/SIMPLE box

Traditional IRA Form 5498 

4. Recharacterized contributions 4641.97

5. Fair market value of account 0

7. IRA type IRA

Roth IRA Form 5498 

3. Roth IRA conversion amount 4762.75

5. Fair market value of account 10403.73

7. IRA type ROTH Ira

Roth IRA contributions 6000

My questions are:

1. Are you guys able to tell from this documentation (which is all they gave) if there were any taxable gains when my investments were sitting in the traditional IRA? How would I report this? I already submitted all my documents and it's not showing that I have to pay any taxes.

2. Why is there a difference between the gross distributions of my two 1099-Rs?

3. I would appreciate a step by step guide on how to report all of this with my specific numbers on Turbotax. I already tried to do it, I think I did it correctly, the only piece that does not fit the puzzle is that if I made some money in the traditional IRA that would be taxable and I have not being able to report that yet.

Thank you for your help.

[DanaB27]

1) No, it seems you didn’t have any taxable earnings for the Roth conversion. When you performed the recharacterization it is deemed that you made the $6,000 contribution to the traditional IRA and never to the Roth IRA. Therefore, your basis in the traditional IRA was $6,000. Any gains or losses that occurred in the Roth before the recharacterization are deemed to have taken place in the traditional IRA because you made the recharacterization.

2) It seems after you recharacterized your contribution you had some earnings in the traditional IRA. But they were still not more than you had lost before. Therefore, your conversion won't be taxable since you had a basis of $6,000. You should have the leftover basis on line 14 of Form 8606 to use in future years.

3) 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 $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 $6,000.00 minus $1,358.03 loss was recharacterized.
9. On the screen "Choose Not to Deduct IRA Contributions" answer "Yes" (since you are 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)

To enter the 1099-R conversion: 

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 "Review your 1099-R info" screen click "Continue" (after you entered all Form 1099-R)
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 2021 Form 8606 and the value of all traditional, SEP, and SIMPLE IRAs

[Ruthenium1]

Thank you for your answer.

I am trying to see form 8606 before I file my taxes but I can't find it. I know that if I had made a "clean" Backdoor Roth IRA without the extra step of Recharacterization, I would have needed to select "traditional IRA" instead of "Roth IRA" on your point #3. Can I skip this step or do I still need to to this?

How can I see form 8606 before filing taxes to make sure it is correct and make sure that it was actually filed in by TurboTax?

[DanaB27]

Yes, you need to report the recharacterization with the steps mentioned in #3 and not enter it directly as a traditional IRA contribution (delete the traditional IRA contribution entry).

Please follow these steps to view Form 8606 (you may be asked to register or pay first):

1. Select Tax Tools on the left and then Print Center 
2. Select Print, save or preview this year's return
3. Select federal return and choose to print just the tax return or to include all worksheets as well. 

@Ruthenium1 

[ojmn]

I have exact same situation for tax year 2023 ( and filing in 2024), but in my case instead of loss it incurred gain and I did get two 1099-R forms and 2 5498 Forms. Here are the details.  

For 2023 my origination contribution was 6500 in Roth IRA  in early January 2023, recharacterized this to Traditional IRA after realizing limitation, by this time fidelity suggested to transfer  6905.16 and after few days transfer back from traditional IRA to Roth 6908.14 for backdoor Roth ( I didn't had any amount in my traditional IRA before so this ~$2 is gained in Traditional IRA).

I did had basis from 2022 line 14: $5612. There is no other basis in any previous year.

Roth IRA form 1099-R

1. Gross distribution: 6905.16

2a. Taxable amount 0

7. N

Traditional IRA form 1099-R

1. Gross distribution 6908.14

2a. Taxable amount 6908.14

2b. both with check marks

7. 2, X on IRA/SEP/SIMPLE box

I followed all the steps for recharacterization, explanation steps and entering 1099-R ( for Traditional IRA )

My Question is:

1. Should I only use both 1099-R form ( from Traditional IRA as well as Roth IRA )  in TurboTax ?

2. TurboTax seems to have confused if I use both of the 1099-R, is there any other way to handle Recharacterization along with backdoor Roth conversation ?

Thanks,

[ojmn]

just clarifying my above question. 

4. Is my 408 ( 6908-6500) taxable ? If so, Turbotax seems to not adding this my overall earning, so how to fix this ?