This tax year 2020, I contributed $3932 to my traditional IRA. At the end of the year, based on my earned income, capital gains and the fact that I have a retirement plan through work, I found out that none of that traditional IRA contribution was tax deductible.
Over the course of the year, my traditional IRA portfolio did very well, and experienced significant gain.
I understand that by recharacterizing the contribution to a Roth IRA, that the initial contribution itself, the $3932, is not taxable. However, I am confused as to whether or not the resulting net income attributable (NIA) is taxable even though I plan to recharacterize it into a Roth, as well?
I have read other example where people over-contributed and were tax on the NIA, I guess because it was considered income. However, I didn't over contribute, I just "mis-contributed." So I was hoping since I am putting the NIA in the Roth as well, it would not get taxed.
Thanks!
Are you sure that your MAGI is not also too high to contribute to a Roth? - see below.
The financial institution should move both the contribution and earning to the other IRA.
The proper way to report the recharacterization and earnings is to enter the 2020 IRA contribution in the IRA contribution interview section and then say yes to "Did you switch from a Traditional to a Roth IRA - recharacterize".
The amount The amount of the original Traditional 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.
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See this IRS article for Roth contribution limits:
https://www.irs.gov/retirement-plans/roth-iras
For single filers there is a range where one is not permitted to deduct a traditional IRA contribution but is permitted to make a Roth IRA contribution.
The NIA moved to the Roth IRA simply becomes earnings in the Roth IRA. If you take Roth earnings out before you meet the requirements for Roth IRA distributions, the distributed earnings are subject to income tax and, if you are under age 59½, to an early-distribution penalty.