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Level 2

Recharacterization of 2019 contribution

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. 

 

 

 

 

 

1 Best answer

Accepted Solutions
Highlighted
Level 7

Recharacterization of 2019 contribution

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.

View solution in original post

4 Replies
Highlighted
Level 7

Recharacterization of 2019 contribution

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.

View solution in original post

Highlighted
Level 15

Recharacterization of 2019 contribution

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.

Highlighted
Level 2

Recharacterization of 2019 contribution

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

Highlighted
Level 2

Recharacterization of 2019 contribution

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!