Recharacterization of Roth IRA contribution - 2020 and 2021. What are my options to avoid penalty?

[rohank03]

Hi all, I need help in figuring out my Roth IRA characterization. I opened a Roth IRA account in 2019. I file taxes as "Married, Filling Jointly".

1. I contributed $6000 in 2019. My adjusted gross income for 2019 was $192,XXX
2. I contributed $6000 in 2020. My adjusted gross income for 2019 was $249,XXX
3. I contributed $6000 in 2021. My adjusted gross income for 2019 was $310,XXX

In total, I have contributed $18,000 in my Roth IRA account in these 3 years. I bought stocks with this $18,000. Currently the value of the Roth IRA account is $8,700 due to market volatility. Since my adjusted gross income for 2020 and 2021 is higher than the allowed limit, my Roth IRA contribution needs to recharacterized. I have few questions.

For 2021 contribution, I am going to recharacterize my contribution for $6000 into traditional IRA. With this $6000, I bought stocks (AMC) and the current value for these stocks is $2200 approx. Did I fill out this form correctly? For Part 2b, I entered the amount $2200 after considering losses. Should the amount in Part 2b be $2200 or the original contribution amount of $6000. See below.

For 2020 contribution, I never requested Roth IRA recharacterization into traditional IRA. What are my options now to prevent paying 6% penalty year after year? Can I still request recharacterization? If not, can I roll over this contribution from 2020 to 2022, since my projected AGI for 2022 will be less? Or is there any other option that I can pursue?

[DanaB27]

No you cannot recharacterize a contribution for 2020 because it is after the due date of the 2020 tax return. For the 2020 contribution you will have to pay the 6% penalty for 2020 and 2021. 

You can either apply the excess contribution to 2022 (if your income is less) during the 2022 tax return interview or you can make a regular distribution without earnings or losses ($6,000) and report it on your 2022 tax return (enter Form 1099-R).

Next year on your 2022 tax return if you want to apply the excess as a 2022 contribution:

1. Click on "Search" on the top right and type “IRA contributions”
2. Click on “Jump to IRA contributions"
3. Select “Roth IRA”
4. On the "Do you have any Excess Roth Contributions" answer "Yes"
5. On the "Enter Excess Contributions" screen enter the total excess contribution from previous year of $6,000 (if it wasn't carried over).
6. On the "How Much Excess to 2022?" screen enter how much you want to apply to 2022.

For the 2021 excess contribution:

Yes, you are supposed to enter $2,200 since it states "Amount of the Contribution to be recharacterized, including earnings/losses". The note below confirms this as well.

You will enter the recharacterization when you enter the contribution to the Roth IRA on your 2021 tax return: 

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 $6,000 (no earnings or losses)
8. TurboTax will ask for an explanation statement where it should be stated that the original $6,000 minus $xxx.xx loss were recharacterized.
9. On the screen "Choose Not to Deduct IRA Contributions" answer "Yes" (if you are thinking about 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)

You will get Form 1099-R  for the recharacterization with code R-Recharacterized IRA contribution made for 2021 and this belongs on the 2021 return. But a Form 1099-R with code R will do nothing to your return. You can only report it as mentioned above. Therefore, you can ignore the Form 1099-R with code R when you get it in 2023. 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.

[rohank03]

Thanks for your reply.

Couple of follow up questions.

Since I bought securities with 2020 Roth IRA contribution, can I still roll over the contribution (in this case stocks) to 2022? What is the form called that I need to fill out with my Trustee/Custodian in order to roll over my excess Roth $6000 contribution (stocks) from 2020 to 2022? I guess I am not quite understanding the steps that I need to take to correct this. What do you mean by either apply the excess contribution to 2022 (if your income is less) during the 2022 tax return interview OR you can make a regular distribution without earnings or losses ($6,000) and report it on your 2022 tax return. In either case, do I need to request a 1099-R from my custodian? In order to request that, I am sure there must a form that I need to fill out.

[DanaB27]

Yes, you financial institute will not be involved when you apply the excess contribution to 2022. You will just enter into TurboTax that you want to apply the excess to 2022 (see steps mentioned in my previous post). No, you do not need/get a Form 1099-R for this transaction.

If you choose to withdraw the 2020 excess as a regular distribution (no earnings or losses) instead of applying it as a 2022 contribution then you would contact your financial institute to make a regular distribution of $6,000. You would get a 2022 Form 1099-R next year and enter it on your 2022 tax return.