recharacterizing too much

[kws3]

Hello!

I am doing my son's taxes. This year, for the first time, he made too much $$ to contribute to his Roth. He recharacterized, but did too much. Turbotax its telling me he contributed too much, which isn't true, but I don't want to reduce the amt the recharacterized because that would not represent what happened and would generate an incorrect Form 8606 for this year and an incorrect 1099-R for next year. 

Details:

4/5/24 & 4/10/24 - Contributed $2500 to Roth. 

5/10/24 – Realized he was over the limit. Opened a Trad IRA. Rechar $2500 plus gains fr Roth to Trad.  

5/15/24 - Converted the recharacterized amount, leaving 0.00 in Trad.

5/22/24 – Contributed $1500 to Roth (uggh!)

3/5/25 -  Realized (again) he was over the limit. Instead of recharacterizing $1500, he rechar the entire $4000 he had contributed for the year.

3/6/25 - Converted the full amount recharaterized, leaving 0.00 in Trad.

Summary: 

Total Roth Amt contrib was $4000. Total amount Rechar to Trad was $6500. So, he really recharacterized $$ from his Roth that had been from previous years’ contributions.

Separately, he contrib $3000 to Trad which he converted to Roth shortly after, leaving 0.00 in Trad.

Turbotax entries for Roth:

Roth IRA Contributions: $4000

Tell us how much you transferred (recharacterized): $6500

Explanation statement:

$4000 contrib to Roth 4/5/24 & 4/10/24 & 5/22/24

$2500 plus $17.93 gains = $2517.93 recharacterized 5/10/24

$4000 plus $324.03 gains = $4324.03 recharacterized 3/5/25

This was $2500 too much. $2500 was really from older Roth $$.

Enter Excess contributions: $0.00

Turbotax gives message “Income too high to deduct an IRA Contribution”. A second paragraph under that says “Also, deductible IRA contributions cannot exceed $7000….”

TT next gives the message “You currently have a penalty”. It goes on to say the penalty is 6% per year and the way to fix it is to take $2500 out of the I IRA, etc..

The problem is that he did not contribute too much, he recharacterized too much.

If I change the recharacterization in Turbotax to $4000, it will not accurately represent the truth, plus the IRS Form 8686 with the 2024 taxes will be incorrect and the 1099-R produced by Fidelity in 2025 will be incorrect.  If I leave it at $6500, TT is telling me to take out $2500 or be penalized if I don’t.

My son has learned his lesson, so it will be ok for the future 😊, but what should I do to resolve this dilemma?

Thank you!

Kathy

[fanfare]

HOW IT WORKS

recharacterization: the original amount to the first IRA you report as contribution to the second IRA, earnings move but that is ignored.
You must use a trustee-to-trustee transfer before the due date April 15,2025 ( or Oct 15, 2025 if 1040 was timely filed or extended).
You will instruct trustee to calculate the allocable earnings.

Treat the contribution as having been made to the second IRA on the date that it was actually made to the first IRA.
----
Upon reporting a Trad IRA contribution (non-deductible) on your tax return, you can then also report a Roth conversion of the contributed amount for net tax of zero, unless your IRA previously had value exceeding basis.

In that case, it can't be done tax free.

to report a non-deductible contribution, Form 8606 must be attached.

@kws3 

[fanfare]

there is nothing to report about earnings., since they are ignored. I removed that sentence above.

[fanfare]

You can't recharacterise in 2025 contributions made for 2023. It is too late.

See instead: rules for return of excess contribution:

I'll post those if you want.

You won't be happy.

[kws3]

Hi fanfare, Thanks for looking at my problem. I admit I am confused by your answer. Taking it sentence by sentence, I will respond. My comments are in itelics.: 

recharacterization: the original amount to the first IRA you report as contribution to the second IRA, earnings move but that is ignored.     I understand what  recharacterization is. 

You must use a trustee-to-trustee transfer before the due date April 15,2025 ( or Oct 15, 2025 if 1040 was timely filed or extended).  It is all the same trustee.

You will instruct trustee to calculate the allocable earnings. Fidelity did that for him.

Treat the contribution as having been made to the second IRA on the date that it was actually made to the first IRA.  I understand. The Form 8606 is for that.
----
Upon reporting a Trad IRA contribution (non-deductible) on your tax return, you can then also report a Roth conversion of the contributed amount for net tax of zero, unless your IRA previously had value exceeding basis.  All the money he recharacterized from Roth to Trad was then converted back to Roth. So the Trad IRA was close to 0 after every conversion.  I reported all of this in TT . TT didn't like that he had recharacterized  more than was converted to his Roth. That makes sense. But  Fidelity let him do it, so it is done and can't be undone.

In that case, it can't be done tax free.  Not concerned about tax here, to be honest. My concern is that he contributed $4000 to his Roth but he recharacterized $6500, and we can't change that.  If we could change it to $4000, all would be fine, but it is done.

to report a non-deductible contribution, Form 8606 must be attached.

[fanfare · Accepted solution]

I see your problem

$2500 plus $17.93 gains = $2517.93 recharacterized 5/10/24

$4000 plus $324.03 gains = $4324.03 recharacterized 3/5/25

The 2500 has to be reported on his 2023 tax return.

This is allowed if 2023 tax return was a) timely filed (April 15), or b) got a six month extension.

You'll have to amend 2023.

You shold definitely do that before proceeding with 2024 tax return.

And you should request an extension of time for 2024.

@kws3 

[fanfare]

SInce you took the 2,500 in May 2024, after Tax Day,
IRS says:

"Report the recharacterization
on the amended return and write “Filed pursuant to
section 301.9100-2” on the return. File the amended return
at the same address you filed the original return"

@kws3 

[kws3]

Fanfare,

Thank you sincerely for your help! I think I get what I need to do. 

Much appreciated.

Yours,

Kathy

[kws3]

Fanfare, 

I am trying to make the changes in TT per your recommendation here. However, Fidelity issued a 1099-R for the $2500 plus $17.93 gains = $2517.93 recharacterization of 5/10/24 using distribution code = "N" which is for a same year recharacterization.  Now I want to make it a distribution code "R" (recharacterization for a prior year). Does Fidelity send their 1099s to the IRS as well as me? In which case, I can't just change things? Or can I change the 1099-R so it is a distribution code "R" (recharacterization for a prior year) despite that.

Thank you.

Kathy

[DaveF1006 · Accepted solution]

Yes, the 1099R's are sent to the IRS so changing the code may raise a red flag. You should request a corrected 1099R. 

[kws3]

Thank you to both Fanfare and DaveF1006 for your advice and help.

I finally was able to call Fidelity today. They will reissue a corrected 1099-R for the $2500 so it will be a recharacterization of 2023 money instead of 2024 money. So my plan is:

1) File and extension for 2024. Already done.

2) Wait for the corrected 1099-R from Fidelity. Should take 4-6 weeks, they say. 

3) Amend 2023 taxes, including the $2500 recharacterization and using what FanFare suggested for wording: “Filed pursuant to section 301.9100-2” on the return. And file the amended return at the same address we filed the original return.

4) Then file 2024 taxes excluding the 1099-R for $2500 since it was dealt with in 2023 taxes.

Thank you both again.