Report Earnings on Roth Recharachterization?

[bigwheels29]

I contributed $6000 to my Roth in March 2020.  I ended up exceeding the AGI limit for Roth eligibility and instructed Fidelity to recharachterize that contribution amount to a Traditional IRA in January 2021.

The amount transferred included the contribution and net income, which amounted to a total transfer of $10,444.

How do I report this?  Do I report the earnings?  Will I need to remove the net income from the Traditional IRA to avoid recurring over-contribution penalties?  Or do I just only report the contribution as recharachterized?

[dmertz]

Presumably this contribution was made fore 2020.  Enter the original $6,000 Roth IRA contribution made for 2020 into 2020 TurboTax, allow TurboTax to identify it as an excess contribution, then indicate that you had $6,000 recharacterized.  Be sure to click the Continue button on the Review Your 1099-R Info page.  TurboTax will prompt you to prepare an explanation statement regarding the recharacterization.

TurboTax will include the resulting $6,000 traditional IRA contribution for 2020 on your tax return, either as a deductible contribution on Schedule 1 line 19 or as a nondeductible contribution on Form 8606 line 1.  If you were covered by a workplace retirement plan in 2020, the traditional IRA contribution will be nondeductible.

The gains that had accrued in the Roth IRA and were transferred to the traditional IRA along with the recharacterized $6,000 are now treated as gains in the traditional IRA and will be taxable when eventually distributed from the traditional IRA.

When you receive the code R 2021 Form 1099-R reporting the recharacterization you'll be able to just ignore it since your explanation provided with the 2020 tax return takes its place.  Entering it into 2021 TurboTax will only cause TurboTax to remind you that the recharacterization needed to be reflected on your 2020 tax return as described above.

[bigwheels29]

Thank you!  So at the outset of the retirement deduction section, do I click Traditional and Roth IRA boxes or just Roth because the recharacterization is not considered a contribution?

[dmertz]

All of the necessary questions will be asked by TurboTax if you mark only the Roth IRA box.  Marking the traditional IRA box won't hurt, but doing so will cause TurboTax to ask unnecessary questions about any contributions made directly to a traditional IRA, of which you made none.

The $6,000 now in the traditional IRA is a traditional IRA contribution, but because it was arrived at through recharacterization of a contribution originally made to a Roth IRA, all of the entries regarding this contribution are done as I described in my first reply.