At the beginning of both 2020 and 2021 I contributed $6000 to my Roth IRA. When it came time to file my 2020 taxes I realized that I was over the Roth IRA income limit. To fix the issue I filed two forms to have the contributions plus earnings recharacterized to a Traditional IRA (that had no funds in it). A week later after both funds had settled, I converted them back to the Roth IRA (backdoor). On my 2020 taxes I explained the recharacterization steps that I had performed for the 2020 contribution.
Now in 2021 I have received three 1099-R forms.
1: 1099-R Recharacterization of 2020 contribution - Code: R (Box 1: $7120.16)
2: 1099-R Recharacterization of 2021 contribution - Code: N (Box 1: $6329.38)
3: 1099-R Roth IRA backdoor conversion - Code: 2 IRA/SEP/SIMPLE Checked (Box 1 and 2a: $13742.61, 2b. both boxes (taxable amount not determined, total distribution) checked )
Once I add the third 1099-R (of the conversion), my taxes owed increases significantly.
To see why it increases so much, I looked at Form 8606 and I see that on Line 18 (taxable amount) it shows $7743. Line 16 shows: $13743, Line 17: $6000.
My understanding is that this money has already been taxed, so I should not owe taxes on this portion.
$7120.16 + $6329.38 = $13449.54. My understanding was that I would only owe taxes on the earnings the Traditional IRA made in the week before converting it: $13742.61 - $13449.54. = $293.07.
If these assumptions are correct, then I am trying to figure out how to correctly fill out the Turbo Tax questions to reach this conclusion.
I have looked at this help page: How do I enter a backdoor roth ira conversion
And have also referenced a few other forum posts that note somewhat similar issues:
https://ttlc.intuit.com/community/retirement/discussion/re-how-do-i-file-a-roth-recharacterization-to-a-traditional-ira-and-then-a-backdoor-roth-conversion/01/2145841
https://ttlc.intuit.com/community/retirement/discussion/report-recharacterization-of-roth-ira/00/1868847/page/2
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What I have tried so far:
Under Wages & Income - IRA section:
1. I've entered the 1099-R info
2. What did you do with the money:
- I check that I moved the money to another retirement account
- I check "I did a combination of rolling over, converting, or cashing out the money"
- I then put the full $13,742.61 in the box labeled "Amount converted to a Roth IRA account"
3. No I didn't put this money in an HSA
4. No, this was not a qualified disaster distribution
5. Any nondeductible contributions to your IRA?
- For this I chose "Yes I made and tracked nondeductible contributions to my IRA". Since I am over the income limit my
6. Let's find your IRA Basis: Tells me to reference the most recent Form 8606 and enter the total basis
- The Form 8606 shows the total basis as 0. So I've entered that in the box for Total Basis as of Dec 31, 2020
7. Tell us the Value of Your Traditional IRA - value of the traditional IRA on Dec 31, 2021
- I entered 0. At the end of the year the account had $0 in it, as the conversion took place in April 2021.
8. Explain your recharacterization
- I add my note here indicating the amount recharacterized and including the earnings and dates.
On Deductions and Credits - Traditional And Roth IRA Contributions section:
1. I select the checkbox for Roth IRA (as that is what I originally contributed to)
2. Value of traditional IRAs on Dec 31, 2021
- I put 0 here.
3. Did you make Roth IRA contribution for 2021? This included contributions that you later recharacterized to a traditional IRA.
- I answered Yes (since I later recharacterized it).
- Repayment of a retirement distribution - Answered No
- Enter your Roth IRA Contributions - Entered 6000
- Tell us how much you transferred/recharacterized - Entered 6000
- Filled out the Roth IRA explanation statement here
4. Enter excess Roth IRA contributions for Prior years
- I entered 0 here. (Its unclear if I'm supposed to indicate the 2020 recharacterized funds here?)
5. It tells me my income is too high to deduct an IRA contribution and deducts $0 (expected)
With all of the above filled out the Form 8606 shows Line 18 taxable amount as 7743.
It seems that the form didnt have a way for me to indicate that the 7120.16 was from the 2020 recharacterization and so it seems that its trying to tax that amount plus the earnings.
I've tried playing around a bit with inserting different numbers into the forms in various places and it does seem to move the numbers back to where I would expect them. One such area being the total basis in traditional IRA (line 1 of form 8606) - I tried entering the 7120.16 here and then it brings line 18 down to 623. Tho I'm not exactly confident that this is the right place.
If my assumptions at the beginning are correct, then I think that somewhere I am filling out a field incorrectly which is resulting in it trying to tax on more than expected.
Any help is appreciated, thank you!
You should have a basis on line 14 of your 2020 Form 8606 because you recharacterized the Roth contribution. This should be your 2020 contribution amount. You will enter this on your 2021 tax return in step 8 when you enter your Form 1099-R for the conversion. Please make sure you enter your recharacterization on your 2020 tax return. you can ignore the 1099-R with code R. It belongs on your 2020 tax return but code R will not change anything on your return.
On your 2021 tax return:
You will enter the recharacterization when you enter the contribution to the Roth IRA:
To enter your conversion and basis from your 2020 tax return:
Please be aware, only your contribution amounts will be nontaxable. The earnings that you had in the Roth before you recharacterized the contributions will be allocated as traditional IRA earnings since a recharacterization means to treat the contribution as if made only to the traditional IRA and never the Roth IRA.