Roth IRA Issue with Form 8606 & 5329

[jinhuang262]

I just realized that I made too much to invest in Roth IRA for both 2021 and 2022 (6,000 each year). Also I failed to report my contribution on my 2021 tax return.

I have already instructed Vanguard to recharacterize my 2022 contribution to traditional IRA so that I could avoid the 6% penalty. For 2021 contribution, Vanguard did Excess Contribution Removal for me. No 1099R received yet. Did both in March 2023.

Questions:

1) I understand that I should report the recharacterization with Form 8606 on my 2022 tax return. But how do I report my withdrawal/removal with Form 5329 on my 2022 tax return since it happened in 2023? Or should I amend my return with 2021 TurboTax?

2) My excess contribution subject to 6% penalty should be 6,000? Should this be considered early distribution subject to 10% penalty?

3) How do I fill in my 1099R in TurboTax?

Thanks for your help!

[DanaB27 · Accepted solution]

You will report the recharacterization of the contribution for 2022 on your 2022 tax return with these steps:

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 ‘Yes” on the “Roth IRA Contribution” screen
6. Answer “No” to “Is This a Repayment of a Retirement Distribution
7. Enter the Roth contribution amount 
8. Answer “Yes” to the recharacterized question on the “Switch from a Roth To a Traditional IRA?” screen and enter the contribution amount (no earnings or losses) on the next screen.
9. TurboTax will ask for an explanation statement where it should be stated that the original $xxx.xx plus $xxx.xx earnings (or loss) were recharacterized.
10. 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 a 2023 Form 1099-R for the recharacterization with code R-Recharacterized IRA contribution made for 2022 and this belongs on the 2022 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 2023 Form 1099-R with code R when you get it in 2024.

You should have removed the 2021 excess contribution as a regular distribution (without earnings or losses) since it was after the extended due date of the 2021 tax return. Therefore, you should get a 2023 Form 1099-R with code J and you will enter this next year on your 2023 tax return. Please make sure that you include the 2021 excess contribution in the net contributions prior to 2023 when TurboTax asks.

1. Login to your TurboTax Account 
2. Click on "Search" on the top and type “1099-R” 
3. Click on “Jump to 1099-R” and enter all your 1099-Rs
4. Click "Continue" on the "Review your 1099-R info" screen
5. Answer all the questions and make sure you enter the net contributions prior to 2023 on the "Enter Prior Year Roth IRA Contributions" screen
6. Answer the remaining question.

Yes, you will need to amend your 2021 tax return to pay the 6% penalty. All you need to do is enter your Roth IRA contribution in the IRA contribution and TurboTax will automatically calculate the 6% penalty on Form 5329.

You will also have to pay the 6% penalty on your 2022 tax return (since the excess wasn’t removed until 2023):

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 2021 (if it wasn't carried over).

[jinhuang262]

Thank you for your detailed information!

Please see if my understanding regarding the excess contribution in 2021 is correct:

What I need to do on TurboTax:

1) On my 2022 tax return, I will include 2021 excess in prior years and this will result a penalty. No 1099R included.

2) On my 2023 tax return, I will only include 1099R with code J on my 2023 tax return. And also include excess contribution in 2021, but this will not result a penalty. 

3) Amend my 2021 tax return using 2021 version TurboTax instead of 2022 version, and pay a penalty.

4) Only Form 5329 Part IV is required. Does this trigger Part I as an early distribution?

[fanfare]

recharacterization: you report the original amount as contribution to the second IRA, earnings are ignored.

return of excess contribution:

before tax due date including extensions:  positive earnings are taxable on the Line 4b for the year of the contribution. negative earnings are ignored.

positive earnings removed are penalized 10% if you are under age 59 1/2.

after tax due date including extensions: you distribute the excess amount being carried forward on 5329,

(or offset it with currently allowed contribution) . 

earnings stay in the Roth account.

@jinhuang262 

[fanfare]

 @jinhuang262 

I revised the synopsis above for clarity.

[DanaB27]

1) Yes, on your 2022 tax return you will report the recharacterization with the steps above and enter the excess from 2021 to pay the 6% penalty.

2) Yes, on your 2023 tax return, you will only include Form 1099-R with code J and enter the excess contribution in 2021, but this will not result in a penalty because entering Form 1099-R with code J will show that you removed the 2021 excess contribution.

3) Yes, you will use the 2021 TurboTax version to amend your 2021 tax return to pay the penalty.

4) Yes, Form 5329 part IV is required but since you don’t remove any earnings part I early distribution won’t be triggered.

@jinhuang262

[jinhuang262]

Thank you @DanaB27 @fanfare ! That answers all my questions!

[jinhuang262]

@DanaB27 

Now I've done the recharacterization. I plan to do backdoor Roth IRA or "conversion".

Do I need to report this on my 2022 tax return altogether with the recharacterization? Should I wait till I receive 1099-R to file in 2023?

I tried to finish Step 1 following this instruction https://ttlc.intuit.com/turbotax-support/en-us/help-article/retirement-benefits/enter-backdoor-roth-... , but my excess contribution turned out to include the traditional IRA contribution. I do not understand. Did I do this correctly? I checked both Traditional IRA and Roth IRA boxes under ""Deductions & Credits".

[jinhuang262]

And also, for the removed part of excess contribution made for 2021, do I need to fill in 1099-R? Or do I wait till the form comes in next year and amend?

[jinhuang262]

@DanaB27 

"You will get a 2023 Form 1099-R for the recharacterization with code R-Recharacterized IRA contribution made for 2022 and this belongs on the 2022 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 2023 Form 1099-R with code R when you get it in 2024."

I looked up and code R means recharacterized contribution made for 2021 and recharacterized in 2022. But my situation is that I recharacterized the part contributed in 2022. (while I removed 2021 excess contribution.) Code N actually represents recharacterized contribution made for 2022 and recharacterized in 2022. Please advise. 

Thank you!!

[DanaB27]

The conversion part is reported on your 2023 tax return since the conversion will happen in 2023.

No, you won’t enter a direct contribution to Traditional IRA (delete that entry). You will only enter the Roth IRA contribution and the recharacterization. You then have the option to make it nondeductible (if it isn’t automatically nondeductible). Please see my instructions above. 

You will wait for Form 1099-R for the return of the excess 2021 contribution. This should have been a regular distribution (without earnings) and you should get Form 1099-R with code J. This will be entered on your 2023 tax return.

Code R on a 2023 Form 1099-R means —Recharacterized IRA contribution made for 2022 and

recharacterized in 2023 (see page 9 of the link).

@jinhuang262 

[jinhuang262]

Thanks @DanaB27 !! You've been a great help!!

[tgurl715]

When choosing to "report the recharacterization" from a Roth to a Tradational IRA does this trigger the 8606 form in the background? I assume it does with the explanation statement, but I'm unsure.

I want to be sure I don't need to fill out contributing to a Tradtional IRA. I only recharacterized my Roth to a tradtional IRA during the 2022 filing year.  

[DanaB27]

It will trigger Form 8606 if you select to make the traditional IRA contribution nondeductible (or is automatically nondeductible because you have a retirement plan at work and are over the income limit). Please see step 10 in the instructions below.

Yes, you will only enter the Roth contribution and  indicate it was recharacterized:

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 ‘Yes” on the “Roth IRA Contribution” screen
6. Answer “No” to “Is This a Repayment of a Retirement Distribution
7. Enter the Roth contribution amount 
8. Answer “Yes” to the recharacterized question on the “Switch from a Roth To a Traditional IRA?” screen and enter the contribution amount (no earnings or losses) on the next screen.
9. TurboTax will ask for an explanation statement where it should be stated that the original $xxx.xx plus $xxx.xx earnings (or loss) were recharacterized.
10. On the screen "Choose Not to Deduct IRA Contributions" answer "Yes" if you are thinking about doing a backdoor Roth. Otherwise select "No". (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)

@tgurl715