Roth IRA Recharacterization, Conversion and Roll-over

[rboleratz]

We received 27 pay checks in 2020 that raised our MAGI, so we had to re-characterize 3,880 of our 6k contribution from Roth IRA (plus earnings) to Traditional IRA. I filed the 8606 for the re-characterization in 2020 tax return. Then in 2021, I converted the 2020 contribution 3880 (non deductible) (plus earnings) to Roth IRA. Then waited a week or so, contributed 6k for 2021 to Traditional IRA and then waited a day or two and rolled that over to Roth IRA.

I received two 1099-R forms -

1. 1099-R for the re-characterization (box 7 has R) - I've read that I don't need to amend my tax return for 2020 since I already filled out 8606 before filing 2020 tax return (so I can ignore this 1099-r form).

2. 1099-R box 7 has 2 - so I need to claim this on my 2021 tax return (this includes, the 3880 non deductible contribution, plus earnings on the 3,880 for 2020 and 6k for 2021 non deductible.

I already did the 8606 form for the 6k non deductible for 2021 and cost basis of 3880 for 2020.

However, I try to enter 1099-R and receiving a message that I must break my 1099r into two for rollover and conversion.

I get to 'What did you do with the money from 1099-r'and I select 'moved the money to another retirement account(or returned to same account)' then 'did a combination of rolling over, converting, or cashing out the money' I enter 9880 (for the rolled over to another retirement account )3880 for 2020 and 6k for 2021) and then 6193.05 for 'amount converted' and hit continue - it tells me I must break my 1099r into two separate translations and delete the current 1099r.

Why is this? I've read all over and followed the directions, which seems it should work...thoughts?

[DanaB27]

Please only select/enter that you converted the amount from the second 1099-R with code 2 in box 7 since you stated that you had moved both amounts from traditional IRA to Roth IRA.  Do not enter $9,880 for the rolled over to another retirement account (this would apply for example if you had moved funds from a traditional IRA to another traditional IRA).

Yes, you can ignore the first 1099-R with code R since you reported it on your 2020 tax return.

Please review these instructions to report a backdoor Roth.

To enter the 2021 nondeductible contribution to the traditional IRA:

1. Open your return
2. Click “Deductions &Credits” on the top
3. Click "I'll choose what to work on"
4. Scroll down to “Traditional and Roth IRA Contributions” and click “Start”
5. Select “traditional IRA”
6. Answer “No” to “Is This a Repayment of a Retirement Distribution?”
7. Enter the amount you contributed $6,000
8. Answer “No” to the recharacterized question on the “Did You Change Your Mind?” screen
9. Answer the next questions until you get to “Any Nondeductible Contributions to Your IRA?” and select “Yes” since you had nondeductible contributions before this tax year
10. If you had a basis in the Traditional IRA before then enter the amount.
11. On the “Choose Not to Deduct IRA Contributions” screen choose “Yes, make part of my IRA contribution nondeductible” and enter the amount.

To enter the 1099-R distribution/conversion: 

1. Click "Federal Taxes" on the top and select "Wages & Income"
2. Click "I'll choose what to work on"
3. Scroll down and click "Start" next to "IRA, 401(k), Pension Plan (1099-R)" 
4. Answer "Yes" to the question "Did You Have Any of These Types of Income?"
5. Click "I'll Type it Myself"
6. Choose "Form 1099-R, Withdrawal of Money from 401(k) Retirement Plans, Pensions, IRAs, etc."
7. Click "Continue" and enter the information from your 1099-R
8. Answer questions until you get to “What Did You Do With The Money” and choose “I moved it to another retirement account”
9. Then choose “I did a combination of rolling over, converting, or cashing out money.” and enter the amount next to "Amount converted to a Roth IRA account"
10. On the "Your 1099-R Entries" screen click "continue"
11. Answer "yes" to "Any nondeductible Contribution to your IRA?"
12. Answer the questions about the basis and value

[rboleratz]

Thank you! Although, I owe a crap ton of money now for a mistake. Ugh...anyhow...

I assume Turbo Tax knows that the 6k is non deductible and should not be taxed and same for the 3880?

How do I verify that I'm not being taxed on the 9880 amount, but just the gains that I had to pull from the Roth IRA?

[DanaB27 · Accepted solution]

Yes, you have the option to make the 2021 traditional IRA nondeductible on the “Choose Not to Deduct IRA Contributions” screen choose “Yes, make part of my IRA contribution nondeductible” and enter the amount $6,000 (step 11 of the contribution instructions above). Please be aware, if you have a retirement plan at work and are over the income limit it will be nondeductible automatically and you only get a screen saying $0 is deductible.

For the $3,880 basis (this is only the contribution and doesn't include earnings, correct?) you will enter it in step 11 and 12 of the conversion instructions above.

Yes, only the earnings will be taxable. You can check Form 1040 line 4 b how much was taxable of your conversion. Please be aware, if your traditional IRA wasn't empty before making the nondeductible contributions and had other deductible funds then this will not be true since each distribution/conversion from the traditional IRA will be pro-rated (have a part of the nondeductible basis included).

[rboleratz]

Yes, thank you!