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Jkessler93
Level 2

Roth IRA recharacterized to a Traditional IRA and then back to a Roth IRA

Hello,

 

I contributed $6000 to my Roth IRA in 2019 and then contributed $6000 to it again in 2020. I incorrectly thought that in 2019, my contribution exceeded the limit. In 2020, my income did actually exceeded the limit. In June 2020, I recharacterized ~$900 from 2019 and ~$5800 from 2020 to a Traditional IRA (loss of $200 from the $6000 contribution). Then, in March 2021, I converted ~$9000 (the original ~$6700 plus gains) back to a Roth IRA.

 

I have no idea how to handle this situation in TurboTax. Is the Traditional IRA recharacterization considered a contribution to the traditional IRA? If so, would the entire ~$6700 be considered a 2020 contribution? Do I go through the process of entering both the conversion and recharacterization in Turbotax?


Thank you!

7 Replies
macuser_22
Level 15

Roth IRA recharacterized to a Traditional IRA and then back to a Roth IRA

You should have received  1099-R's  one with a code R for the 2019 contribution recharactorized in 2020 and one with a code N for the 2020 contribution recharactorized in 2020.

 

The amount of a recharacterized 2019 contribution must be reported on your 2019 tax return (amended of not reported) that will produce a 2019 8606 form with the amount of actual contribution (not adjusted for earnings or losses) on line 1.

 

You do the same thing for 2020.     

 

A 2020 1099-R with a code R in box 7 (Recharacterized IRA contribution made for 2019 and recharactorized in 2020) will tell you that you must amend 2019.

A code R 1099-R does nothing whatsoever if entered into the 1099-R section of an amended 2019 return. It does not get sent to the IRS and nothing goes on the tax return at all. The only purpose of the 1099-R is to report the recharacterization to the IRS, but it still must be reported on your 2019 tax return.

The box 1 on the 1099-R will report the total recharacterized amount (contribution plus earnings) but it does not separately report the earnings and box 2a must be zero.

The proper way to report the recharacterization and earnings which is to enter the 2019 IRA contribution in the IRA contribution interview section and then say yes to "Did you switch from a Roth to a Traditional IRA - recharacterize".

The amount The amount of the original Roth contribution must be entered - not any earnings or losses.

Then TurboTax will ask for an explanation statement where it should be stated that the original $xxx.xx plus $xxx.xx earnings (or loss) were recharactorized.

There is no tax or penalty on the before-tax earnings since the earning were simply switched into the recharactorized account.

That is the only way to prepare and attach the proper explanation statement for a code R 1099-R.

Enter IRA contributions here:
Federal Taxes,
Deductions & Credits,
I’ll choose what I work on (if that screen comes up),
Retirement & Investments,
Traditional & Roth IRA contribution.

OR Use the "Tools" menu (if online version under My Account) and then "Search Topics" for "ira contributions" which will take you to the same place.

Since the after-tax Roth contribution is now a Traditional IRA contribution it can be either a before-tax deduction if your MAGI allows a deduction which might result in an additional 2019 refund, or it will be an after-tax contribution reported on a 8606 form (line 1 & 14) as a "basis" in the Traditional IRA that will reduce the tax of future distributions.

 

The code N is entered the same way on your 2020 tax return.   Be sure to say you want the contribution to be non-deductible if that question is asked in the contribution interview so the 8606 will be created.

 

The conversion will be reported next year on your 2021 tax return.

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**
Jkessler93
Level 2

Roth IRA recharacterized to a Traditional IRA and then back to a Roth IRA

Thank you very much for your explanation, that certainly helps a lot. I just have a few follow up questions.

  • You mentioned that "Since the after-tax Roth contribution is now a Traditional IRA contribution..." However, I converted the total amount (~$9000) in my Traditional IRA back into my Roth IRA in March 2021. How do I report this?
  • Turbotax has a page "Tell us how much you transferred," with the prompt "Amount switched from a Roth to a Traditional IRA." Should this be $6,000 (the amount that I originally contributed), or $5800, the amount that I actually recharacterized (the original $6000 but after a loss of $200).
  • On the next page, titled "Roth IRA Explanation Statement," it asks for "The Amount Recharacterized" and "The Amount Transferred (Recharacterization plus earnings or losses)." It also says "if you have more than one recharacterization, enter the information for all recharacterizations." I have two questions about this:
    • First, should I include the ~$900 that I recharacterized from my 2019 return? Ie, should I input $6900 into this box?
    • Ignoring the $900, should the first box ("The Amount Recharacterized") be $6000 and the second box ("The Amount Transferred") be $5800?
  • Do I need to amend my 2019 return even though it turns out that I didn't actually exceed the income limitation for 2019?

macuser_22
Level 15

Roth IRA recharacterized to a Traditional IRA and then back to a Roth IRA


@Jkessler93 wrote:

Thank you very much for your explanation, that certainly helps a lot. I just have a few follow up questions.

  • You mentioned that "Since the after-tax Roth contribution is now a Traditional IRA contribution..." However, I converted the total amount (~$9000) in my Traditional IRA back into my Roth IRA in March 2021. How do I report this?
  • Turbotax has a page "Tell us how much you transferred," with the prompt "Amount switched from a Roth to a Traditional IRA." Should this be $6,000 (the amount that I originally contributed), or $5800, the amount that I actually recharacterized (the original $6000 but after a loss of $200).
  • On the next page, titled "Roth IRA Explanation Statement," it asks for "The Amount Recharacterized" and "The Amount Transferred (Recharacterization plus earnings or losses)." It also says "if you have more than one recharacterization, enter the information for all recharacterizations." I have two questions about this:
    • First, should I include the ~$900 that I recharacterized from my 2019 return? Ie, should I input $6900 into this box?
    • Ignoring the $900, should the first box ("The Amount Recharacterized") be $6000 and the second box ("The Amount Transferred") be $5800?
  • Do I need to amend my 2019 return even though it turns out that I didn't actually exceed the income limitation for 2019?


The conversion done in 2021 is reported on yiur 2021 tax return next year.

 

 As i said above the original contribution *amount* (not adjusted for gains or losses) is entered.

 

Yes you need to amend 2019 to report the recharacterization.   Anyone can do that. I does not mean that there was an excess.

 

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**
Jkessler93
Level 2

Roth IRA recharacterized to a Traditional IRA and then back to a Roth IRA

Thank you again for your help. One last question, on the next page, titled "Roth IRA Explanation Statement," it asks for "The Amount Recharacterized" and "The Amount Transferred (Recharacterization plus earnings or losses)." Should I include the ~$900 that I recharacterized from my 2019 return in 2020? Ie, should I input $6900 into this first box, and ~$6700 into the second box?

macuser_22
Level 15

Roth IRA recharacterized to a Traditional IRA and then back to a Roth IRA


@Jkessler93 wrote:

Thank you again for your help. One last question, on the next page, titled "Roth IRA Explanation Statement," it asks for "The Amount Recharacterized" and "The Amount Transferred (Recharacterization plus earnings or losses)." Should I include the ~$900 that I recharacterized from my 2019 return in 2020? Ie, should I input $6900 into this first box, and ~$6700 into the second box?


As I posted above:

 

The amount The amount of the original Roth contribution must be entered - not any earnings or losses.

Then TurboTax will ask for an explanation statement where it should be stated that the original $xxx.xx plus $xxx.xx earnings (or loss) were recharactorized.

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**
Jkessler93
Level 2

Roth IRA recharacterized to a Traditional IRA and then back to a Roth IRA

Thanks again for the response. I think you may be slightly misunderstanding my question. I'm not asking whether or not to include the amount after earnings or losses. I'm asking if "The Amount Recharacterized" and "The Amount Transferred (Recharacterization plus earnings or losses)" should only include the $6000 that I recharacterized from my 2020 contributions, or if it should include the other $900 that I also recharacterized in 2020 from previous years of contributions. Or, does that $900 only come into play in the amendment of my 2019 returns.

macuser_22
Level 15

Roth IRA recharacterized to a Traditional IRA and then back to a Roth IRA


@Jkessler93 wrote:

Thanks again for the response. I think you may be slightly misunderstanding my question. I'm not asking whether or not to include the amount after earnings or losses. I'm asking if "The Amount Recharacterized" and "The Amount Transferred (Recharacterization plus earnings or losses)" should only include the $6000 that I recharacterized from my 2020 contributions, or if it should include the other $900 that I also recharacterized in 2020 from previous years of contributions. Or, does that $900 only come into play in the amendment of my 2019 returns.


You can only recharacterize the exact amount of 2020 contributions (not including any gains or losses) - not any prior contributors.  

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**
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