Roth recharacterization to Traditional, followed by backdoor back to Roth

[LMTaxBreaker]

In Nov 2024 I made a 2024 contribution of $7000 to Vanguard Roth within my $7000 limit (46 yrs old), then realized in Dec 2024 that I was over the income limit, so I recharacterized it ($7000 grew to $7016 by then) with Vanguard as a Traditional contribution with the intent of following that with a backdoor conversion from Traditional back to Roth. I'm within the income limits that allow for that. In Feb 2025, I went ahead with the backdoor conversion ($7016 grew to $7062 by then) as a 2024 operation. Messy, I know. Better to do all steps right away, in the year it's intended for. Questions below: 

- In TurboTax Deluxe (desktop/downloaded software version), is my contribution $7000 to Roth ("even if you recharacterized it later")?

- How do I treat the growth that it experienced by the time the next 2 steps of recharacterization to Traditional, then more by the time of the backdoor conversion back to Roth?

I tried just following prompts in TT thinking the questions would be intuitive (Intuit!), but for me, they weren't, and during the final check in the software, it flagged a few issues and showed me the errors at their locations on the tax return form, at which point purple dust shot out of my ears and I realized I don't understand what it thinks I was trying to do!

Thanks in advance for your advice on this (and I promise to do clean conversions in the future!)

[fanfare]

recharacterization: the original amount to the first IRA you report as contribution to the second IRA, earnings move but that is ignored.
You must use a trustee-to-trustee transfer before the due date April 15,2025 ( or Oct 15, 2025 if 1040 was timely filed or extended).
You will instruct trustee to calculate the allocable earnings.

report this on your tax return for the year during which the contribution was made.
Treat the contribution as having been made to the second IRA on the date that it was actually made to the first IRA.

Attach a statement to your tax return describing the recharacterization and how you treated the contribution to the second IRA.
----
Upon reporting a Trad IRA contribution (non-deductible) on your tax return, you can then also report a Roth conversion of the contributed amount for net tax of zero, unless your IRA previously had value exceeding basis.

to report a non-deductible contribution, Form 8606 must be attached.

Your contribution to the second IRA (Traditional) is $7,000.

--

A conversion to Roth executed in 2025 goes on your 2025 tax return.

@LMTaxBreaker 

[dmertz · Accepted solution]

Enter the original Roth IRA contribution of $7,000.  When TurboTax indicates that this is an excess contribution, indicate that you "switched" (recharacterized) $7,000 to be a traditional IRA contribution instead.  This will cause TurboTax to prompt you to enter an explanation of the recharacterization where you'll indicate that a gain-adjusted amount of $7,016 was transferred to the traditional IRA to accomplish the recharacterization of the $7,000 contribution.  Enter the code-N 2025 Form 1099-R that you received, but this will have essentially no effect on your tax return since the recharacterization is indicated via the entries in the contribution section.

The $7,062 Roth conversion will be reportable on your 2025 tax return.  The Roth conversion is not a 2024 operation because it did not occur in 2024.  If the resulting traditional IRA contribution in 2024 was nondeductible, your basis in nondeductible traditional IRA contributions shown on line 14 of your 2024 Form 8606 will carry forward to line 2 of your 2025 Form 8606 to be applied to the Roth conversion.

[LMTaxBreaker]

In the Deductions & Credits section, TurboTax first goes through Traditional IRA, then Roth (we have both, and after 2020, only use Traditional IRAs for the purpose of doing backdoor conversion to Roth. The Traditional IRAs otherwise maintain a $0 balance and $0 basis). 

Traditional IRA section: 

So going through the prompts in sequence, "Tell us how much you contributed. Enter the total amount you put into a traditional IRA for 2024, even if you later transferred some or all of it to a Roth IRA. Your total 2024 traditional IRA contributions: ".  

This is confusing, because since the sequence of what I did with Vanguard was 1) contribute $7000 to Roth in Nov 2024 before realizing I was not allowed to; 2) correct the disallowed Roth contribution by recharacterizing the $7016 Roth contribution as a non-deductible traditional IRA contribution ($7k contribution + earnings by the December 2024 recharacterization date); 3) In Jan 2025 did a conversion of the non-deductible traditional IRA contribution + earnings to that date ($7062). 

At this step in TurboTax, should I enter the $7000? $7016? Or should I enter $0?

I'm inclined to enter $0, because TT has a note here "Do not enter any of the following: Roth contributions (even if you later recharacterized them to a traditional IRA". What I did seems to fit the description in that exception note - the $7000 was first a disallowed Roth contribution that was subsequently recharacterized to Traditional. 

• My traditional IRA's 2024 Form 5498 information: 
  • Line 1 "IRA Contributions", there is no $ value there. 
  • Line 4 "Recharacterized contributions", $7016.13
  • Line 10 "Roth IRA contributions", there is no $ value there.
• My Roth IRA's 2024 Form 5498 information: 
  • Line 1 "IRA Contributions", there is no $ value there
  • Line 4 "Recharacterized Contributions", there is no $ value there
  • Line 10 "Roth IRA contributions", $7000

Roth IRA section: 

• "Enter your Roth IRA Contributions. Enter your total Roth IRA contributions for 2024, even if you transferred, or "recharacterized" some or all of it to a traditional IRA. NOTE: Include contributions made between Jan 1, 2025 and April 15, 2025 that you want to include on your 2024 return.": $7000
  • Am I correct to enter the $7000 here, after entering $0 on the same step in the Traditional IRA series of questions (reference above)?
• "Tell us how much you transferred. How much of the $7000 that you contributed to this Roth IRA did you switch, or 'recharacterize', to your traditional IRA. Amount switched from a Roth to a Traditional IRA:" $7000
• "Roth IRA explanation statement": Below is what I wrote: 
  • Date of the original contribution: 11/26/24
  • Date of the Recharacterization of the gain-adjusted $7016 (original Roth contribution + earnings to date): 12/01/24
  • The amount rechacterized: $7016
  • The amount transferred (recharacterization plus earnings or losses): $7016
  • Reason for the Recharacterization: Realized while doing my 2024 tax return that I was over the income limit for direct Roth contribution, so I recharacterized the entire contribution plus earnings to Traditional IRA so I could backdoor convert to Roth later, before the filing deadline in 2025.

Did I do this correctly? 

Although the gains were small, I'm also concerned that the gains (which I imagine should be taxed upon conversion of from Traditional to Roth in Jan 2025) aren't in the math of this tax return. But maybe they'll be taxed on my 2025 tax return since the conversion operation occurred in 2025 (?). 

[dmertz]

Since your original contribution was to a Roth IRA, all of your entries are to be made in the sections dealing with Roth IRA contributions.  When TurboTax indicates that you have a $7,000 excess Roth IRA contribution, you'll indicate that you recharacterized the $7,000 contribution, not a $7,016 contribution.  $7,016 was the gain-adjusted amount transferred to the traditional IRA, not the amount recharacterized.  Since the original contribution was not to a traditional IRA, entering nothing in the traditional IRA contribution section (or enter $0 as your traditional IRA contribution  This is what the TurboTax instruction that you quoted is saying to do.

Everything that you say you entered appears to agree with this.  The result will be either a $7,000 nondeductible traditional IRA contribution on Form 8606 line 1 (most likely) or a $7,000 deductible traditional IRA contribution on Schedule 1 line 20 (or the $7,000 split between these two), depending on your circumstances.

The $16.13 of gain transferred to the traditional IRA simply becomes gain in the traditional IRA.  The only reference to it that should be present in your 2024 tax return is in the explanation statement for the recharacterization.  When converted to Roth the $16.13 will be taxed along with any other gains that occurred while the money was in the traditional IRA ($62 total taxable, if I read your original post correctly).