Roth recharacterization with incorrect 1099-R saying early distribution

Forum|Forum|4 years ago
February 4, 2022
15 replies
59 views

I contributed small amount to my traditional IRA in 2020, but later found out that I cant deduct it from my income due to my income level, but still can contribute to Roth IRA. So, in 2021 before filing my 2020 taxes, I used my online broker account to move the money and its gain to my Roth account . I didnot deduct this money from my income and didnot file 8606. Because IRS says if you recharacterize all the contributions in year, you dont need to file 8606.

This year, I received my 1099-R from my broker with early distribution - code 2 in box 7- in 2021. I dont need to pay penalty, but have tp pay tax for distribution, which I havent deducted it in 2020 taxes.

I called my broker to correct it and they said that for recharacterization they have a form which needs to be filled manually to show that this transfer was recharacterization, otherwise they wouldnt know and will report it as early distribution.

How can I handle this situation?

Thanks

fanfare

Level 15

@fshams

you can repair this situation partially or fully, depending on whether you already had a non-zero balance in IRAs when you started this adventure.

The first step is to amend 2020 to elect a non-deductible contribution to your traditional IRA.

You do that by attaching 2020 Form 8606.

fanfare

Level 15

Tip: little known fact.

Because you won't be changing any dollar amount,

you can leave lines 1-23 empty when you file 1040-X.

dmertz

Level 15

What you did online told your IRA custodian to do a Roth conversion, not a recharacterization, so the Form 1099-R is correct. A Roth conversion does not transform the original traditional IRA contribution into a Roth IRA contribution, it remains a traditional IRA contribution.

fshamsAuthor

Level 2

thanks @dmertz

We did the same for my spouse's IRA, We converted the 2020 original contributions and gains to Roth IRA in 2020 with the intention of recharacterization and added a statement to explain the recharacterization.

For my account did the same except I transferred the money in 2021before tax due date.

@fanfare suggested to amend 2020 tax return and add 8606 . I am working on it, but TurboTax doesn't give me this option to to add 8606 forms to my and my spouse's accounts for 2020 tax return. It only asks for 2019 and prior years non-deductible contributions.

How can I handle this in TurboTax. I am using the 2020 desktop CD version. My spouse's 1099-R is for 2020 and for me is for 2021