Roth recharacterization with incorrect 1099-R saying early distribution

[fshams]

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]

@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]

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]

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.

[fshams]

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

[fanfare]

You can get fillable PDF copies of Form 8606 and Form 1040-X at the IRS website.

An amended 2020 Tax return must be filed on paper.

You don't need TurboTax since no dollar amounts are changing when you did not take the deduction.

[fanfare]

I assumed you did all this in 2021.

If you have any other activity (incorrect actions) reported on the 2020 return then perhaps some amounts will be changing.

We can't see your tax return.

[dmertz]

Since the custodian did what you asked, even though it wasn't what you intended, it's extremely doubtful that they would change the Form 1099-R.  In that case your only option to treat it as a recharacterization would be to treat the Form 1099-R as incorrect and file a substitute Form 1099-R (Form 4852) to claim to the IRS that the one issued by the custodian is erroneous.  Whether or not the IRS would agree with this claim is unknown.

[fshams]

We had 2 actions,

in 2020 my spouse converted the IRA (nonreduced) to Roth, including original contributions and gains. The intention was recharacterization

for myself I contributed in 2020 and converted in 2021 to Roth including original contributions and gains.

Is this going to change anything?

[dmertz]

As far as on can tell you both contributed to a traditional IRA for 2020 and did Roth conversions in 2021, so, a fanfare said, you'll need to amend your 2020 tax return to include Form 8606 showing a nondeductible traditional IRA contribution.  Your spouse's traditional IRA contribution also needs to be reflected on the 2020 tax return, either nondeductible on your spouse's Form 8606 or deductible on Schedule 1.

[fshams]

Correct, we both contributed to Traditional IRA. My spouse converted in 2020 and I did in 2021. If I fill 8606 for me and my spouse's contributions, then I think I have to pay taxes for the gains. Is that right? and additional $50 for late 8606 ($100 for 2 person)

[dmertz]

Yes, gains in the traditional IRA are taxable when converted to Roth.

The IRS does not seem to be too aggressive about charging the late filing fee for late filed Forms 8606, particularly when the tax year in question has not yet closed as would be the case for a 2020 tax return.  I would let the IRS bill for any late fees rather than pay them up front.

[fshams]

Thanks!,

Should I have a 8606 form showing 2020 year on it? Or can be any the latest found on IRS website?

[dmertz]

A nondeductible traditional IRA contribution made for 2020 must be reported on a 2020 Form 8606.  If you are downloading the form from the IRS website, it can be found here:

https://www.irs.gov/pub/irs-prior/f8606--2020.pdf

[fshams]

Then, I think I should amend 2020 tax return. right? 1040X