Do I have to make up two new 1099Rs in Turbotax 2015 for a traditional IRA to Roth conversion with a later partial recharacterization?

[MelWetzger]

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I am doing 2015 taxes. I converted $X from a traditional IRA to a Roth IRA and then later did a recharacterization of about 2/3 of $X by putting 2/3 $X back into the traditional IRA for tax year 2015. My broker issued a 1099R showing the $X as a Gross Distribution from the traditional IRA for 2015. Even though I have only one 1099R, Turbotax seems to be telling me I have to make up two new separate 1099Rs.

Is this correct, or am I missing something? Thanks

[dmertz · Accepted solution]

You should have received two Forms 1099-R from the broker, one 2015 Form 1099-R for the original conversion and the other either a 2015 or 2016 Form 1099-R for the recharacterization.  Enter these exactly as received and answer the follow-up questions as they apply relative to the moment that the distribution was made.

The fact that TurboTax is mentioning splitting a Form 1099-R suggests that that when entering the Form 1099-R for the original conversion you are inappropriately indicating that some portion was rolled over rather than being converted.  You should instead be indicating that you converted the entire $X to a Roth IRA, then on the following page indicate that you moved some of this back to a traditional IRA.  The next page will ask how much of the original conversion was left in the Roth IRA, that would be 1/3 of $X.

[MelWetzger]

OK thank you dmertz. I have one 1099R for 2015 for the traditional IRA showing a gross distribution of $X. This $X was moved into a Roth IRA. And I have another a 1099R for the Roth IRA for 2016 (which is coded R in box 7) showing a gross distribution amount which was moved back (recharacterized) into the traditional IRA. (The traditional IRA account number is not on the 1099R for the Roth, however.) The amount recharacterized is equivalent to about 2/3 of X. I say equivalent, because the value of stock between the time of the first distribution and the recharacterization changed. (I have been told the code R in box 7 means for the previous tax year).

I have only one 1099R for the traditional IRA (2015) and one 1099R (2016 coded R in box 7) for the Roth. Each 1099R cites only one account, not both accounts.

QUESTION: Are the two 1099Rs I mention above (one for the traditional IRA and one for the Roth IRA)  the the two 1099Rs I should use for Turbotax?

Thanks

[dmertz]

Yes, these are exactly the two that I referred to in my answer, one conversion distribution from the traditional IRA and one recharacterization distribution from the Roth IRA.  When you indicate the amount left in the Roth IRA, it's the amount of 1/3 $X.  In your explanation you'll indicate that 2/3 of $X was recharacterized, but due to a drop in value of the investment between the time of the conversion and the time of the recharacterization, an adjusted amount of something less than 2/3 of $X was transferred back to the traditional IRA.

[MelWetzger]

Thank you DMertz.

You say above, "In your explanation you'll indicate that 2/3 of $X was recharacterized, but due to a drop in value ... ."

Where do I provide such an explanation? Is it, for example, on an IRS Form or in an attached letter to the IRS?

Thank again.

[dmertz]

As you click through TurboTax pages following the entry of these Forms 1099-R, I would expect TurboTax to prompt you to enter the explanation which will be included in your e-filing.  Be sure to click the Continue button on the Your 1099-R Entries page and proceed through those follow-up pages as well.  If for some reason TurboTax doesn't prompt you to enter the explanation statement  (I think there are some scenarios where explanation is required but TurboTax does not prompt, but I don't think that this is one of them), I would manually prepare an explanation statement and include it with my mailed tax return.

[MelWetzger]

Thank you, DMertz

[MelWetzger]

Hello, In trying to use Turbotax as suggested above by DMertz, a couple of potential glitches have developed. First, when entering the information from the 1099R for the recharacterized amount, the dropdown menu in Turbotax for Box 7 describes code R as "Recharacterized IRA contribution made for 2014 and recharacterized in 2015."

In fact the the amount recharacterized was made for 2015 and recharacterized in 2016. On the other hand, subsequent pages in Turbotax ask if the 1099R form shows tax year 2015 or 2016. In fact the form shows 2016, meaning that it could not possibly be a recharacterized amount for 2014.

So I'm not sure what to make of this. On the other hand, it seems that form 1040 is being filled out correctly in terms of income.

[dmertz]

This is a common question.  The drop-down text assumes that you are entering a 2015 Form 1099-R.  However, you are entering a *2016* Form 1099-R so code R is correct.  Just be sure in the follow-up to indicate that it is a 2016 Form 1099-R.

[MelWetzger]

Thanks DMertz. Another possible glitch: in filling out the 1099R query for the original Roth conversion it asks me: "How much of the original converted funds ($X) did you recharacterize from a Roth back to a traditional IRA?" I keep selecting "part of the amount" radio button. But every time I go back and review this, Turbotax has selected "the entire amount."

But I think Turbotax is still filling out the form 1040 correctly.

[dmertz]

TurboTax does not record the answer to this question.  It's used on-the-fly to determine if TurboTax needs to ask how much was left in the Roth IRA and not recharacterized.

[MelWetzger]

Thanks DMertz.