Traditional IRA to Roth IRA question

[simpleworld]

Hi,

I put some money to my nondeductible traditional IRA (let's say $4000) using the 2020 limit last April. After a few months, I converted all the money (with some earning, let's say $4400) into a ROTH IRA. So I receive the forms 1099-R and 5498. This case is very similar to the Example 5 in the Turbotax.

I am a bit confused because the Form 1099-R is different than what Turbotax suggests in the example. In my Form 1099-R, both Box 1 and 2a show $4400 and the code for Box 7 is "2". While in the example in the Turbotax, box 1 is $4400, but no amount in box 2a, code "R" in box 7.

Is there a chance that the bank made some mistakes on my Form 1099-R? If my Form 1099-R is correct, then what should I fill with outstanding rollovers/recharacterizations? It is clear that the value of my traditional, SEP, and SIMPLE IRAS on Dec. 31 2021 is 0.

Thank you.

[DanaB27]

A 2021 Form1099-R with code R -Recharacterized IRA contribution made for 2020 belongs on the 2020 return. But a 1099-R with code R will do nothing to your return. You can only report it as mentioned below. Therefore, you can ignore the 1099-R. 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.

To verify, did you make a Roth contribution for 2020 that you recharacterized in 2021 to a traditional IRA? If yes you will enter the 

 recharacterization when you enter the contribution to the Roth IRA:

1. Login to your TurboTax Account 
2. Click on "Search" on the top right and type “IRA contributions”
3. Click on “Jump to IRA contributions"
4. Select “Roth IRA”
5. Answer “No” to “Is This a Repayment of a Retirement Distribution
6. Enter the Roth contribution amount 
7. Answer “Yes” to the recharacterized question on the “Did You Change Your Mind?” screen and enter the contribution amount (no earnings or losses)
8. TurboTax will ask for an explanation statement where it should be stated that the original $xxx.xx plus $xxx.xx earnings (or loss) were recharacterized.
9. On the screen "Choose Not to Deduct IRA Contributions" answer "Yes" (if you are thinking about doing a backdoor Roth. If you have a retirement plan at work and are over the income limit it will be nondeductible automatically and you only get a warning and then a screen saying $0 is deductible)

Do you have a second Form 1099-R for the conversion?

Or did you accidentally request a recharacterization of your traditional IRA contribution to Roth IRA contribution instead of a conversion? 

[simpleworld]

Thank you for your reply.

A dump question is, what is the difference between recharacterization and conversion? I am getting a bit confused now. If I simply moved my money (contribution plus earnings) from the traditional IRA to ROTH IRA, is that a conversion or recharacterization? I found some people saying that conversion is from traditional IRA to ROTH IRA and recharacterization is from ROTH IRA to traditional IRA.

I only have one 1099-R and the box 2a is exactly as box 1 with box 7 shows "2" (early distribution). In the Turbutax, "Tell Us the Value of Your Traditional IRA", there are 3 question:

Value of your Traditional, SEP, and SIMPLE IRAs on Dec. 31 2021

Outstanding Rollovers

Outstanding Recharacterizations

Should I fill 0 for all three of them?

Thank you again.

[DanaB27 · Accepted solution]

I apologize I misread that you received a Form 1099-R with code R. I apologize for any inconvenience.

Recharacterization of a traditional IRA to Roth IRA is treated as if the contribution was never made to the traditional IRA but only the Roth IRA. You have specifically to request it with your financial institute. With a conversion, you move funds from a traditional IR to Roth IRA and this is a taxable event unless you have nondeductible contributions in the traditional IRA.

It seems as if you made a conversion and got the right Form 1099-R.

Yes, if the value of all your Traditional, SEP, and SIMPLE IRAs on Dec. 31 2021 was $0 then you will enter 0. And it seems as if you didn’t have any outstanding rollovers or recharacterizations. Therefore, you can enter $0.

Please review the steps for backdoor Roth (traditional IRA to Roth conversion) below.

To enter the nondeductible contribution to the traditional IRA:

1. Open your return
2. Click “Deductions &Credits” on the top
3. Click "I'll choose what to work on"
4. Scroll down to “Traditional and Roth IRA Contributions” and click “Start”
5. Select “traditional IRA”
6. Answer “No” to “Is This a Repayment of a Retirement Distribution?”
7. Enter the amount you contributed
8. Answer “No” to the recharacterized question on the “Did You Change Your Mind?” screen
9. Answer the next questions until you get to “Any Nondeductible Contributions to Your IRA?” and select “Yes” if you had nondeductible contributions before this tax year
10. If you had a basis in the Traditional IRA before then enter the amount.
11. On the “Choose Not to Deduct IRA Contributions” screen choose “Yes, make part of my IRA contribution nondeductible” and enter the amount (if you have a retirement plan at work and are over the income limit it will be nondeductible automatically and you only get a warning and then a screen saying $0 is deductible).

To enter the 1099-R distribution/conversion: 

1. Click "Federal Taxes" on the top and select "Wages & Income"
2. Click "I'll choose what to work on"
3. Scroll down and click "Start" next to "IRA, 401(k), Pension Plan (1099-R)" 
4. Answer "Yes" to the question "Did You Have Any of These Types of Income?"
5. Click "I'll Type it Myself"
6. Choose "Form 1099-R, Withdrawal of Money from 401(k) Retirement Plans, Pensions, IRAs, etc."
7. Click "Continue" and enter the information from your 1099-R
8. Answer questions until you get to “What Did You Do With The Money” and choose “I moved it to another retirement account”
9. Then choose “I did a combination of rolling over, converting, or cashing out money.” and enter the amount next to "Amount converted to a Roth IRA account"
10. On the "Your 1099-R Entries" screen click "continue"
11. Answer "yes" to "Any nondeductible Contribution to your IRA?"
12. Answer the questions about the basis from line 14 of your 2020 Form 8606 and the value of all traditional, SEP, and SIMPLE IRAs

[simpleworld]

Perfect. Thank you for your help.