Two Roth 20/21 recharacterizations, plus one backdoor conversion

[RuffyK]

Hello,

Thank you for looking at this for my spouse and I who are filling jointly. In 2020 our MAGI was too high for Roths, but we didn't know it and we contributed 6000 and 7000 to our Roths.

In 2021 our MAGI was also too high for Roths, but we didn't know it and...

• We again contributed 6000 and 7000 to our Roths.
• When doing our 2020 taxes we discovered the limit issue, and recharacterized all the above the Roth monies for both my spouse and I, (for both 2020 and 2021.)
• My spouse never had a Trad IRA, so she also did a backdoor Roth with her entire recharacterized amount (from both 2020 and 2021).
• I did not do a backdoor.

We have received the following 1099-Rs (tax year 2021 listed on them):

Me:

• Dist Code N; IRA/SEP/SIMPLE [blank] - $7130
• Dist Code R; IRA/SEP/SIMPLE [blank] - $11597

Spouse:

• Dist Code N; IRA/SEP/SIMPLE [blank] - $6576
• Dist Code R; IRA/SEP/SIMPLE [blank] - $8071
• Dist Code 2; IRA/SEP/SIMPLE [X]; Taxable amt not determined [X]; Tot Dist [X] - $14169

Would you please tell me:

• Do I need to amend our 2020 return as TT seems to be indicating (because of the 1099-R Dist Code R forms)?
• If so, how do I amend our 2020 return?
• What fields need to be filled out on our 2021 return for any of these 1099-R amounts?
• What fields need to be filled out on our 2021 return for my spouses backdoor conversion, (which I believe would be for the $14169 listed on the 1099-R?)
• Do I have an 'excess contribution', and do I need to pay a 6% tax on it, and if so how?

Thank you very much for your advice!
Ruffy

[DanaB27]

No, if you entered the recharacterization on your 2020 return like mentioned below then you do not need to amend your 2020 tax return. 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 with code R.

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)

When you make the contribution nondeductible TurboTax will create Form 8606 and you will have a basis on line 14 to carry to 2021 (enter for your spouse on the 2021 return when entering the 1099-R for the conversion with steps 11 and 12).

For the 2021 return, you will enter recharacterization with the steps above.

You will enter Form 1099-R with codes N but they won't be taxable. For the conversion you will enter the 1099-R like this:

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" after you entered all Form 1099-Rs
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

No, you do not need to pay the 6% excess contribution tax since you recharacterized your contribution before the due date (assuming you had enough taxable compensation like wages to make the contributions).

[RuffyK]

Hello Dana,

When doing our 2020 taxes we had our financial institution recharacterize all the monies, but as far as our 2020 tax filing I'm not sure if I recharacterized it. On our 2020 taxes we submitted 8606 forms for the 7k and 6k amounts where, for example, the 7k amount is listed on lines 1,3 and 14, but nothing else is entered. I'm not sure where else to look to see if I 'recharacterized' these amounts on our 2020 taxes.

Where should I look for evidence, and if I did not recharacterize on our 2020 taxes, what do I need to do about it now?

Thank you,

Ruffy

[DanaB27]

You will have an explanation statement with your return. Also, you can check your IRA Contribution Worksheet lines 2 and 22.

If it isn't listed amend your 2020 return and follow the recharacterization steps above.

[RuffyK]

Hi Dana,

My 2020 return has nothing on 1040 line 4a-IRA dists, (even though I provided a recharacterization 'explanation statement'), and likewise the 2020 IRA info Worksheet has nothing for line 2 (YE value), and nothing checked on 'Opened Roth before 2016'. As mentioned before, 2020/8606, only has lines 1 and 3 entered.

I am thinking I will need to amend 2020 - do you agree? When I amend 2020 and file 2021, is there a trick you can provide to keep the 2020, and 2021 amounts separate?

Thank you,

Ruffy

[RuffyK]

Also, do we know owe the 6% on one (or both) of those IRAs?

Thanks!

[DanaB27]

Yes, you will need to amend the 2020 tax return to add the recharacterization and statement if you didn't enter the recharacterization when you filed the 2020 tax return. It won't change Form 8606 and you will not change line 4 of Form 1040.

You will use the 2020 TurboTax version to enter the recharacterization and need to delete the direct contribution to the traditional IRA (I assume you entered this since you have the entries on Form 8606).

On the 2020 amended return:

You will enter the recharacterization when you enter the contribution to the Roth IRA

1. Click on "Search" on the top right and type “IRA contributions”
2. Click on “Jump to IRA contributions"
3. Select “Roth IRA” for you an your spouse
4. Answer “No” to “Is This a Repayment of a Retirement Distribution
5. Enter your Roth contribution amount of $7,000
6. Answer “Yes” to the recharacterized question on the “Did You Change Your Mind?” screen and enter the contribution amount of $7,000 (no earnings or losses)
7. TurboTax will ask for an explanation statement where it should be stated that the original $7,000 plus $4,957 earnings were recharacterized.
8. Answer “No” to “Is This a Repayment of a Retirement Distribution
9. Enter your spouse's Roth contribution amount of $6,000
10. Answer “Yes” to the recharacterized question on the “Did You Change Your Mind?” screen and enter the contribution amount of $6,000 (no earnings or losses)
11. TurboTax will ask for an explanation statement where it should be stated that the original $6,000 plus $2,071 earnings were recharacterized.
12. On the screen "Choose Not to Deduct IRA Contributions" answer "Yes" and enter the contribution 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)

On the 2021 tax return:

1. Click on "Search" on the top right and type “IRA contributions”
2. Click on “Jump to IRA contributions"
3. Select "traditional IRA" and “Roth IRA” for you an your spouse
4. Say "No" to "Did you contribute to a traditional IRA"
5. Continue until "Any Nondeductible contributions to your IRA" and select "Yes"
6. Enter the basis from Form 8606 line 14
7. Answer “No” to “Is This a Repayment of a Retirement Distribution
8. Enter your Roth contribution amount of $7,000
9. Answer “Yes” to the recharacterized question on the “Did You Change Your Mind?” screen and enter the contribution amount of $7,000 (no earnings or losses)
10. TurboTax will ask for an explanation statement where it should be stated that the original $7,000 plus $130 earnings were recharacterized.
11. Answer “No” to “Is This a Repayment of a Retirement Distribution
12. Enter your spouse's Roth contribution amount of $6,000
13. Answer “Yes” to the recharacterized question on the “Did You Change Your Mind?” screen and enter the contribution amount of $6,000 (no earnings or losses)
14. TurboTax will ask for an explanation statement where it should be stated that the original $6,000 plus $576 earnings were recharacterized.
15. On the screen "Choose Not to Deduct IRA Contributions" answer "Yes" and enter the contribution 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)

 

[DanaB27]

No, you do not need to pay the 6% excess contribution tax for 2020 and 2021 since you recharacterized your contributions before the due date.

@RuffyK

[RuffyK]

Hi Dana,

When I attempt to amend our 2020 return TT (cd version) tells me it finds no differences between my amended return and the original. The following seem to be the case:

1. When I enter a Roth to Trad Recharacterization via the TT IRA contribution easy-step, TT enters the values (6k and 7k) on lines 1, 3 and 14 of our 8606 forms.
2. I already included a recharacterization statement when I filed the 2020 return.
3. TT states that "Income too high to deduct IRA contribution" for both my spouse and I.

I am not sure how to tell the IRS we recharacterized, other than the explanation statement, (which they already have). Am I supposed to somehow delete the 8606 forms for the amended return? If so how?

Thanks,
Ruffy

[DanaB27]

It seems as if you have entered the recharacterization already since you had an explanation statement and therefore you do not have to amend your return. No, you do not delete Form 8606. If you entered the recharacterization correctly when you filed your original 2020 return then you should have Form 8606 with your basis on lines 1, 3, and 14 included on your return.

@RuffyK

[RuffyK]

Hi again Dana,

I am confused because TT is telling me we made excess contributions of $130 and $576 to our Trad IRAs. Here is what I did. In 'Wages and Income':

1. Imported our two 1099-Rs (Dist code=N). Mine: $7130 Spouse: $6576
2. Imported Spouse 1099-R (Dist code=2). Spouse $14169 (This is a backdoor conversion)
3. (I did not import the two 1099-R (Dist code=R), because these amounts are listed in the explanation statement on our 2020 taxes.)

After importing these in 'Wages and Income', I then went into 'Deductions Credits' and walked through easy step telling it we contributed $7000 and $6000 to Roths, and then recharacterized the above amounts ($7130 and $6576) to Trads. I thought because we rechacterized both these back in May of 2021 that we wouldn't have the 6% excess contrib tax. Can you tell me why is TT telling me it is excess?

Thank you,
Ruffy

[DanaB27]

It seems you have entered the contribution amount plus earnings on the "Tell Us How Much You Transferred" screen. I know the title is confusing, but you need to only enter the contribution amount recharacterized (without earnings or losses) on this screen. Therefore, please correct the entry to show $7,000 and $6,000.

@RuffyK