When and how to amend tax return after recharacterizing excess contribution to Roth IRA

[x46359]

Here's my situation:

• In 2018, I contributed the full $5500 to my Roth IRA and filed my 2018 tax returns on time (before April 15, 2018)
• A week ago, I realized that I was over the income limit for Roth IRA contributions. So after a little research, I learned that I have until Oct 15, 2019 to remove the excess contributions to avoid the 6% penalty. 
• I recharacterized the excess (plus earnings) to a Traditional IRA.
• I believe I now need to file an amended 2018 tax return. Not sure exactly what I need to do and by when.
• FYI, I'm told the 1099-R for this recharacterization is not going to be produced until next year (2020) and I'm not sure if I need to fill out/amend other forms (e.g. 8606, 1040, etc.). I also have an employer sponsored 401K and over the income limit so this will be a non-deductible TIRA contribution.

Any help is greatly appreciated!

[Critter]

Nothing is done on the 2018 return ... the 2019 1099-R will be reported on the 2019 return. And FYI ... if you had entered the ROTH contribution in the program to start with it would have told you about the over contribution earlier so you could take care of it before 4/15... also if your income is that high you really need to wait to file your return to see how much you can legally put in before you make the contribution since you have until 4/15 to do so ... this way you will never have this issue again.

[dmertz]

Yes, your 2018 tax return now needs to include From 8606 to report the nondeductible traditional IRA contribution.  If the original excess Roth IRA contribution was reported on 2018 Form 5329 and the penalty paid, Form 5329 will also need to be amended to explicitly show that there is now no excess contribution.  [Critter's answer is wrong with respect to this.]

There is no need to wait to amend.  In TurboTax you'll revisit the Traditional and Roth IRA contribution section, make sure that you have entered the Roth IRA contribution and, when TurboTax indicates that it's an excess contribution, indicate that you had the contribution ($5,500) recharacterized to a traditional IRA.  TurboTax will prompt you to prepare an explanation statement that needs to be included with your amendment which should indicate the amount contributed to the Roth IRA ($5,500), the amount recharacterized ($5,500) and the earnings-adjusted amount transferred to the traditional IRA.  TurboTax will prepare Form 8606 to show the nondeductible contribution.

Since your recharacterization was performed after April 15 after having timely filed your tax return you must indicate “Filed pursuant to section 301.9100-2” on your Form 1040X.  You'll need to mail the Forms 1040X, 8606 and, if originally filed to show the excess Roth IRA contribution, the corrected From 5329.  You'll need to prepare Form 5329 manually since TurboTax will simply remove the entries on Part IV, but you actually need to now indicate that $0 was excess to correct the originally filed Form 5329.

After amending, you can ignore the code R 2019 Form 1099-R that you'll receive next year since you will have already reported the recharacterization.  If you enter it into 2019 TurboTax, TurboTax will ignore it other than to remind you that the recharacterization was reportable on your 2018 tax return.  If you enter it into 2018 TurboTax, TurboTax will also ignore it.

[x46359]

Thank you both for your quick and timely responses. 

A few follow-up questions:

• Given the Roth IRA contribution wasn't explicitly reported in my 2018 return, I don't see Form 5329 (or any penalty paid) as part of the package that was filed.  Do I still need to prepare and file a revised Form 5329 with the amended return?
• Any idea what steps (if any) need to be taken to amend my state return (California)?

[dmertz]

Since no Form 5329 was filed with your originally filed tax return, no Form 5329 is needed with your amendment.

I'm not as familiar with California taxes, but I don't think that you need to amend anything with regard to your California tax return.  Your federal AGI does not change as a result of the recharacterization, so I don't think that your California tax return would change.  When you do the amendment in TurboTax, check to see that the resulting California tax return is unchanged from your filed tax return.

[janeb1]

I overcontributed as well on my 2019 taxes. I was told I could move the excess to my 2020 contribution and not have to pay the penalty as long as it was done by 10/15/2020. Do you know if this is true?

[dmertz]

If you timely filed your 2019 tax return or you requested a filing extension, you have until October 15, 2020 to obtain a return of the excess contribution made for 2019.  You can then do whatever you want with that money, including using it to fund a 2020 IRA contribution that you are eligible to make.

You'll receive a 2020 Form 1099-R reporting the return of the 2019 contribution.  Any earnings required to accompany that returned contribution will need to be reported on your 2019 tax return, subject to income tax and potential early-distribution penalty, so you'll need to make sure that your 2019 tax return reflects the returned contribution.

If the investment gains attributable to the excess contribution are substantial, say 30% or more, it might be more beneficial to pay the excess-contribution penalty for 2019 and apply the excess as part or all of your 2020 Roth IRA contribution, allowing the gains to remain in the Roth IRA and not be subject to tax or penalty.

If the excess was the result of being over the AGI threshold, you also have the option to recharacterize the Roth IRA contribution to be a traditional IRA contribution instead.  This may be beneficial if the Roth IRA has lost value since the time the contribution was made.

[asb4]

The responses from @Critter and @dmertz seem to contradict each other. The first said do nothing; the second to amend the 1040 and file with a Form 8606. Which is the right answer? What did you end up doing, @x46359 ?

I'm in the same situation this year. Contributed max amount ($6k) to Roth IRA in 2021 but ended up being above the income cap. Filed taxes at start of 2022. Now I've recharacterized the contribution and having it placed in a Rollover IRA. But do I need to amend 2021 return? And now (in 2022) or after I get my 1099-R (in 2023 probably)? Thanks. 

[FangxiaL]

In your situation, I would agree with @dmertz. 

Per IRS Instructions for Form 8608, if you have already filed your 2021 taxes, Form 8606 was not generated with your original return. Here is in part what the IRS instructions say

"... Generally, you can recharacterize (correct) an IRA contribution by making a trustee-to-trustee transfer from one IRA to another type of IRA. Trustee-to-trustee transfers are made directly between financial institutions or within the same financial institution. You must generally make the transfer by the due date of your return (including extensions) and reflect it on your return. However, if you timely filed your return without making the transfer, you can make the transfer within 6 months of the due date of your return, excluding extensions. If necessary, file an amended return reflecting the transfer (see Amending Form 8606, later). Write “Filed pursuant to section 301.9100-2” on the amended return.

Reporting recharacterizations.

You made a contribution to a Roth IRA and later recharacterized part or all of it in a trustee-to-trustee transfer to a traditional IRA. Report the nondeductible traditional IRA portion of the recharacterized contribution, if any, on Form 8606, Part I. Don’t report the Roth IRA contribution (whether or not you recharacterized all or part of it) on Form 8606. Attach a statement to your return explaining the recharacterization. If the recharacterization occurred in 2021, include the amount transferred from the Roth IRA on your 2021 Form 1040, 1040-SR, or 1040-NR, line 4a. If the recharacterization occurred in 2022, report the amount transferred only in the attached statement, and not on your 2021 or 2022 tax return.

..."

@asb4

[asb4]

Thank, you @FangxiaL. The part not covered in the IRS Instructions is whether you need to amend your return - file a 1040X -  simply to attach the recharacterization statement. As the instructions say, "IF NECESSARY, file an amended return...." (emphasis mine). In my case, the recharacterized amount is nondeductible, so there is nothing to report or deduct, and according to the instructions:

"If the recharacterization occurred in 2022, report the amount transferred ONLY in the attached statement, and not on your 2021 or 2022 tax return."

Does TurboTax allow you to submit an attached statement explaining the recharacterization WITHOUT reporting any amounts "on your 2021 ... tax return" or amending a Form 8606 (because there was no Form 8606 originally submitted)?  Thank you. 

[asb4]

I should note I did not report the original Roth contribution on Form 5498 when I filed originally, thinking it was unnecessary as a nondeductible contribution. 

[FangxiaL]

When you recharacterize the Roth IRA contribution to Traditional IRA, it is treated as if you made a contribution to your Traditional IRA. Since you did not take the deduction, you are required to file Form 8606 to track the basis. The purpose of amending your 2021 return is to generate Form 8606. It won't impact your tax liability because there is no deduction for either Roth or the Traditional IRA recharacterized from Roth IRA.

@asb4

[FangxiaL]

Your brokerage is required to file Form 5498 with the IRS, showing the type of IRA and the amount of contribution for the tax year. Many taxpayers don't enter their Roth IRA contributions on their tax returns. It doesn't mean that the IRS is not aware of the contributions made by them. 

@asb4

[dmertz]

Critter's answer did not address the recharacterization of the contribution for 2018.  The originally filed 2018 tax return would not have reported the traditional IRA contribution that resulted from the recharacterization, so the originally filed 2018 tax return needed to be amended to either include a deduction for the traditional IRA contribution (if a deduction was permitted) or adding 2018 Form 8606 to report a nondeductible traditional IRA contribution.