Why is Recharacterized of Roth Contribution taxable

[rkierski]

My MAGI for 2019 was too high to make full Roth IRA contributions (for 2019).   In January of 2020, my wife and I both Recharacterized part of our 2019 Roth IRA contribution ($298 of mine, and $302 of hers) as a non-deductable Traditional IRA contribution that we then immediately converted back to our Roth IRA's.  We both got 1099-R's.  They are identical, except for the amounts, names, and account information.  Neither my wife or I have any Traditional IRA's with a balance.  The only Traditional IRA's we have are the ones we used to Recharacterize and the Convert in January of 2020.

My 2020 taxes, line 4b shows that I have $302 of taxable IRA distributions.  When I look at the IRA Info worksheet, line 35 (Conversion contributions taxable at conversion), it shows $302 as taxable in the Spouse column.  The Taxpayer column is blank.

This seems wrong.   Is this a BUG in TurboTax?  I'm pretty sure that neither of our recharacterization and conversion is taxable.  Why would one be, but the other isn't?

[macuser_22]

If you entered the recharacterization properly in the Roth IRA contribution section then yiu should each have a 8606 form with the nondeductible amount on line 1.

The proper way to report the recharacterization and earnings which is to enter the 2020 IRA contribution in the IRA contribution interview section and then say yes to "Did you switch from a Roth to a Traditional IRA - recharacterize".

The amount The amount of the original Roth contribution must be entered - not any earnings or losses.

Then TurboTax will ask for an explanation statement where it should be stated that the original $xxx.xx plus $xxx.xx earnings (or loss) were recharactorized.

[rkierski]

In a nut shell... I did exactly as you say.   The difference being that I imported the 1099-R forms for our accounts.  Upon more careful examination of the related TurboTax forms, form 5329-S shows the $302 as being an excess contribution to her Roth IRA for 2020.  This seems to be because line 10 of IRA Info Wks shows an excess contribution in 2019 of $302... supposedly from line 24 or her 2019 5329-S.  But I looked at line 24 of the 2019 form, and it's blank.  And, as far as I can tell, I can't edit line 10 of IRA Info Wks to correct the value.  So... somehow, it seems that her 1099-R that shows the recharacterization was interpreted as replacing the value of her 2019 form 5329.  I don't know how that's possible.

As the result... I'm going to assume this is a bug or mistake somewhere... possibly in the way I jumped from "Ask-me-everything" mode to "I'll-tell-you-what-I-want-to-enter" mode... and back.  And, unfortunately, I'm going to start over.... with a clean slate to see if the values get entered the same.

A little while later.....

I've gotten past the 1099-R income part of the interview.  I'm following the "Ask-me-everything" mode, which is a royal pain, since I don't have most of the stuff they're asking... but none the less... the IRA Info Wks now has a blank line 10 for both T and S columns.  So... maybe there was an interview question I was supposed to answer, but because I didn't have TT "ask-me-everything" it never got a chance to ask me... and assumed something wrong.  But... why would it show values that it has supposedly transferred from my 2019 taxes incorrectly?

[rkierski]

That was a waste of time.  I started my taxes over, and followed the "ask-me-everything" mode only to have it tell me again that $302 of my wife's contribution is taxable.  But now, there's even less of an indication why it thinks it's taxable.

I am 100% sure that there is a bug.  Since my wife and I did essentially the same transaction and got the same documentation from the broker... either both of the transactions would be taxable... or neither of them would be.  And since we both recharacterized a 2019 Roth contribution, we've already paid the taxes on that money.  What's more, after entering the information, I got a screen saying "The good news is that you don't owe any additional taxes"... for both sets of 1099-R's.

I'm trying to find an email, phone number, or some way to contact Turbo Tax customer support to report this as a bug.  But I can't find anything except this TurboTax community page. 

[Critter-3]

You may wish to delete the imported 1099-R forms and enter them again manually and follow these exact instructions to report the conversion :  

The "Backdoor Roth" does not exist in tax law. It is a procedure used by some to take advantage of a quirk in tax law that allows making a non-deductible contribution to a Traditional IRA when one cannot contribute to a Roth IRA, and the immediately converting the Traditional IRA to a Roth IRA, thereby getting the money into the Roth via "backdoor".

That "procedure" can only work of all these requirements are met:
1) No Traditional IRA account whatsoever can exist (that includes any SEP or SIMPLE IRA accounts) at the start.
2) The Tradition IRA contributions must be reported on a 8606 form as non-deductible.
3) The conversion to a ROTH must be shortly after the contribution to avoid taxable gains.
4) The entire Traditional IRA value must be zero that the end of the year of conversion.

Otherwise the conversion will be partly taxable.

First you must enter your Traditional IRA contributions (if there were 2020 contributions).

IRA contribution
Federal Taxes,
Deductions & Credits,
I’ll choose what I work on (if that screen comes up),,
Retirement & Investments,
Traditional & Roth IRA contribution.

Be SURE to answer the follow up that the are choosing to make this contribution NON-DEDUCTIBLE - if that screen comes up. (DO NOT say that you moved (recharacterized) the money to a Roth) – this is a conversion, not a recharactorazition.

Then enter the 1099-R that shows the distribution.

Federal Taxes,
Wages & Income
I’ll choose what I work on (if that screen comes up),,
Retirement Plans & Social Security,
IRA, 401(k), Pension Plan Withdrawals (1099-R).

Answer the follow-up questions answer the question that you moved the money to another retirement. The screen will open up with choices of where it was moved. Choose you converted it to Roth IRA.

When asked if you have made any non-deductible contributions say " "yes" if you did then enter the non-deductible contributions made for tax years before 2020.     (Usually zero unless you also made a 2019 or earlier non-deductible contribution. If you do have prior year basis then enter the last filed 8606 line 14 value.).

Enter the 2020 year end value of your Traditional IRA a "0" (zero) - if it is in fact zero - this tax free Roth conversion will not work if it is not zero.

[If you had any other Traditional IRA at the end of 2020, then the nondeductible "basis" must be pro-rated over the current distribution and the total IRA value and only a portion of the Roth conversion will be non taxable and part will be taxable, with the remaining non-deductible basis carrying forward for future distributions. You can never only withdrew the nondeductible basis as long as the IRA exists and has a value more than zero.]

The non-deductible amount of your contribution will be subtracted from the taxable amount of the conversion on then 8606 form and enter on line 4a of them 1040 form and a zero taxable amount on line 4b if you did it right.

Also see this TurboTax FAQ:
https://ttlc.intuit.com/questions/4350747-how-do-i-enter-a-backdoor-roth-ira-conversion

[macuser_22]

You are essentially trying to do a "backdoor Roth".  

Perhaps I mislead you and mis-read your question.  You said that the excess was a *2019* contribution recharactorized in 2020.    If that is the case then the recharacterization cn only be entered on an amended *2019* tax return - the tax year that the contribution was *for* not the year removed.

You would get a 2019 8606 with the carry forward amount of non-deductible basis on line 14 that yiu will need for doing the "backdoor Roth" conversion that yiu appear to be doing.   See below for the backdoor procedure.

The "Backdoor Roth" does not exist in tax law. It is a procedure used by some to take advantage of a quirk in tax law that allows making a non-deductible contribution to a Traditional IRA when one cannot contribute to a Roth IRA, and the immediately converting the Traditional IRA to a Roth IRA, thereby getting the money into the Roth via "backdoor" tax free.

That "procedure" can only work of all these requirements are met:
1) No Traditional IRA account whatsoever can exist (that includes any SEP or SIMPLE IRA accounts) at the start. If existing IRA's contain any before-tax money or earnings then it will be partly taxable.
2) The Tradition IRA contributions must be reported on a 8606 form as non-deductible.
3) The conversion to a ROTH must be shortly after the contribution to avoid taxable gains.
4) The entire Traditional IRA value must be zero that the end of the year of conversion.

Otherwise the conversion will be partly taxable.

First you must enter your Traditional IRA contributions (if there were 2020 contributions).

IRA contribution
Federal Taxes,
Deductions & Credits,
I’ll choose what I work on (if that screen comes up),,
Retirement & Investments,
Traditional & Roth IRA contribution.

Be SURE to answer the follow up that the are choosing to make this contribution NON-DEDUCTIBLE - if that screen comes up. (DO NOT say that you moved (recharacterized) the money to a Roth) – this is a conversion, not a recharactorazition.

Then enter the 1099-R that shows the distribution.

Federal Taxes,
Wages & Income
I’ll choose what I work on (if that screen comes up),,
Retirement Plans & Social Security,
IRA, 401(k), Pension Plan Withdrawals (1099-R).

Answer the follow-up questions answer the question that you moved the money to another retirement. The screen will open up with choices of where it was moved. Choose you converted it to Roth IRA.

When asked if you have made any non-deductible contributions say " "yes" if you did then enter the non-deductible contributions made for tax years before 2020.     (Usually zero unless you also made a 2019 or earlier non-deductible contribution. If you do have prior year basis then enter the last filed 8606 line 14 value.).

Enter the 2020 year end value of your Traditional IRA a "0" (zero) - if it is in fact zero - this tax free Roth conversion will not work if it is not zero.

[If you had any other Traditional IRA at the end of 2020, then the nondeductible "basis" must be pro-rated over the current distribution and the total IRA value and only a portion of the Roth conversion will be non taxable and part will be taxable, with the remaining non-deductible basis carrying forward for future distributions. You can never only withdrew the nondeductible basis as long as the IRA exists and has a value more than zero.]

The non-deductible amount of your contribution will be subtracted from the taxable amount of the conversion on then 8606 form and enter on line 4a of them 1040 form and a zero taxable amount on line 4b if you did it right.

Also see this TurboTax FAQ:
https://ttlc.intuit.com/questions/4350747-how-do-i-enter-a-backdoor-roth-ira-conversion

[rkierski]

And, when I look at the forms, now it shows a value for both S and T that have been copied from our 2019 form... that was blank -- neither of us have a value on line 24 for our form 5329 in 2019.  Again, that've very odd since 1) we don't have values and it's reporting that it took values from a previous years forms... and 2) if one of those transactions would have a problem, I would expect both would have the same problem, and 3) the transactions shouldn't have been taxable at all.

TT did pop up saying that we'd have to amend our 2019 taxes due to the recharacterization.  It did that twice... once when I was entering my transactions, and once when I was entering her transactions.  Is it possible TT "assumes" you will amend your taxes and updates the information with what it believes will be your amended information?

I did the recharacterization and conversion in 2020 before filing my 2019 taxes.

[macuser_22]

---

@rkierski wrote:

And, when I look at the forms, now it shows a value for both S and T that have been copied from our 2019 form... that was blank -- neither of us have a value on line 24 for our form 5329 in 2019.  Again, that've very odd since 1) we don't have values and it's reporting that it took values from a previous years forms... and 2) if one of those transactions would have a problem, I would expect both would have the same problem, and 3) the transactions shouldn't have been taxable at all.

TT did pop up saying that we'd have to amend our 2019 taxes due to the recharacterization.  It did that twice... once when I was entering my transactions, and once when I was entering her transactions.  Is it possible TT "assumes" you will amend your taxes and updates the information with what it believes will be your amended information?

I did the recharacterization and conversion in 2020 before filing my 2019 taxes.

---

There should NOT be an 5329 at all for 2019 or 2020 because there was no excess contribution if it was recharactorized to be a Traditional IRA contribution instead.   It does not count at a Roth contribution at all.  A recharacterization  is treated as if the Roth contribution never happened at all.

[rkierski]

A couple of things... I previously eliminated some information to make it easier to follow and answer assuming it was a simple problem with a simple solution.  I will now give a longer bit of information so that the details aren't conflicting...

Some time ago, I left a job and rolled my company 401k into an IRA.  On 12/31/2019, that IRA had a balance... lets say $1M.  I started a new job on 1/2/2020 and was able to roll backwards that IRA into my new companies 401k, so that in January 2020, that IRA had no balance.

Starting in 2015, my wife and I made regular monthly contribution to Roth IRA's (each). 

In November or December of 2019, when I realized I would be getting an additional paycheck from my former employer I realized that I would make more than the Roth IRA contribution limit.  Believing that time was of the essence, I calculated what I thought would be our total 2019 MAGI.  My wife and I both did recharacterizations of some (bot not all) of our 2019 Roth IRA contributions as non-qualified traditional IRA contributions (about $2500 each).  Because my wife's IRA had a balance of $0, she was able to immediately convert her non-qualified traditional IRA contribution to her Roth IRA.  Because my traditional IRA had a balance of $1M, I would have had to apply the pro-rata to the conversion and opted to wait until 2020 to do the conversion... after rolling back my IRA to my new employers 401k.

In January 2020, I did the IRA rollback, and then did the conversion of my $2500 to my Roth IRA.

When I did my Taxes in February 2020, I discovered that I calculated my 2019 MAGI incorrectly back in November (I had forgotten that group life insurance is considered taxable income).  I entered the information from the 2019 1099-R's for the recharacterizations done in 2019 on my 2019 taxes.

I calculated the additional 2019 Roth IRA contributions that would need to be recharacterized -- $298 for me, and $302 for my wife.  I believe the instructions told me to enter these additional recharacterizations with my 2019 taxes, and I think TurboTax wouldn't let me continue until I "fixed" the excess 2019 Roth contributions.  What I recall is that the calculations you do make it so the contribution never took place... or that the contribution was a non-qualified IRA contribution all along.

For 2020, I have 3 1099-R's.  1 for my IRA RollBack, 1 for my $298 recharacterization, and 1 that includes the money from 2019 that I didn't convert until 2020, the $298 and my 2020 backdoor Roth contributions ($2500 + $298 + $7000 = $9798).  My wife has 2 1099-R's.  1 for her $302 recharacterization, and one that includes the $302 and her 2020 backdoor Roth contributions ($302 + $7000 = $7302).

Are you saying that neither of the 1099-R's for 2019 recharacterization ($298 and $302) should have been entered on our 2020 taxes?  That they should only be applied to our amended 2019 taxes?  If so... do I need to amend my 2019 taxes before doing my 2020 taxes so that the numbers I carry forward are correct? 

[macuser_22]

What code is in box 7 for the 1099-R's for the recharacterizations?

[rkierski]

The code is "R"

[rkierski]

I looked at amending my 2019 taxes adding the 1099-R's for the recharacterizations.   The code in box 7 is "R", when I selected that in TurboTax-2019 it said "2018 contribution recharacterized in 2019"  That tells me I'm not supposed to be adding this 1099-R to my 2019 taxes... since that code isn't right.

[macuser_22]

I said above how to enter it.

A 2020 1099-R with a code R in box 7 (Recharacterized IRA contribution made for 2019 and recharactorized in 2020) will tell you that you must amend 2019.

A code R 1099-R does nothing whatsoever if entered into the 1099-R section of an amended 2019 return. It does not get sent to the IRS and nothing goes on the tax return at all. The only purpose of the 1099-R is to report the recharacterization to the IRS, but it still must be reported on your 2019 tax return.

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.

The proper way to report the recharacterization and earnings which is to enter the 2019 IRA contribution in the IRA contribution interview section and then say yes to "Did you switch from a Roth to a Traditional IRA - recharacterize".

The amount The amount of the original Roth contribution must be entered - not any earnings or losses.

Then TurboTax will ask for an explanation statement where it should be stated that the original $xxx.xx plus $xxx.xx earnings (or loss) were recharactorized.

There is no tax or penalty on the before-tax earnings since the earning were simply switched into the recharactorized account.

That is the only way to prepare and attach the proper explanation statement for a code R 1099-R.

Enter IRA contributions here:
Federal Taxes,
Deductions & Credits,
I’ll choose what I work on (if that screen comes up),
Retirement & Investments,
Traditional & Roth IRA contribution.

OR Use the "Tools" menu (if online version under My Account) and then "Search Topics" for "ira contributions" which will take you to the same place.

Since the after-tax Roth contribution is now a Traditional IRA contribution it can be either a before-tax deduction if your MAGI allows a deduction which might result in an additional 2019 refund, or it will be an after-tax contribution reported on a 8606 form (line 1 & 14) as a "basis" in the Traditional IRA that will reduce the tax of future distributions.

[rkierski]

Based on your response, I dug a little deeper and believe I've found the actual problem...

My wife and I each had 2 recharacterizations for our 2019 contributions.  Both sets were reported with our original 2019 taxes.  So we don't need to amend our 2019 taxes.  Neither has to be reported on our 2020 taxes and... as you pointed out, the corresponding 1099-R is just ignored.

The actual problem is that the basis for my wife that was calculated by TurboTax on our 2019 taxes wasn't carried forward (imported) correctly even though it claims to have been copied.  The 2019 line is correct (based on my understanding of the calculation), but the value on our 2020 worksheet is $0.  My basis calculated by TurboTax on our 2019 taxes was carried forward correctly -- the line on our 2019 taxes matches the value on our 2020 worksheet.

Unfortunately, I'm going to need to have a tax accountant review my 2019 and 2020 taxes to make sure I'm correct.

[rkierski]

As it turns out... it doesn't appear that line 14 is actually copied.  But rather a line from an IRA worksheet.  And, when I did my 2019 taxes I answered a couple of questions wrong.

TurboTax asks for the total of all traditional IRA's as of 12/31.  To which I said "$0".  On that same page, it asks for the total of outstanding recharacterizations.  I left that blank, it assumed $0.

The problem is in the wording.  As I had already completed the both recharacterizations, there weren't any outstanding or in progress at the time of the question.  But it should have asked if I'd done any recharacterizations since 12/31 for 2019... which I had.

For line 14, TurboTax correctly calculated the basis with the information I'd provided -- the total of the 2 recharacterizations minus the amount converted to Roth.  But in the Wrks, it should have reported an error because the value for line 14 that it calculated was different than the value in the Wrks -- $0.