topic Ineligible contribution to roth IRA -> recharacterize as trad IRA - How to report? in Retirement tax questions

Ineligible contribution to roth IRA -> recharacterize as trad IRA - How to report?

sansu — Tue, 23 Mar 2021 05:01:50 GMT

I had an ineligible contribution ($5,500) to a Roth IRA in a previous year (2018) that I re-characterized to a traditional IRA the following year (2019).

My Roth IRA had earnings of ~$50. So the total amount of the roth IRA (at the time it was ready to be rolled to a trad IRA) was $5,550.

How do I report this correctly in TurboTax?

My understanding from the IRS guidelines for Form 5329 (https://www.irs.gov/pub/irs-pdf/i5329.pdf) is that rollovers are not to be considered as excess contributions. Rather, the earnings from the rollover ($50) are to be reported on Form 8606.

The contribution amount still remains the same at $5,500 on the following year’s (2019) tax return, on Form 5329.

Is my understanding correct?

Re: Ineligible contribution to roth IRA -> recharacterize as trad IRA - How to report?

DanaB27 — Tue, 23 Mar 2021 14:16:24 GMT

To clarify, you recharacterized the 2018 contribution in 2019 before April 15th. You will have to enter the recharacterization on your 2018 tax return. Please see How do I amend a 2018 return in TurboTax?.

Login to your TurboTax Account
Click on "Search" on the top right and type “IRA contributions”
Click on “Jump to IRA contributions"
Select “Roth IRA”
Answer “No” to “Is This a Repayment of a Retirement Distribution
Enter the Roth contribution amount $5,500
Answer “Yes” to the recharacterized question on the “Did You Change Your Mind?” screen and enter the contribution amount $5,500 (no earnings or losses)
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.
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 and you only get a screen saying $0 is deductible)

There is no tax or penalty on the earnings since the earning will be simply switched into the recharacterized account.

Form 8606 is used to track the basis if you make the contribution nondeductible like mentioned in step 9.

You will not use Form 5329 since you recharacterized the amount in time and therefore no longer had an excess contribution.

Is the money still in the traditional IRA or did you convert the amount to a Roth IRA?

Re: Ineligible contribution to roth IRA -> recharacterize as trad IRA - How to report?

sansu — Sun, 28 Mar 2021 02:14:55 GMT

Money is still in the traditional IRA.

Re: Ineligible contribution to roth IRA -> recharacterize as trad IRA - How to report?

ReneeM7122 — Thu, 01 Apr 2021 23:29:00 GMT

Correct, the rollover is not considered an excess contribution.

Here are steps for the backdoor Roth conversion. Here's a video showing how to reverse it.