topic So do I understand correctly that any profit that my ROTH made before recharacterizing, is not taxable? in Retirement tax questions

So do I understand correctly that any profit that my ROTH made before recharacterizing, is not taxable?

blankfam — Sat, 01 Jun 2019 15:30:16 GMT

My 2017 Roth investment was $6500. In Jan 2018 I recharacterized it (the original $6500 plus about $3000 profit) to a non deductible traditional IRA. Then in Feb. 2018 I did a conversion from traditional back to Roth. I can't figure out what is taxable and what my basis is.

Enter in your 1099-R figures for the two 1099-Rs that hav...

DanielV01 — Sat, 01 Jun 2019 15:30:18 GMT

Enter in your 1099-R figures for the two 1099-Rs that have codes N and R reported. This will allow TurboTax to appropriately account for those amounts, but they will not be taxable distributions (since they are recharacterizations to a nondeductible TIRA). But this information assists in determining basis to determine how much the conversion itself is taxable. Then, with the 1099-R with a box code of 2, carefully follow the directions below:

Enter in the information as reported on the 1099-R for this IRA in the main portion of the screen. Even though box 2a has an amount, the box "taxable amount not determined" should be checked, and box 7 probably has a code 2. Make sure you enter your 1099-R as you have received it. Hit Continue.
Next screen says Good News: You Don't Owe Extra Tax on This Money (this means there's no penalty, but the income still needs to be reported correctly to be removed from taxable income). Hit Continue.
Next screen: Did You Inherit the IRA from This Payer? Probably No. Hit Continue.
The next screen asks: What Did You Do With The Money From This Payer? First, select I moved the money...and then I converted all of this money to a Roth IRA account.
After a few screens relating to Disaster Payments, you come to a screen asking Any Nondeductible Contributions to Your IRA? Click YES and Continue.
Enter how much was your total Basis on December 31, 2017. This is the amount of total nondeductible contributions you've made throughout the years. This information is on Form 8606 from your 2017 tax return. (In your case, it is the $6500 reported with your 2017 recharacterization. That amount will be excluded from taxable income, and the growth on the recharacterized TIRA will be included.

You will still have a few questions after this, but you will see the portion of your distribution that was from your nondeductible contributions will have been excluded from your taxable income.

The $3000 of growth is taxable on conversion. When you r...

DanielV01 — Sat, 01 Jun 2019 15:30:19 GMT

The $3000 of growth is taxable on conversion. When you recharacterize a Roth contribution to a nondeductible Traditional IRA, it changes the character of the IRA and the growth in the IRA. The original contribution is not treated as a Roth, but rather as a nondeductible TIRA. This saves you from the penalty of overfunding the Roth (because your income was too high); however, upon conversion, it means that the growth within the IRA is now taxable.

According to your example, you recharacterized your original $6500 Roth contribution into a nondeductible TIRA, but there were $9500 of total funds due to growth, which you then immediately converted back into a Roth. In this exchange, $6500 is considered to be a nondeductible TIRA contribution made as of the date you originally "contributed" it as a Roth (and would be the basis in the TIRA on December 31, 2017), and the $3,000 of growth will be taxed upon conversion into the Roth (since these funds grew tax-free, they are taxable upon conversion).

However, while the growth itself is taxable, the growth does not limit the amount of contribution you may make this year. If you wish to make another full back-door Roth contribution for 2018 (conversion being reported in 2020 for tax year 2019), you may do so.

This FAQ gives additional information on the difference between a recharacterization and a conversion: https://ttlc.intuit.com/replies/3300628

Thank you for your reply. Unfortunately, I seem to have...

blankfam — Sat, 01 Jun 2019 15:30:21 GMT

Thank you for your reply.  Unfortunately, I seem to have muddied the waters with how/when I did things.

I invested in the ROTH IRA throughout 2017.  In Jan 2018 I recharacterized and received a letter from Fidelity stating that  $9155 was recharacterized (the original $6500 plus earnings of $2655.)  I reported this on my 2017 tax return.

I had also made a ROTH contribution of $540 in January 2018 which was a 2018 contribution.  I recharacterized this as well in January and the value was $574.

In February 2018 I converted the entire balance of this traditional IRA back to a ROTH.  The value of the account at that time was $9464.

So in 2019 I received 3 1099-Rs.  The first one, for the 2017 recharacterization, shows a distribution of $9264 (a different value from the $9155 which I reported to the IRS on my 2017 return) with a code R.

The second one is for the $574, code N.  And then the third one is for the $9464 code 2 showing the entire amount to be taxable.

I don't know how to fix this or how to properly report to the IRS.  Thank you for any guidance you can provide.

Re: The $3000 of growth is taxable on conversion. When you r...

Drfreud — Thu, 25 Feb 2021 21:01:18 GMT

I have a related question. I am currently 58 1/2. If I withdraw an excess contribution for 2020 prior to April 15, 2021, I will owe a 10% penalty on the earnings. If I leave the money in the account, I will owe a 6% penalty on the amount that is overfunded. IRS document 590-A says:

"Applying excess contributions.

If contributions to your Roth IRA for a year were more than the limit, you can apply the excess contribution in 1 year to a later year if the contributions for that later year are less than the maximum allowed for that year."

The financial institution that has by Roth IRA says they don't report anything beyond the initial funding.

1) How does one report that a contribution in 2020 will be applied to 2021 in TurboTax?

2) If I do this, do I still pay the 6% penalty in 2020?

3) If I take the 6% hit today and hit another limit in 2021 and subsequently remove the amount funded and any earnings in 2022, I would avoid the 10% penalty on earnings since I will be over 59 1/2 and just have to pay the normal tax rate on earnings and that would be a long term capital gain. Is that correct?