IRA recharacterization capital gains

[rsokinawa]

I was contributing $500 a month (from Jan 2020 to May 2020) to my Roth IRA when I realized that my MAGI would be too high to contribute to a Roth.  I recharacterized the $2500 to my traditional IRA account but with the capital gains (calculated by TD Ameritrade), it came out to $4403.51.  I contributed the remaining $3500 to the traditional IRA account to max out my contribution for 2020 which left me with a total of $7903.51.  I would like to roll this over back to my Roth IRA but what are my tax liabilities for the capital gains and how would I report that on turbo tax? 

[DanaB27]

You will have to make your contribution nondeductible and then only the gains will be taxable when you convert it to the Roth IRA. When entering your IRA contributions please read each question carefully.

Please follow these steps to enter your traditional IRA contribution and the  recharacterization of the Roth contribution:

1. Login to your TurboTax Account 
2. Click on the Search box on the top and type “IRA contributions”
3. Click on “Jump to IRA contributions"
4. Select “traditional IRA” and  "Roth IRA”
5. Enter the amount you contributed to the traditional IRA of $3,500
6. Answer “No” to “Is This a Repayment of a Retirement Distribution?”
7. Answer “No” to the recharacterized question on the “Did You Change Your Mind?” screen
8. Continue through the questions until you are in the Roth contribution section
9. Answer “No” to “Is This a Repayment of a Retirement Distribution
10. Enter the Roth contribution amount of $2,500
11. Answer “Yes” to the recharacterized question on the “Did You Change Your Mind?” screen and enter the contribution amount of $2,500 (no earnings or losses)
12. 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.
13. On the screen "Choose Not to Deduct IRA Contributions" answer "Yes"

When you convert the amount to you Roth IRA you will get a 1099-R. It sounds like this will happen in 2021 and therefore will have to go on your 2021 tax return:

1. Login to your TurboTax Account 
2. Click on the Search box on the top and type “1099-R”
3. Click on “Jump to 1099-R”
4. Click "Continue" and enter the information from your 1099-R
5. Answer questions until you get to “Tell us if you moved the money through a rollover or conversion” and choose “I converted some or all of it to a Roth IRA”
6. On the "Your 1099-R Entries" screen click "continue"
7. Answer "yes" to "Any nondeductible Contributions to your IRA?" 
8. Answer the questions about the basis ($6,000 from 2020, unless you had other nondeductible contributions in the traditional IRA in 2019 and before)

[rsokinawa]

Thank you very much for the step-by-step response.  So the capital gains will be paid out when I file taxes in 2021 when I receive the 1099R?  Seems odd I would have to wait 1 year to pay for something which occurred for 2020.    

[dmertz]

The Roth conversion that you are proposing would be occurring in 2021, not in 2020, so it would be taxable on your 2021 tax return.  Because the gains in the Roth IRA became gains in the traditional IRA upon performing the recharacterization, they are now deferred income which is taxable upon distribution from the traditional IRA (if not rolled over to another traditional account).

[rsokinawa]

Thanks again for the clarification, much appreciated!  Mahalo~