IRA to Roth Recharacterization made excess contribution

[avatarlex]

Trying this backdoor Roth for first time. I made $2000 contribution to IRA in 2021, then recharacterized to Roth. I also made a 2021 contribution in February 2022 for $1000 and recharacterized it right away. I obviously exceed MAGI. I went through the TurboTax questions and at the end, it says my MAGI puts me over the current Roth limit, which means the $3000 I put into Roth is considered and excess contribution and have to pay penalty unless I withdraw before I file my 2021 return. Is this right or did I do something wrong?

[fanfare]

@avatarlex 

"Trying this backdoor Roth for first time. ... did I do something wrong?"
you took the wrong actions.

"recharacterized to Roth."
You now have an excess contribution to a Roth IRA.

[avatarlex]

@fanfare can you please elaborate or DM please?

[DanaB27 · Accepted solution]

To verify, you made a traditional IRA contribution and then converted it to a Roth IRA or did you request a recharacterization with your bank?

If you did the backdoor correctly with making a contribution to the traditional IRA and then converting the funds to a Roth IRA then you will use the following steps to report it.

To enter the $3,000 nondeductible traditional IRA contribution:

1. Login to your TurboTax Account 
2. Click on "Search" on the top right and type “IRA contributions” 
3. Click on “Jump to IRA contributions"
4. Select “traditional IRA”
5. Answer “No” to “Is This a Repayment of a Retirement Distribution?”
6. Enter the amount you contributed $3,000 and enter that you contributed $1,000 in 2022
7. Answer “No” to the recharacterized question on the “Did You Change Your Mind?” screen
8. Answer the next questions until you get to “Any Nondeductible Contributions to Your IRA?” and select “Yes” if you had a nondeductible contribution before this tax year.
9. Enter your basis in the Traditional IRA from your 2020 Form 8606 line 14 (if you had a basis in the prior year)
10. On the “Choose Not to Deduct IRA Contributions” screen choose “Yes, make part of my IRA contribution nondeductible” and enter the amount (if you have a retirement plan at work and are over the income limit it will be nondeductible automatically and you only get a warning and then a screen saying $0 is deductible).

To enter the $2,000 1099-R conversion (the $1,000 conversion will be reported on your 2022 tax return): 

1. Click on "Search" on the top right and type “1099-R”  
2. Click on “Jump to 1099-R”
3. Click "Continue" and enter the information from your 1099-R
4. 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”
5. On the "Review your 1099-R info" screen click "continue"
6. Answer "yes" to "Any nondeductible Contributions to your IRA?" if you had any nondeductible contributions in prior years.
7. Answer the questions about the basis from line 14 of your 2020 Form 8606 and the value of all traditional, SEP, and SIMPLE IRAs

You will have Form 8606 with a $1,000 basis on line 14. This will get entered into your 2022 tax return.

If you indeed requested a recharacterization with your bank then you  have an excess contribution. Please comment if you do and I will provide more information. 

[fanfare]

to recharacterize  means you had contributions made to one IRA as having been made directly to a different IRA, namely, your Roth IRA.

" I obviously exceed MAGI. "

 See IRS 2021 Pub 590A Page 34 for how to handle an excess contribution.

You must have the custodian calculate earnings by submitting the correct form to the custodian.