Is a return of excess plus earnings considered a recharacterization?

[keystonetex]

Hi Turbotax Community,

I just recently requested a return of excess plus earnings from the investment company that manages my ROTH IRA since I found out that my income was too high to contribute.  After the return of excess, the $6000 was then contributed for 2021 to a traditional IRA with the same company.  The earnings were also contributed to the traditional IRA, but as a 2022 contribution.  

Does that whole process describe a recharacterization?  

I would enter $6000 under both the traditional and ROTH IRA contribution sections even though the $6000 was removed from the ROTH IRA, correct? 

Am I subject to an early withdrawal tax penalty under these circumstances? 

Thank you for any help!

[DavidD66]

The $6,000 is a recharachterization.  It is not subject to an early withdrawal penalty.  The earnings withdrawn are subject to an early withdrawal penalty.  You would only enter the Traditional IRA contribution for 2021. 

[keystonetex]

Thanks David - one thing that is still a bit confusing is that the traditional IRA page states:

"Do not enter any of the following here:

     - Roth contributions (even if you later recharacterized them to a traditional IRA)

While the $6000 did end up in the traditional IRA, wouldn't I list my total 2021 traditional IRA contributions as $0 based on the statement above?

Thanks!

[DanaB27]

Please double-check with your financial institute if they reported it as a recharacterization but it sounds like you got the return of excess contribution plus earnings and then made a new contribution. It will be important to know what Forms they will issue.

If it was a withdrawal and a new contribution then you will enter it as a regular traditional IRA contribution:

1. Click on "Search" on the top right and type “IRA contributions” 
2. Click on “Jump to IRA contributions"
3. Select “traditional IRA”

You will get a 2022 Form 1099-R  in 2023 with codes P and J for the withdrawal of excess contribution and earnings. This 1099-R will have to be included on your 2021 tax return and you have two options:  

• You can wait until you receive the 1099-R  2022 in 2023 and amend your 2021 return or
• You can report it now in your 2021 return and ignore the 1099-R when it comes unless there is Box 4 Federal Tax withholding and/or Box 14 State withholding. Then you must enter the 2022 1099-R into the 2022 tax return since the withholding is reported in the year that the tax was withheld. The 2022 code P will not do anything in 2022 tax return but the withholding will be applied to 2022.

To create a 1099-R in your 2021 return please follow the steps below:

1. Login to your TurboTax Account 
2. Click on the "Search" on the top right and type “1099-R” 
3. Click on “Jump to 1099-R”
4. Answer "Yes" to "Did you get a 1099-R in 2021?"
5. Select "I'll type it in myself"
6. Box 1 enter total distribution (contribution plus earning)
7. Box 2a enter the earnings
8. Box 7 enter J and P
9. Click "Continue"
10. On the "Which year on Form 1099-R" screen say that this is a 2022 1099-R.
11. Click "Continue" after all 1099-R are entered and answer all the questions.
12. Continue until "Did you use your IRA to pay for any of these expenses?" screen and enter the amount of earnings under "Another reason" if you are over 59 1/2 (if you are under 59 1/2 click "Continue")

Please be aware, code P will say in the drop-down menu "Return of contribution taxable in 2020" you can ignore that since the follow-up question will tell TurboTax that it will be taxable in 2021.

If it was recharacterization, you will enter the recharacterization when you enter the contribution to the Roth IRA 

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 “Roth IRA”
5. Answer “No” to “Is This a Repayment of a Retirement Distribution
6. Enter the Roth contribution amount 
7. Answer “Yes” to the recharacterized question on the “Did You Change Your Mind?” screen and enter the contribution amount (no earnings or losses)
8. 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.
9. 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 automatically and you only get a warning and then a screen saying $0 is deductible)

You will get Form 1099-R  for the recharacterization with code R-Recharacterized IRA contribution made for 2021 and this belongs on the 2021 return. But a 1099-R with code R will do nothing to your return. You can only report it as mentioned above. Therefore, you can ignore the 1099-R with code R when you get it in 2023. 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.