Entering recharacterization and additional traditional IRA contribution for back door roth IRA

[skim04c]

Hi,

While filing the 2021 tax year, I realized that I have not correctly filed the 2020 tax year, thus I am currently going back to amend the 2020 tax because that is the tax year I first started to do the back door Roth IRA. I've been reading numerous posts similar to my situation and has been a great help, but I want to make sure I did correctly filed from what I learned from the posts.

My scenario:

1. In 2020, I contributed to Roth IRA account as I thought I was qualified for the regular Roth IRA contribution. I made several contributions in 02/2020 - 07/2020, which total amount of Roth IRA contribution until Jul 2020 was $2220.

2. In Aug 2020, I realized that my MAGI is over the limit for Roth contribution, and learned back door Roth. I asked the brokerage to recharacterized my Roth ira contribution to traditional ira by opening my very first traditional IRA account.

Recharacterization was done in 08/2020 with an amount of $2220. when recharacterized to traditional, the total amount was $2393.16 including the earnings (from form 5498).

3. After completing the recharacterization from roth to traditional, I made an additional contribution to traditional IRA in the amount of $3780 and transferred to Roth IRA for the back door roth during 08/2020 - 10/2020.

4. Total IRA contribution in 2020 was, therefore, $6000. but 1099-R (T-IRA) shows $6168.78, probably due to earnings from recharacterization.

Below are my tax forms.

1099-R (T-IRA)

1: 6168.78

2a: 6168.78

2b: total amount not determined - X; Total distribution - X

7: 2

IRA/SEP/SIMPLE: X

1099-R (R-RA)

1: 2393.16

2a: 0

7: N

5498 (T-IRA)

1. IRA contribution: 3780

4. Recharacterized contribution: 2393.16

5. Fair market value of account: 0

5498 (R-IRA)

3. Roth IRA conversion amount: 6168.78

5. Fair market value of account: 11,862.58 (I had $1,665 in roth ira account in 2019)

10. Roth IRA contribution: 2220

After entering IRA 1099-R information in income section in TT, below is the step I entered in Dedection&Credits -> Tradtional and Roth IRA Contribution to inform my recharacterization and back door roth contribution.

Asking about T-IRA:

1. Checked both Tradition IRA and Roth IRA.

2. Is This a Repayment of a Retirement Distribution? - No

3. Tell Us How Much You Contributed: 

3a.Your total 2020 traditional IRA contributions: 3780

3b. Total contribution for 2020 between January 1, 2021 and May 17, 2021: 0

4. Did You Change Your Mind? - No

5. Any Excess IRA Contributions Before 2020? - No

6. Any Nondeductible Contributions to Your IRA (T-IRA question)? - No (As I opened T-IRA account in 2020 for first time)

7. Tell Us the Value of All Your Traditional IRA Accounts: 0 (As I transferred all to roth IRA)

8. Is This a Repayment of a Retirement Distribution? - No

Asking about Roth IRA:

9. Enter Your Roth IRA Contributions: 2220

10. Tell Us How Much You Transferred: 2220 (I only entered the amount I contributed to roth, NOT including the earning which is then 2393.16. I am not sure if I need to enter 2220 or 2393.16 here)

11. Roth IRA Explanation Statement:

a. Reason for the Recharacterization: Made erroneous contribution to Roth IRA, meant to contribute to Traditional IRA.

b. Date of the Original Contribution: 02/04/2020, 03/02/2020, 04/01/2020, 05/01/2020, 06/01/2020, 07/01/2020, 07/15/2020

c. Date of the Recharacterization: 08/06/2020

d. Amount recharacterized: $2220

e.The Amount Transferred (Recharacterization plus earnings or losses): $2393.16

12. Let Us Track Your Roth IRA Basis - Yes (as I had value in roth-ira in 2019 but I did not report in previous tax, should I amend 2019 tax year too since I forgot to include 2019 roth IRA?)

13. Withdraw from Your Roth IRA Before 2020? - No

14. Enter Prior Year Roth IRA Contributions (prior to 2020) - 1665

15. Any Roth IRA Conversions (prior to 2020)? - No

16. Enter Excess Contributions (prior to 2020): 0

17. Income Too High To Deduct an IRA Contribution - Continue

This is how I entered so far.

In the Tax return form I see, form5329 - line15&16 "Excess contributions for 2020" with 169 which I assume is a correct amount due to earnings during the recharacterization and from 1099-R (6168.78 - 6000 = ~169) and form 8606 line 13 showing 6169.

I know that I may have to pay the penalty of excess IRA contribution amount. Is TT taken care of the penalty for 169, that I over contributed? Because in the form 5329, line 25 asks about additional tax for 6% penalty, it does not show any numbers. Or I do not I have to pay any penalty because I did not over contribute but it was just from the earnings? If so, I do not have to worry about the question of excess contribution in the TT? I just say No to excess contributions like questions 5 and 16i n the future including 2021 tax?

[Opus 17]

Are those your 2020 tax return numbers or your 2021 tax return numbers?

Did your 2020 tax return include form 8606?  Did you report the 2020 IRA contributions as tax-deductible or non-deductible?

[skim04c]

Hi @Opus 17,

Thanks for your response. 

Yes, the numbers are from 2020 tax. I am waiting to work on 2021 tax once correctly filing the 2020 tax amend

At the time I filed 2020 tax, I did not know how to correctly report recharacterization and backdoor roth ira, thus, I did not include any of the information.

Looking at the original 2020 tax return, I have form 8606 (nondeductible IRA) but no form 5329.

In form 8606,

line 1: 6000

line 16: 6169

line 17: 6000

line 18: 169

In new amend version 2020 tax, after following above steps,

in form 8606,

line 1: 6169

line 16: 6169

line 17: 6169

line 18: 0

and form 5329

line 15: 169

line 16: 169

line 17: 0

Did I correctly filed with the amend version so far?

[Opus 17]

Let me first tag some people for help here, while I think about this.

@macuser_22 

@dmertz 

[Opus 17]

This is a bit too complicated for me.  What do you think you did wrong originally?

This topic should be relevant.

https://ttlc.intuit.com/community/retirement/discussion/are-earnings-on-recharacterizations-taxed/00...

I think you should simply have entered $6000 as your traditional IRA contributions (the recharacterization makes it as if it never happened, so all your contributions were to the traditional IRA.  And you ignore the earnings, per @macuser_22 ).  So you contributed $6000 non-deductible to a traditional IRA.

Then you converted $6169, and should pay the tax on $169, but no penalties. 

I'm not sure where you went wrong, but your amended return is also wrong at this point.

[dmertz]

When I enter everything as described, I don't see anything on Form 5329 lines 14 and 15.  I suggest reviewing the IRA Contribution Worksheet to find why TurboTax thinks that you contributed a total of $6,168.78 instead of $6,000.

[skim04c]

@Opus 17, @dmertz 

Thanks again for the input,

I just revisited my entries...

and the latest version of the tax report does not show form 5329 anymore.

In the form 8606, now it shows as following:

line 1: 6,000

line 2: 0

line 3: 6000

line 5: 6000

line 13: 6000

line 16: 6169

line 17: 6000

line 18 (taxable amount): 169

Would this be correct?

And as you mentioned that there should be no penalties for excess amount ($169, I am understanding it as this is not excess amount contribution but it is just earning), I do not have to report as excess amount contribution in the future tax returns, and I can keep contribute to the maximum amount of $6000 every year?

[dmertz]

Yes, that looks correct.

[skim04c]

Thank you!!