Recharacterization - Excess Roth Contribution

[TMNT]

I'm working on my 2023 Taxes and a recharacterization I did last year in 2022 is still haunting me...please assist!

- In 2021 I contributed $6000 to a Roth

- In Feb 2022, while doing my Turbo taxes turns out my AGI was too high, that all 6K was in excess

- I don't have a Traditional IRA, so I recharacterized my $6000 plus earnings into a new one.

-Fast forward to doing taxes today in 2023 and I see I have a 2022 1099-R with Gross Distribution and Taxable Amount of $6294.16 Box 7 is R. 

-In 2022 I also contributed another $6000 to a Roth. $0 was put into the Traditional.

- Looking at my completed and filed 2021 Turbo Tax tax form 1040, I see paid the 6% tax = $360 (which I'm not sure I needed to pay since I recharacterized BEFORE I filed?)

- Now in 2023, Turbo Tax is once again telling me that I contributed in excess of $294.16 and that I need to withdraw this amount (plus earnings) or else. This would be the amount in excess of $6000 that was originally recharacterized I'm thinking.

My issue is that when I go to my Traditional IRA, I have only contributed that one time when I did the recharacterization in Feb 2022 (for 2021.) So for 2022 and 2023 it says $0 contributed, thus nothing for me to be able to withdraw.

In sum, in 2021 I made 6K to my Roth. I recharacterized that amount (plus $294.16 in earnings) in 2022 then contributed another 6K to my Roth for 2022. $0 was put into my Traditional.

At this point do I really need to withdraw $294.16 from my Traditional IRA?

I'm not really sure what to do here...

[DanaB27]

No, you don't have to withdraw an excess if you had enough taxable compensation then you shouldn’t have an excess contribution after you recharacterized. It might be that you entered the amount recharacterized wrong, you only enter the contribution amount (without earnings and losses).

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 “Switch from a Roth To a Traditional IRA?” screen and enter the contribution amount (no earnings or losses) on the next screen.
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. But a Form 1099-R with code R will do nothing to your return. You can only report it as mentioned above. Therefore, you can ignore Form 1099-R with code R. 

You will have to amend your 2021 tax return to correct the recharacterization entry and that should remove the 6% penalty.

[TMNT]

OK thank you so much for the response. Three clarifications please:

1. In 2022 when in TurboTax I marked that I recharacterized $6000 I actually did that correctly? I don't have to put the actual amount that was ultimately transferred, which was $6234 with earnings and was reported on 2023s 1099R.

2. You mentioned I would need to amend. The reason for that ammendment is not because I put in a wrong number ( since I correctly stated $6000) but rather because I had in there the $360 for the 6% fee (of $6000) for not recharacterizing. Since I did in fact correctly recharacterize $6000 and did so (in Feb 2022) before filing (in April 2022), I should not have been charged a fee. The amendment would be strictly to let them know I did actually recharterize and should not have a fee applied. Would the amendment result in a refund of that $360?

3. All of this should have no regards for this year's 2023 return? I don't need to "correct" or withdraw anything to make up for 2022?

Does all that sound about right?  Thank you in advance for your time and consideration. 

[ThomasM125]

You need to amend the 2021 tax return to report the recharacterization. When you do so you will get a refund of any penalty you paid for overcontributing to the ROTH IRA. The amount recharacterized will be the $6,000 contribution. You are correct, none of this will affect 2023 return.

You need to report the earnings ($234) as taxable in 2021. You can enter a subsitute form 1099-R in 2021 to do this:

1. Choose the Federal option on your left menu bar
2. Choose Wages & Income
3. Choose the Retirement Plans and Social Security menu option 
4. Choose IRA, 401(k), Pension Plan Withdrawals(1099-R)
5. Choose the enter 1099-R option
6. Choose Change how I enter my form
7. Choose Type it in myself
8. Choose Financial institution or other provider (1099-R)
9. Enter in as much information as you can regarding the pension income 
10. Work through that section until you see Do any of these situations apply to you?
11. Choose I need to file a substitute 1099-R
12. Complete the information requested

Enter the earnings in box 1 and box 2(a) and use code "8" in box 7.

[TMNT]

I GREATLY appreciate your patience and assistance here.

So I actually did report that in my 2021 return:

Date of the Original Contribution: 2021
Date of the Recharacterization: 02/04/2022
The Amount Recharacterized: $6294.16
The Amount Transferred (Recharacterization plus earnings or losses): $6294.16
Reason for the Recharacterization: Excess Contribution

But I also got charged $360:

Total excess contributions. . . . . . . . . . . . . . . . . . . 24 $6000
25 Additional tax. Enter 6% (0.06) of the smaller of line 24 or the value of your Roth IRAs on December 31,
360. 

So since I did actually report the $6000 recharacterization do I need to amend? Would the reason for the amendment be strictly to try to get that $360 back, not because I did something wrong?

[LindaS5247]

Yes, the reason to amend your 2021 tax return would be to correct the $360 penalty.

You stated you entered the following in TurboTax for 2021:

Date of the Original Contribution: 2021
Date of the Recharacterization: 02/04/2022
The Amount Recharacterized: $6294.16
The Amount Transferred (Recharacterization plus earnings or losses): $6294.16
Reason for the Recharacterization: Excess Contribution

The amount recharacterized would be $6,000

The amount transferred would be $6,294.16

The amount of the original Roth contribution should be entered - not any earnings or losses.

Click here for additional information on amending your federal tax return for a prior year.