Recharacterization in 2022 for 2021 Tax Year

[paulqs]

Hello, 

I found out my MAGI is over the limit for Roth Contributions. In Feb 2022, I recharacterized all my 2021 Roth contributions to a Traditional IRA. My total IRA contributions (Roth and Traditional were still under the limit). 

Question: I am using desktop app version of Turbo tax premier. In the deduction sections - do I put anything under the Roth Contributions or should I just I declare all contributions for 2021 under the Traditional? I called Vanguard and they said since the transaction was done in 2022, even though this is for 2021 tax year, I would not get any 1099-R or tax statements for this. 

If I declare Roth Contributions in Turbo Tax - can I have an option to say that the entire contribution was recharacterized?

Thank you everyone.

[DanaB27 · Accepted solution]

Yes, you can say that the entire contribution was recharacterized.

You will enter the recharacterization when you enter the contribution to the Roth IRA:

1. Open TurboTax
2. Click on the Search box on the top 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
8. Enter the contribution amount (no earnings or losses)
9. 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.
10. 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 and you only get a screen saying $0 is deductible)

Next year you will get a 2022 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 and you can ignore the 1099-R with code R next year. 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.

[paulqs]

Dana thank you so much for this explanation. Glad to know that when I receive the 1099-R with R code, that I do NOT have to report it and can disregard. I was wondering how would that work as it would be 2023 that I will receive the 1099-R and it would be for the 2021 tax year. This is helpful Thank you!

[OCBaseballNut]

So I had a similar situation happen to me as the original poster.  I contributed to my Roth in 2021, however when doing my taxes in 2022, TurboTax showed that my AGI was too high, so I had to recharacterize the Roth contribution to Traditional in 2022 for 2021.  In 2022, because I knew my AGI would be too high, I proactively contributed $6,000 to my Traditional IRA, then did a Roth conversion on that amount.

Fast forward to 2023, as you indicated in your reply to the other user, I received a 1099-R for the recharacterized amount (with my Roth account number on it and Code R in Box 7) AND one that appears to contain the Roth conversion amount plus the recharacterized amount (with my Traditional IRA account number on it).  I also got Form 5498 for my Traditional IRA that shows the regular $6,000 contribution (Line 1) and the $6,157 recharacterization for 2021 that was processed in 2022 (Line 4).

My questions are:

• Is an amended return needed for the 2021 tax year due to the recharacterization?
• I've entered ALL the 1099-R forms into my return... How do I tackle the "Traditional IRA and Roth IRA" section when working on my return this year for 2022 to reflect BOTH the normal Traditional contribution that I converted AND the Roth conversion that I recharacterized for 2021?

This is all messy, I know, but I want to get this right the first time... Measure twice, cut once.

I thank you in advance for any light you can shed on this!

[fanfare]

having now a Traditional IRA contribution for 2021, you have to determine wither it is deductible.

if not deductible file 2021 Form 8606 to increment your IRA basis.

@OCBaseballNut 

[OCBaseballNut]

Oh, it’s definitely not deductible since my AGI remains too high.  TurboTax generated Form 8606 when I worked through the IRAs section.  I’m just uncertain of the issues I’ve raised above.

[fanfare]

Is an amended return needed for the 2021"

I recommend using 1040-X to submit 8606.

Note: when you are not changing any dollar amounts on your amended tax return, you can leave all the lines 1-23 EMPTY.

Do not include your old 1040 nor your revised 1040 because the Form 1040-X reflects any changes there and becomes your new tax return.

using this method you sign 1040-X not 8606.

[OCBaseballNut]

Oh wait, you said file 2021 Form 8606… so I have to file an amended return?  My 2021 return already generated an 8606 indicating it wasn’t deductible…

[TMNT]

I'm basically in the same boat as you:

- In 2021 I contributed $6000 to a roth

- In Feb 2020, while doing my taxes turns out my AGI was too high

- So I recharacterized my $6000 to a Traditional

-Fast forward to doing taxes today and I see I have a 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

- Looking at my completed and filed 2021 Turbo Tax tax form 1040, I see I also 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.  

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 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 need to make a withdrawal. 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.