2022 Roth IRA conversion from 2021 contribution

[Melissa_514]

In 2021, my spouse and I each contributed $6000 to our Roth IRAs. Later, we learned that our 2021 combined income was too high for Roth contributions, so in early 2022 we recharacterized our contributions as traditional contributions. My spouse's recharacterized value was $6446, and my recharacterized value was $6174.

Later in 2022, we each used a backdoor Roth conversion to move this money into our respective Roth IRAs. At that time, the value of my spouse's conversion was $6120 and my conversion was $6169. All the money that we converted had been initially contributed in 2021 and recharacterized in early 2022 (our traditional IRAs had $0 in them at the beginning of 2022).

Later in 2022, I contributed $1500 to my traditional IRA, and my spouse contributed $4774.  We did not do any more backdoor Roth conversions in 2022.

We received 1099-Rs for our recharacterization and our backdoor Roth conversions.  The recharacterization 1099-Rs do not have a taxable amount, and the 1099-Rs from the backdoor Roth conversions have "Taxable Amount not determined" checked.

1) How much of the recharacterization/Roth conversion is taxable, and how do we correctly input this into Turbotax, given that the contributions were made in 2021, but the backdoor Roth conversion was done in 2022?

2) Do we need to file an amended Form 8606 for 2021?

Thank you very much.

[DanaB27]

2) Yes, if you did report the recharacterization on your 2021 tax return and had Form 8606 with the basis on line 14 then you will have to amend your 2021 tax return.

You will enter the recharacterization when you enter the contribution to the Roth IRA on your 2021 tax return:

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 $6,000
7. Answer “Yes” to the recharacterized question on the “Did You Change Your Mind?” screen and enter the contribution amount of $6,000 (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 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 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.

1) TurboTax will calculate the taxable amount on Form 8606 and you will have a basis on line 14 to carry over to 2023 since you did not convert the contribution for 2022 in 2022.

Please review the steps below for your 2022 tax return:

To enter the nondeductible contribution to the traditional 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 “traditional IRA”
5. Answer “No” to “Is This a Repayment of a Retirement Distribution?”
6. Enter the amount you contributed
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 2021 Form 8606 line 14 (since 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 1099-R conversion: 

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?" since you had any nondeductible contributions in prior years.
7. Answer the questions about the basis from line 14 of your 2021 Form 8606 and the value of all traditional, SEP, and SIMPLE IRAs

[Melissa_514]

Thank you for the assistance.

Regarding the steps below "To enter the nondeductible contribution to the traditional IRA:", Step 6 states: "Enter the amount you contributed"

Is this the amount that each of us contributed directly to our Traditional IRA in 2022, or does it include the amount from 2021 that was recharacterized in 2022? That is, should I enter $6000 or $12,174.39?

Again, thanks for the help.

[DanaB27]

For step 6 on your 2022 tax return you will only enter the amount directly contributed to the traditional IRA for 2022 ($1,500 for you and $4,774 for your spouse according to the original post).

On your 2021 tax return, you won't enter any direct contribution to the traditional IRA since you made a direct contribution to the Roth IRA and then recharacterized it.

@Melissa_514 

[Melissa_514]

Thank you!  We successfully amended our 2021 return to get the for 8606 basis values and entered in our 2022 contribution information.  We also entered in the 1099-Rs for the backdoor Roth conversions, though there was no opportunity to enter the 8606 basis values when entering the 1099-Rs under "Wages and Income". The basis values could only be entered when providing the IRA information under "Deductions and Credits."

I'm a bit concerned, because I still don't think that any of the gains are being taxed in the Roth IRA conversion. They do not show up under "Total Income" when I click the bar chart next to the Federal Refund. Aren't the earnings from our contributions taxable in the  Roth conversion?  Or are the earnings not taxable because the amount that each of of us converted ($6169 and $6120) is less than the amount that each of us earlier recharacterized ($6174 and $6446)?  

Again, thank you for the help on figuring this out.  Almost there!

[DanaB27]

No, how much is taxable depends on your value on December 31, 2022, and your basis. You can see the calculation on Form 8606. The taxable amount can be seen on line 18 of Form 8606 and on line 4b of Form 1040. You still have funds left in the traditional IRA from the contribution for 2022 (which you didn't convert in 2022) therefore you also should have a basis left on line 14.

To look at Form 8606 please follow these steps (you might be asked to pay before you can view it):

1. Select Tax Tools on the left and then Print Center 
2. Select Print, save or preview this year's return
3. Select Federal return
4. Scroll down to Form 8606

@Melissa_514 

[Melissa_514]

I paid for Turbotax and then checked each of our 8606 forms.  Based on my understanding of Form 8606, I think that my Form 8606 is incorrect.

Specifically, the issue is the $4500 contribution for Year 2022 made after January 1, 2023. In the TurboTax worksheet attached to the tax return (when selecting "Include government and TurboTax worksheets (optional)", the contributions made after January 1, 2023 are not subtracted from the numerator when calculating Line 10 in Form 8606 (This is the calculation in Line 8 of the TurboTax worksheet that is included with the displayed return).  Therefore, the division in the TurboTax worksheet is $12000/$7584, which yields a value of 1.000 (all values above 1 are set to 1).

However, Form 8606 specifically states that contributions made after January 31 should be subtracted from the numerator when computing Line 10.  So for me, this should give $7500/$7584, yielding a value of 0.9889.

How can I get TurboTax to correctly calculate Line 10 in Form 8606 as 0.9889 rather than 1.00? Can I manually edit Form 8606 prior to filing?

This is a pretty minor issue (I'm trying to report $68 in taxable income), but I'd like to get it right.

Thank you!

[DanaB27]

TurboTax is following the instructions of Pub 590-B and uses Worksheet 1-1. Worksheet 1-1 specifically states "Enter the total of all contributions made to your traditional IRAs during 2022 and all contributions made during 2023 that were for 2022".

Pub 590-B gives instructions to use the IRA Distribution worksheet and when to complete Form 8606 lines 6 to 12 (see steps 4 and 5):

To report your nontaxable distribution and to figure the remaining basis in your traditional IRA after distributions, you must complete Worksheet 1-1 before completing Form 8606. Then, follow these steps to complete Form 8606.

1. Use Worksheet 1-2 in chapter 1 of Pub. 590-A, or the IRA Deduction Worksheet in the Form 1040 or 1040-SR, or 1040-NR instructions to figure your deductible contributions to traditional IRAs to report on Schedule 1 (Form 1040), line 20.
2. After you complete Worksheet 1-2 in chapter 1 of Pub. 590-A or the IRA Deduction Worksheet in the form instructions, enter your nondeductible contributions to traditional IRAs on line 1 of Form 8606.
3. Complete lines 2 through 5 of Form 8606.
4. If line 5 of Form 8606 is less than line 8 of Worksheet 1-1, complete lines 6 through 15c of Form 8606 and stop here.
5. If line 5 of Form 8606 is equal to or greater than line 8 of Worksheet 1-1, follow instructions 6 and 7 next. Don't complete lines 6 through 12 of Form 8606.
6. Enter the amount from line 8 of Worksheet 1-1 on lines 13 and 17 of Form 8606.
7. Complete line 14 of Form 8606.
8. Enter the amount from line 9 of Worksheet 1-1 (or, if you entered an amount on line 11, the amount from that line) on line 15a of Form 8606.

@Melissa_514