Form 8606 help: Roth contribution to Tira recharacterization to backdoor Roth

[marie]

I'm using TurboTax Deluxe to do my 2018 Income Taxes. (Married, filing jointly) I want to confirm that I've answered the interview questions correctly, and that the Form 8606 has been generated correctly.  Here are the facts. I am a stay at home spouse and through the end of 2018, owned only a Roth IRA, to which I've been making contributions based on spousal income. Spouse owns some retirement accounts through employers, but no other IRAs. (Until now) In Jan 2018, I made my full $6500 contribution to my ROTH IRA.  I realized in Jan 2019 that my husband's 2018 income exceeded $199,000, making my contribution ineligible. So, in Jan 2019, I opened a traditional IRA at the same institution as the Roth, and recharacterized the 2018 Roth contribution (minus losses, ugg) to the TIRA. Two weeks later, in Jan 2019, I did the "backdoor" converting the entire new TIRA balance (with earnings) to my existing Roth IRA.  Everything is non deductible. My brokerage won't issue the 1099R until next year, in Jan 2020 for 2019. But, after completing my taxes, Turbo Tax has generated the 8606 for this year (I know they'll be one for next year, too) that shows a 2018 basis in the TIRA of $6500, even though the TIRA wasn't opened until Jan 2019. So the basis in the TIRA as of 12/31/2018 shows as $6500 when the account wasn't even opened then. I'm assuming that's due to the original contribution going into a Roth (Jan 2018) that was recharacterized In Jan 2019. I'm just not sure whether Turbo Tax is doing the 8606 correctly. Should my TIRA basis for 2018 be $6500, even though the account wasn't even open yet in 2018, and the transfer wasn't in 2018, and the money was recharterized into and converted out of the TIRA all in 2019, before the tax filing deadline.The brokerage shows the 2018 contribution as a Roth contribution, even though I recharacterized it. I have not made a 2019 contribution yet. Hoping someone can let me know if this sounds right. Specific line item tips on the 8606, or in the interview screens would be immensely helpful. Any tips on when make my 2019 contribution would be helpful too. I believe this year will also exceed the income cap to be able to do a direct Roth contribution. Thanks to anyone who can help.

[macuser_22 · Accepted solution]

If the 2018 contribution (you had until April 15 2019 to recharacterize) is on the 2018 8606 line 1, 3 & 14, then you did it correctly.  If you had a loss then only the actual amount that was recharacterized should be on the 8606.

You will need to use the line 14 amount when you report the 1099-R for the conversion when the interview asks for prior years non-deductible basis.

You should also receive a 2019 1099-R with a code R for the recharacterization  that you do not enter if it was already reported this way:

A 2019 code R 1099-R does nothing whatsoever if entered into the 1099-R section of an amended 2018 return. It does not get sent to the IRS and nothing goes on the tax return at all. The only purpose of the 1099-R is to report the recharacterization to the IRS, but it still must be reported on your 2018 tax return.

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.

The proper way to report the recharacterization and earnings which is to enter the 2017 IRA contribution in the IRA contribution interview section and then say yes to "Did you switch from a Roth to a Traditional IRA - recharacterize".

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

Then TurboTax will ask for an explanation statement where it should be stated that the original $xxx.xx plus $xxx.xx earnings (or loss) were recharactorized.

For a non-deductible contribution that will produce a 8606 form with the contribution  on line 1, 3 and 14.

Next year when  filing the 2019 tax return and 2019 IRA contribution and Roth conversion, enter the back door Roth this way:

This so-called “back-door Roth” method ONLY works if you have NO OTHER Traditional IRA accounts.  If you do, then the non-deductible part must be spread over ALL accounts and cannot be withdrawn by itself.  Only if you started with NO Traditional, SEP & SIMPLE IRA and ended up with a zero amount in ALL Traditional, SEP & SIMPLE IRA accounts will this Roth conversion not be taxable.

First you must enter your Traditional IRA contributions (if there were 2019 contributions).

IRA contribution
Federal Taxes,
Deductions & Credits,
I’ll choose what I work on (if that screen comes up),,
Retirement & Investments,
Traditional & Roth IRA contribution.

Be SURE to answer the follow up that the are choosing to make this contribution NON-DEDUCTIBLE - if that screen comes up. (DO NOT say that you moved (recharacterized) the money to a Roth) – this is a conversion, not a recharactorazition.

Then enter the 1099-R that shows the distribution.

Federal Taxes,
Wages & Income
I’ll choose what I work on (if that screen comes up),,
Retirement Plans & Social Security,
IRA, 401(k), Pension Plan Withdrawals (1099-R).

Answer the follow-up questions answer the question that you moved the money to another retirement. The screen will open up with choices of where it was moved. Choose you converted it to Roth IRA.

When asked if you have made any non-deductible contributions say " "yes" if you did then enter the non-deductible contributions made for tax years before 2019.     (Usually zero unless you also made a 2018 or earlier non-deductible contribution. If you do have prior year basis then enter the last filed 8606 line 14 value.).

Enter the 2019 year end value of your Traditional IRA a "0" (zero) - if it is in fact zero - this tax free Roth conversion will not work if it is not zero.

[If you had any other Traditional IRA at the end of 2019, then the nondeductible "basis" must be pro-rated over the current distribution and the total IRA value and only a portion of the Roth conversion will be non taxable and part will be taxable, with the remaining non-deductible basis carrying forward for future distributions. You can never only withdrew the nondeductible basis as long as the IRA exists and has a value more than zero.]

The non-deductible amount of your contribution will be subtracted from the taxable amount of the conversion on then 8606 form and enter on line 4a of them 1040 form and a zero taxable amount on line 4b if you did it right.

Also see this TurboTax FAQ:
https://ttlc.intuit.com/questions/4350747-how-do-i-enter-a-backdoor-roth-ira-conversion

[marie]

Thank you for the prompt response. The 2018 8606 is reporting $6500 on lines 1,3 & 14. In the TT interview, it takes me through the TIRA questions first, then the Roth IRA questions. In the Roth questions, it says "Enter X's total Roth IRA contributions for 2018, even if you transferred or "recharacterized," some or all of it to a traditional IRA.  Note:  Include contributions made between January 1, 2019 and April 15, 2019 that you want to include on your 2018 return."

My 2018 contribution was to the Roth on 1/2/2018, $6500, so that is what I entered in the above interview question. The 2018 contribution was recharacterized to the TIRA on 1/17/2019, (the first and only TIRA, opened on the same day,) $6304.25.  There is no interview question that asks for the amount recharacterized. I did get the screen prompt to complete the "explanation statement" for the 1040, 4a, where I entered all the relevant information regarding the recharacterization, but not the backdoor conversion yet. Is that correct? The backdoor conversion of the entire balance of the TIRA ($6412.28) was 13 days later, 1/30/2019. The brokerage shows the 2018 tax year contribution to the Roth. For the 2019 tax year, the brokerage shows "rollover contributions" of $6304.25 to the traditional, and $6412.28 to the Roth. I have not made a 2019 tax year contribution yet. But it appears that even though the TIRA wasn't opened until Jan 2019, I will still have a basis in it for 2018, based on the recharacterization, which seems to "back date" the TIRA basis to the date of the orginal Roth contribution.

So, I just want to clarify that on the 2018 8606, line 14, the basis in TIRAs for 2018 and earlier years is correct, $6500, even though the TIRA (nor any other TIRA) didn't exist until 1/17/2019? (And that Turbo Tax is using the amount of the full $6500 contributed to the Roth on 1/2/2018, not the amount recharacterized, and reporting that on the 8606 as if it were in the TIRA rather than the Roth in 2018.) So, I will have a basis in TIRA for 2018, correct? 

For my 2019 contribution, I anticipate income in 2019 that will likely be either in the phase out range or exceeding the Roth income limit. Should I make the 2019 contribution to the Roth and later recharacterize as needed, or just do the initial contribution to the TIRA (which is now at $0, and only had funds in it from 1/17/19 to 1/30/19.........plus whatever I do later this year or early in 2020 for the 2019 contribution) and do an immediate backdoor conversion? Are two backdoor conversions allowed in the same calendar year? (The first was for 2018 tax year, in Jan. 2019, and the second would be for the 2019 contribution, if it's relevant.) Or, should I just wait out the year and make the 2019 contribution early in 2020 when I know the exact income?

All the transactions are (or will be) non deductible. Should I expect additional tax liability only on the TIRA earnings for the brief period before the conversion(s) to the Roth? (I realize there will be income taxes on the contribution amount, but those are expected to be included in the payroll withholding.)

And, for clarity, I had only Roth IRA contributions up until the recharacterization and conversion in Jan 2019 for the 2018 contribution, so there was never any prior basis in TIRAs, and I have not filed the 2018 return yet, so there is no amended return in question. (Trying to get it right the first time, so I appreciate the guidance.)

Thanks in advance for your patience!

[macuser_22 · Accepted solution]

Yes, that is correct.   A recharacterization treats a Roth contribution *as if* it never happened and the contribution was to the Traditional IRA in the first place.  You have until the due date of the tax return (or extended due date if a timely extension is filed) so a recharacterization for a 2018 contribution could be done up to Oct 15, 2019 whether the Traditional IRA existed prior to then or not.

See IRS Pub 590A for the rules on this.

https://www.irs.gov/publications/p590a#en_US_2018_publink1000230678