How to enter a Roth to traditional IRA recharacterization followed by a conversion back to roth IRA with taxable gains in TurboTax?

[thegoodreturn]

For tax year 2024, I contributed the max to my Roth IRA ($7000). Later in the year, I had a traditional 401(k) to Roth 401(k) conversion which made me no longer eligible to contribute directly to my Roth IRA.

Before the end of 2024, I recharacterized my Roth IRA to a traditional IRA. At the time of the recharacterization, the amount was $7500 due to investments. I waited a day and did a conversion from traditional IRA back into the Roth IRA. At the time of the conversion, the amount went down by $100 - the amount was only $400 more than the original Roth IRA contribution amount.

Will $500 or $400 be added to my marginally taxed income for 2024?

I received a 1099-R for the recharacterization and another 1099-R for the conversion.

Can someone let me know how I can enter everything into TurboTax desktop correctly? I can't seem to get TurboTax to add the $400 or $500 as taxable income, and the answer choices for the "What did you do with the money" question seem confusing to me.

[DaveF1006]

It depends. Here is how recharacterizations and conversions work in TurboTax. 

1. Recharacterization: When you recharacterized your Roth IRA contribution to a Traditional IRA, the earnings ($500 in your case) are treated as if they were earned in the Traditional IRA. This means the $500 is not taxable at the time of recharacterization. You should receive a 1099-R with a code "R" in Box 7 for the recharacterization, which is informational and does not directly affect your taxable income. 
2. Conversion: When you converted the Traditional IRA back to a Roth IRA, the taxable amount is based on the total value converted minus any basis (non-deductible contributions). Since the amount converted was $7,400 and your original contribution was $7,000, the $400 in earnings will be added to your taxable income for 2024.

TurboTax Entries:

1. Enter the original Roth IRA contribution under "IRA Contributions."
2. Indicate that the contribution was recharacterized and provide the details (e.g., $7,500 recharacterized amount).
3. Enter the 1099-R for the recharacterization. TurboTax will ask for an explanation statement, where you can note the original contribution, the recharacterized amount, and the earnings.
4. Enter the 1099-R for the conversion. TurboTax will calculate the taxable amount ($400) based on the information provided.

[thegoodreturn]

When entering the conversion 1099-R, what should I choose for this option?

1) I moved the money to another retirement account (or returned it to the same retirement account).

2) I did something else with it (cashed out, etc.).

If option 1), which subsequent option should I pick?

A) I rolled over all of this money to another traditional IRA or other retirement account (or returned it to the same account).

B) I did a combination of rolling over, converting, or cashing out the money.

And if option B), another two choices:

C) Amount rolled over to another (or back to the same retirement account

D) Amount converted to a Roth IRA account

I don't seem to be able to get TurboTax to tax only the $400 on it. It appears with the choices I have, it either taxes the entire $7,400 or nothing at all.

[DanaB27 · Accepted solution]

You will select option 1) I moved the money to another retirement account (or returned it to the same retirement account).

You then will select option B) I did a combination of rolling over, converting, or cashing out the money.

Then option D) Amount converted to a Roth IRA account and enter the amount converted.

To confirm you entered the recharacterization and made it nondeductible:

1. Click on "Search" on the top right and type “IRA contributions” 
2. Click on “Jump to IRA contributions"
3. Select “Roth IRA”
4. Answer ‘Yes” on the “Roth IRA Contribution” screen
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 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 "Federal Taxes" on the top and select "Wages & Income"
2. Click "I'll choose what to work on"
3. Scroll down and click "Start" next to "IRA, 401(k), Pension Plan (1099-R)" 
4. Answer "Yes" to the question "Did You Have Any of These Types of Income?"
5. Click "I'll Type it Myself"
6. Choose "Form 1099-R, Withdrawal of Money from 401(k) Retirement Plans, Pensions, IRAs, etc."
7. Click "Continue" and enter the information from your 1099-R
8. Answer questions until you get to “What Did You Do With The Money” and choose “I moved it to another retirement account”
9. Then choose “I did a combination of rolling over, converting, or cashing out money.” and enter the amount next to "Amount converted to a Roth IRA account"
10. On the "Your 1099-R Entries" screen click "continue"
11. Answer "yes" to "Any nondeductible Contribution to your IRA?" if you had any nondeductible contributions in prior years.
12. Answer the questions about the basis from line 14 of your 2023 Form 8606 and the value of all traditional, SEP, and SIMPLE IRAs

[thegoodreturn]

On the conversion 1099-R, what amount should I enter here in this box - $7,400, or only the $400? Should I leave the other box "Amount rolled over to another (or back to the same) retirement account" empty?

Step 9 in your instructions: Then choose “I did a combination of rolling over, converting, or cashing out money.” and enter the amount next to "Amount converted to a Roth IRA account"

[DanaB27]

You will enter the amount converted to Roth IRA: $7,400. Yes, leave the other box "Amount rolled over to another (or back to the same) retirement account" empty.

[thegoodreturn]

Thank you!