How to handle Roth IRA recharacterization to Traditonal IRA, and then Traditional to Backdoor Roth Across 2023 & 2024

[Ats1]

Hello -

I am dealing with the following situation and want to be sure this is handled correctly on our 2023 tax return.

In December 2023, my wife inadvertently contributed $X amount to her Roth IRA, not realizing our income limit was too high. Subsequently, in January 2024, we recharacterized this contribution to be a Traditional IRA contribution instead, and then immediately (in January 2024) converted the amount to a Roth. 

Given the accidental Roth contribution occurred in 2023 and the recharacterization and conversion occurred in 2024, we want to be sure we’re inputting this information correctly. Please let us know the appropriate steps.

[DanaB27]

You will enter the recharacterization on your 2023 return 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 ‘Yes” on the “Roth IRA Contribution” screen
6. Answer “No” to “Is This a Repayment of a Retirement Distribution
7. Enter the Roth contribution amount 
8. 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.
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" since 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 a 2024 Form 1099-R  for the recharacterization with code R-Recharacterized IRA contribution made for 2023 and this belongs on the 2023 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 the Form 1099-R with code R when you get it in 2025.

You will have a 2023 Form 8606 with a basis on line 14 and this will be entered next year on your 2024 tax return when you enter the Form 1099-R for the conversion.

Next year on your 2024 tax return:

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?" if you had any nondeductible contributions in prior years.
7. Answer the questions about the basis from line 14 of your 2023 Form 8606 and the value of all traditional, SEP, and SIMPLE IRAs

Please see How do I enter a backdoor Roth IRA conversion? for additional information for next year.