How to report a recharacterization of Roth IRA to a nondeductible traditional IRA in TurboTax?

[purpleblue08]

I had originally made a excess contribution to a Roth IRA in 2020, then had to recharacterize it into a traditional nondeductible IRA in 2021. How do I report recharacterization of Roth IRA to traditional IRA plus gains/losses in TurboTax, in order to not pay the penalty? Will I need to do anything for the 2021 tax year? 

[DanaB27]

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 “Did You Change Your Mind?” screen and enter the contribution amount (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 want to make this contribution nondeductible (this question will not come up if you had retirement plan at work and your income is over the limit)

You will get a 1099-R 2021 in 2022 for the recharacterization with code R-Recharacterized IRA contribution made for 2020 and this belongs on the 2020 return. But a 1099-R with code R will do nothing to your return. The only way to report the recharacterization is with the steps above. 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.

[purpleblue08]

Thank you @DanaB27. I have some more questions. Sorry this is new to me just want to make sure I do this correctly. 

After I filled in the explanation statement, it brought me to the next screen that says "did you open a ROTH IRA before 2020"?; I should answer that question as "yes" correct? 

Can I select "no" to tracking the cost basis? 

Also since I did a recharacterization of a ROTH to traditional IRA, how should I answer the question "do you have any excess ROTH contributions"? Should that be a "no"?

Thank you for your help! 

[DaveF1006]

If you opened your Roth Account before 2020, then that answer to your first question is yes. if you made a non-deductible contribution to your traditional IRA, you should say yes to begin tracking the cost basis. This will generate a form 8606 and will begin tracking your non-deductible contributions made to your traditional IRA. Please review this IRS link for more details regarding the 8606.

Based on what you mentioned, the answer to the third question is no.

[purpleblue08]

Thank you for the quick response @DaveF1006!

Is it normal that turbotax generated a form 5329? When I looked at it, it was blank. It did also generate a form 8606. 

Also for a backdoor ROTH conversion, should wait until next year when I get my 1099? It was done in 2021 after the recharacterization. 

[DaveF1006]

It depends. I am not sure why the 5329 generated unless it was generated because of the excess contribution.  If it is blank, it means you weren't charged an early withdrawal penalty. 

As far as the Roth conversion, I would wait until next year when you receive the 1099-R.