IRA basis after recharactization and backdoor conversion

[brittx92]

Hello,

My wife and I accidentally over contributed to our Roth IRAs in 2023, after exceeding the income limits despite all our deductions (401k, HSA, DCFSA, etc.).

I noticed this at the end of 2023, and contacted Vanguard to recharacterize both of our account contributions to traditional. Vanguard initiated the recharacterization in the last week of the 2023; some of the funds were recharacterized in the last week of calendar year 2023, and some of them in the first week of calendar year 2024.

Once the recharactsrizations were completed, I them back door converted those funds back to the Roth IRA accounts. I received a 1099R for the 2023 for my Roth account with the gross distribution listed under code R (this confused me as the funds were contributed towards the 2023 limit, and recharacterized in 2023), my wife did not received any 1099-R for 2023. For my 2023 taxes I recorded the recharacterization and the subsequent backdoor conversion following the prompts from Turbotax. I did my best to explain our situation in the explanation statement section.

This year my wife and I both received two 1099-Rs each, one for the Roth and one for the traditional accounts. The Roth forms show the distribution coded with R, and the Traditional forms show the distribution coded with 2.

Now, for the 2024 tax year I am trying to get a grip on my IRA basis, and I'm getting a little confused. Last year Turbo tax populated the 8606 with what appears to be a basis of the contributions of the Roth + the Traditional. I am not sure this is correct, and I want to get this cleaned up. The way I understand it, contributions that were made to a Roth IRA and then recharacterized to Traditional should count towards the second account, in this case the Traditional. However, because I did the backdoor conversion after the recharacterization, back into the Roth accounts, should it then count towards the Roth basis?

[DaveF1006]

It depends on how the information flows on your 8606.  Here is the way it should look.

1. Part I of Form 8606 is where you report the non-deductible contributions to your Traditional IRA (contributions made to your Traditional IRA). 
2. Line 1: You’ll report the total non-deductible contribution made to your Traditional IRA (e.g., $6,000).
3. Line 2: This will calculate the total basis in your Traditional IRA, which is the sum of your non-deductible contributions. (In this case, $6,000).
4. Part II of Form 8606 is used to track the Roth IRA conversion.
5. Line 16: You report the total amount converted from the Traditional IRA to the Roth IRA. This would be the $6,000 you converted in this example.
6. Line 17: If the entire amount was a non-deductible contribution (as in this case), the amount converted will also be non-taxable, and Line 17 should reflect the same amount ($6,000).
7. Line 18: This is the taxable amount of the conversion, but since you contributed after-tax money to the Traditional IRA, this should be zero.
8. This part will ensure that the $6,000 you converted to your Roth IRA will not be taxed again when you take it out in the future.

In your particular case, the Traditional IRA contribution is reported in Part 1 of the 8606, then converted. The Roth conversion is reported in part 2 so that the converted amount is non-taxable.  Your 8606 must have this information I described above to make certain the form accurately reflects these transactions.