Paid into Traditional IRA instead of Roth IRA

[user17692770492]

In error, I transferred, online, $2,000 to my empty Traditional IRA account instead of to the Roth IRA.  I contacted the Bank immediately and they, the next day transferred the funds to the correct account BUT they have now issued a 1099-R for the $2,000, as a withdrawal.  And entering that into Turbo Tax of course drives an extra tax burden.  Is there a way around this ?

In Turbo Tax in the IRA Contributions Worksheet I entered the $2,000 as a Contribution on Line 1.  Also as a IRA Roth recharacterization on Line 4 but I don't see either of these offsetting the 1099-R as income.

Being self-employed I have maximized and entered my $8,000 Roth IRA contributions, of which the above $2,000 was part.

[DavidD66]

What code did your bank use in Box 7 of your Form 1099?  That code will determine how you have to deal with this to eliminate or minimize any tax or penalty. 

[user17692770492]

Code 7 in box 7. Is that good, bad or simple wrong ?

[CatinaT1]

Since you have code 7 in box 7, it means the bank processed a Distribution and a New Contribution rather than a Recharacterization. This is why you received a 1099-R with Code 7 (Normal Distribution).

Because the funds were moved immediately and you intended them to be Roth contributions all along, you can treat the 1099-R as a Rollover rather than income.

Follow these step to enter your 1099-R:

1. Go to Wages & Income > Retirement Plans and Social Security > IRA, 401(k), 703(b) (1099-R).
2. Enter the 1099-R exactly as it appears (Code 7 in Box 7).
3. Continue through the follow-up questions. When asked "What did you do with the money?", select:
4. "I moved the money to another retirement account (or returned it to the same account)."
5. Then choose:
6. "I rolled over all of this money." (Since the full $2,000 went into the Roth IRA).
7. When asked if the money was rolled into a Roth IRA, say Yes.

After you have completed this, you can check your Form 1040, Line 4.

1. Line 4a (IRA Distributions): Should show the $2,000.
2. Line 4b (Taxable Amount): Should show $0 (or just the amount of any other actual distributions you took).
3. The Word "Rollover": You should see the word "Rollover" printed next to Line 4b on the actual tax form.

[dmertz]

Expanding on what CatinaT1 said, with the distribution of the $2,000 from the traditional IRA being reported as an ordinary distribution, the movement of these funds to the Roth IRA would have to be treated as a Roth conversion, not a recharacterization, with your regular contributions being $2,000 to the traditional IRA and only $6,000 to the Roth IRA.

The bank should have instead processed this as a recharacterization, which was your intent, and reported with code N in box 7.   Depending on whether you have any other funds in traditional IRAs and, if so, whether you have basis in nondeductible traditional IRA contributions, there might not be any difference treating this as a Roth conversion instead of a recharacterization.  If it does make a difference that you are not willing to accommodate due to how the basis is handled on Form 8606, you would have to get the bank to correct the Form 1099-R to have code N in box 7 (and zero in box 2a) or submit a substitute Form 1099-R (Form 4852) showing the code N.  Submitting a substitute Form 1099-R would preclude you from e-filing.

[user17692770492]

Thank you all.  I’m first trying to get JP Morgan to re-issue the 1099-R with a code N in Line 7 instead of a 7.  That seems like the proper solution.  If that fails, I’ll follow your advise.  Thanks again