Please help. Converted non-deductible Traditional to Roth IRA but stuck with filing

[dhuynh44]

Hi all,

Please help as I am stuck.  In 2021 my wife and I both made nondeductible contributions to our traditional IRA thru Fidelity and converted these to Roth IRA (we also recharacterized some contributions for year 2020).  When we are filing in Turbotax 1099-R, we end up owing taxes on our total amount (let's say $5000 under 2a taxable amount).  Our distribution code in box 7 is "2" and IRA box is checked.  It says we owe taxes on the amount even though its non-deductible.  We put that we moved money to another retirement account, and amount converted to Roth IRA was whole amount ($5000).  The taxes owed are still there.  Then the next screen it says "Any nondeductible contributions to IRA?"  We select "Yes", however I have never filed a form 8606 and do not know where to obtain one.  It says if we never filed a 8606 just enter "0".  However these contributions were nondeductible so we should have a basis.  How do I obtain a form 8606 or this basis for 2020, or how do I proceed?  Thank you!

[DanaB27]

First, you stated that you recharacterized a contributions for 2020 in 2021. I'm assuming Roth IRA to traditional IRA? If you entered this on your 2020 tax return and made them nondeductible you should have Form 8606 for this.

Here are the steps for the recharacterization on your 2020 tax return:

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 have a retirement plan at work and are over the income limit it will be nondeductible automatically and you only get a screen saying $0 is deductible)

The 1099-R  for the recharacterization with code R-Recharacterized IRA contribution made for 2021  belongs on the 2020 return. But a 1099-R with code R will do nothing to your return. You can only report it as mentioned above. Therefore, you can ignore the 1099-R with code R. 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.

If you need to amend your 2020 tax return please see: How do I amend my 2020 return?

On your 2021 tax return

To enter the nondeductible contribution to the traditional IRA:

1. Open your return
2. Click “Deductions &Credits” on the top
3. Click "I'll choose what to work on"
4. Scroll down to “Traditional and Roth IRA Contributions” and click “Start”
5. Select “traditional IRA”
6. Answer “No” to “Is This a Repayment of a Retirement Distribution?”
7. Enter the amount you contributed
8. Answer “No” to the recharacterized question on the “Did You Change Your Mind?” screen
9. Answer the next questions until you get to “Any Nondeductible Contributions to Your IRA?” and select “Yes” since you had nondeductible contributions before this tax year (from the 2020 recharacterization)
10. If you had a basis in the Traditional IRA before then enter the amount.
11. On the “Choose Not to Deduct IRA Contributions” screen choose “Yes, make part of my IRA contribution nondeductible” and enter the amount.

To enter the 1099-R distribution/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" after entering all 1099-Rs
11. Answer "yes" to "Any nondeductible Contribution to your IRA?"
12. Answer the questions about the basis and value

[dhuynh44]

Thanks for the response, since I don’t have a 8606 from 2020, do I need to amend my 2020 with the recharacterization to obtain a 8606 before I can continue with my 2021 return?  Also, when you mention basis, is this the amount that was contributed to my IRA, or the total value (including any gains or losses)?  I do not have my 2020 tax software, how is the best option to obtain this since I already paid for it last year?  Thank you 

[GeorgeM777]

To follow-up on the comments from @DanaB27, you may need to amend to the extent that you did not properly account for any non-deductible traditional IRA contributions.  Your amended return may not change your tax liability for the prior year to the extent you did not receive a deduction for your IRA contribution (hence the term, "non-deductible IRA contribution).

Yes, your traditional IRA basis is the total non-deductible contributions you made to that account.  Your traditional IRA basis would not include any gains, dividends, or interest.  In other words, your basis includes only your after-tax money dollars contributed to the IRA for which you were not able to deduct such amount on your return.  When you rolled your traditional IRA into the Roth IRA, you would need to know your basis in the traditional IRA so that your basis, as represented by your non-deductible contributions, is not taxed twice.  

To amend your 2020 return, and assuming you filed through TurboTax in 2020 and used TurboTax online, log into your current account.  Click on Tax Home, left margin, and scroll down the page to Your tax return & documents.  Click on the drop down arrow on the right to open the menu.  Select Amend (change) 2020 return. 

@dhuynh44

[dhuynh44]

Hi thanks for the response.  For year 2020, I had similar questions (maybe you guys can see from my previous posts) and ended up putting my correct nondeductible amount basis, so I did not end up paying any extra taxes (thanks for the help).  However I did some recharacterizations in year 2021 for the year 2020, so it is asking I amend 2020 year.  How will this affect my return for 2020 (like you mentioned)?  Do I have to amend 2020 to get my 8606 for year 2021, or can I just use my total cost basis to answer the question "What is your total cost basis at the end of December 2020"?  Also, I used a CD for Turbotax 2020 however I believe I misplaced it, and it is no longer saved on my computer.  How can I obtain an extra copy or is Turbotax able to provide me an online copy since I filed with them for 2020?  Thank you

[DanaB27]

If you know the correct basis (nondeductible contributions) from your traditional IRA  from your 2020 tax return then you get can enter this when TurboTax asks about your basis prior to 2021. 

For example, you contributed $5,000 to the Roth but recharacterized the $5,000 to traditional and made them nondeductible (or they were automatically nondeductible because you had a retirement plan and your income). And you didn't make any other traditional IRA contributions. Then you can enter $5,000 as the basis from prior years when preparing your 2021 tax return.

But please verify from your 2020 tax return copy that you hopefully saved on your computer or printed out, that you reported the recharacterization correctly and that your tax return included Form 8606.

If you do need to amend your 2020 tax return and need another copy of the software then please contact TurboTax customer service what can be done: What is the TurboTax phone number?

[dhuynh44]

Thanks for the info, i filed my taxes last year then recharacterized after that fact.  I received my 1099-R last month, labeled as 2021 year.  Would this mean this recharacterization amount is for contributions for 2021 or 2020?   When I put in this 1099-R for TurboTax 2021 it says I should amend for year 2020 if that helps.  Thanks 

[DanaB27]

No, the recharacterization will have to be reported on our 2020 tax return. You can only report it as mentioned below. A 1099-R with code R will do nothing to your return. Therefore, you can ignore the 1099-R with code R. 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.

You will enter the recharacterization when you enter the contribution to the Roth IRA on your 2020 tax return:

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 of (no earnings or losses)
8. TurboTax will ask for an explanation statement where it should be stated that the original $xxxx.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 screen saying $0 is deductible)

When you filed your 2020 tax return did you only enter the Roth contribution? 

[dhuynh44]

Hey all, so I looked at my 2020 return and noticed  I do have 8606 forms for my wife and I.  When I inputted my 1099-R for both of us it added more taxes to our total even though they were nondeductible.   I’m assuming once I enter my 8606 information and my contributions for 2021 under “deductions and credits” I should see this extra added tax disappear?   Thanks 

[FangxiaL]

During the first step, when you enter your Traditional IRA contribution, make sure to enter the Total Basis as of December 31, 2020. 

During the second step, you enter the 1099-R form received. It should work out fine as long as you enter everything properly.

[Edited on2/23/2022| 7:14PM,PST]

[dhuynh44]

Hey, just curious why you mention should be at least $7000, and do you mean by clean IRA?   So looking at my 8608 it says my basis was $2500.  I accidently made a contribution of $1300 in 2020 to my Roth instead of my traditional, so in 2021 I recharacterized it back to traditional then converted it back to Roth.  After speaking with fidelity they mentioned the $1300 was for year 2020.   So when I put my basis for December 2020, do I put what’s on form 8608, or do I also add this $1300 that was recharacterized?  Thank you..

[FangxiaL]

I was assuming that $14k was contributed to a Tradtional IRA at the same time, 7k for 2020 and 7k for 2021.

By "clean" IRA, I meant there is no mixture of deductible and non-deductible traditional IRA contributions. It is simpler if all the IRA contributions are after-tax dollars. 

You can download 2020 Form 5498, which shows your contribution for 2020. 

@dhuynh44

[dhuynh44]

Hey, so i guess that’s my question too.  I have 2 forms for 2020 5498, one for traditional and one for Roth.  Lets say I accidently made a contribution to Roth in 2020 for $1000, and what I did was recharacterize that $1000 in 2021 to traditional right before I filed for 2020, so I just received the 1099-R for that now.   Do I add this $1000 from my 2020 Roth 5498 (also what I recharacterized in 2021) to the basis of my traditional IRA for end of year 2020?  Sorry for all the confusion, this became way more complicated with multiple years.  Thanks 

[dhuynh44]

I also wonder if I messed up on my 2020 return.   To my understanding the 1099-R is what I converted from traditional to Roth..  However when it asks how much I contributed to the traditional under “deductions and credits” do I also put in this number from 1099-R (lets say $2506) or what I actually contributed to the traditional because the numbers are different (let’s say $2000), or whats on my 5498?   What I actually contributed to traditional is always an even number however on my 5498 what I contributed is a weird number like $2345.10.  Nothing ever matches.  I also convert from traditional to Roth as soon as I can as to not have any gains.  Thanks 

[DianeW777]

Form 5498 is for information purposes and is not a document that is used on the tax return. You only report anything that is issued to you on Form 1099-R.

Since you immediately transfer your traditional IRA contributions to your Roth IRA (within the calendar year) AND all of your traditional IRAs are nondeductible (after-tax) there should be no taxable income on the tax return even if you were issued a Form 1099-R (codes in Box 7).

Please update here if you need further assistance.