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

[dhuynh44]

@DanaB27   Thanks Dana 

I’m slowly getting there; I’m just trying to understand more.  I also received a 2020 1099-R for my Roth account with an amount of $1200 with taxable amount $0 and box 7 = N for a recharacterization.  On my 5498 for the same year for my traditional IRA it says recharacterized contribution of $1200.  I received these notices January of 2021, we’ll before I actually Did the recharacterizations we have been talking about this whole time. 

Im going to call my institution on what the heck this is bc I don’t remember doing anything of this sort in 2020,  however, just for my info where could this 1099-R come from?   

[DanaB27]

A 2020 Form 1099-R with code N  indicates that you made a Roth contribution in 2020 and recharacterized it in 2020.

Yes, you might have to check with your financial institution to verify this information but it would explain the “missing $1,203" we were wondering about earlier. You will need to find out how much was contributed and how much was considered earnings on the $1,200.

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

1. Click on "Search" on the top right and type “IRA contributions” 
2. Click on “Jump to IRA contributions"
3. Select “Roth IRA”
4. Answer “No” to “Is This a Repayment of a Retirement Distribution
5. Enter the Roth contribution amount 
6. Answer “Yes” to the recharacterized question on the “Did You Change Your Mind?” screen and enter the contribution amount (no earnings or losses)
7. 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.
8. On the screen "Choose Not to Deduct IRA Contributions" answer "Yes" (if 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 also will have to enter the 2020 Form 1099-R with code N on your tax return. This won't be taxable and is for information only.

@dhuynh44

[dhuynh44]

@DanaB27 

Well @DanaB27 , after over an hour on the phone with my institution, my problem got more complicated (insert nervous laugh here).  I know why this whole process has been so confusing (should have been a lot easier if not for the information below).

So the $1000 I contributed to Roth was actually recharacterized the same year 2020, however in March 2021 this $1000 was recharacterized again (glitch in the system by the financial institution, it should never have been allowed to happen).  Hence all my confusion with so many forms and numbers that didn't add up.

The same situation applies to my wife.  She initially made a contribution of $1000 into Roth which was recharcterized the same year (2020), but made another contribution of $1500 to Roth by accident.  In March of 2021 instead of recharacterizing this $1500, the institution recharacterized $2500 (including the $1000 recharacterization already done in 2020).

They are working on providing new 1099-R and 5498, however this will take 3-5 weeks.

How can I apply for an extension for 2021 tax year, and are there any repercussions in doing so?  What information can you provide me?  Any advice would be greatly appreciated in this whole situation. 

Thank you!

[DanaB27]

Please see How do I file an IRS extension (Form 4868). If you expect to owe any tax then please make sure you pay the tax with your extension since paying any tax after the due date will incur interest. Other than that there aren't any repercussions. 

I happy you found the issue and hope this will solve everything. 

[dhuynh44]

@DanaB27 

Thank you.  It's one small step but not sure what my institution will come back at me with.  They said the forms were essentially correct since these transactions did happen, but not sure how it will affect my filing since "outstanding recharacterizations" might be actually different than on the forms.

I'm going to assume possibly that after I complete my 2021 return the numbers may be different if I get new forms.  Do I just fill out 2021 return with the forms and numbers we have been discussing for now?  What will happen after I submit payment however these numbers are indeed different and my tax due changes?

Also, what do I do with my 2020 amended return?  Can this wait until after I submit my 2021 return?  These numbers may essentially be different also. 

@DanaB27  you have been a great help thank you

[DanaB27]

Yes, you can wait to amend your 2020 tax return until after you submit your 2021 return.

Yes, you would use your current information to calculate any tax due. Since you are getting corrected Forms you won't get penalized if they increase your tax.

[dhuynh44]

@DanaB27 

Well Dana I thought I could take a break but since I need to still pay, I had a couple of more questions on my 2021 return 😉

1.  on 2021 return it asks "Any Nondeductible Contributions to IRA?"  I choose "Yes I tracked nondeductible contributions" and this next amount would be "Total Basis as of December 31, 2020" would be $1624 (Line 14 on form 8606 2020)?

2.  "Tell Us the Value of all your traditional IRA accounts"

          -  I had $500 at the end of year in the account (converted in 2022)

          - I contributed $1920 in January of 2022 for prior year 2021

However the next line down it asks "Include any IRA distributions I made in 2020.  The amount you enter must be at least the amount of your distributions".  What number or what exactly is this question asking?  Is this anything other than conversions?

Thank you!

[dhuynh44]

@DanaB27  

Hi, if I could get your advice on something please since I still have to file.  So my institution will get back to me possibly after my taxes are due.  

The $1000 ($1317 total) that I recharacterized in 2021 was essentially duplicated.  I actually did recharacterize this already in 2020.  So in essence I did not have this basis end of year 2020 (I still have the $1000 basis I contributed in 2021 for 2020). 

Question is, since I don’t know what my institution will come back with as far as tax forms, should I still file like I carried the recharacterization over to 2021, or should I pretend I never did this recharacterization in 2021?

I mean I know what I did as far as recharacterizations, but as far as filing the official forms still say I recharacterized the $1000 in both 2020 and 2021.  Thank you 

[DanaB27]

No, do not enter the duplicate recharacterization if you are certain about it.

Yes, "Total Basis as of December 31, 2020" would be $1,624 (Line 14 on your 2020 Form 8606).

Yes, your total value to the traditional IRA for the "Tell Us the Value of all your traditional IRA accounts" screen is your value on December 31, 2021 (from your year-end statement) plus the contribution for 2021 made in 2022. Please ignore 2nd part it doesn't apply to you.

@dhuynh44

[dhuynh44]

@DanaB27 

Thank you.  I am certain of it, however I am not sure what my institution will come back with in terms of new forms, they said the forms are technically correct bc they reflect actual movement of money, but they are doing an investigation; bc you can’t recharacterize something that’s already been converted.  

I do understand if I extend this return it is not final, however I do have a problem.  If I remove the $1317 ($1000 contributed + $317) gains for 2021 for year 2020, won’t my 1099-R that I use for 2021 be technically wrong, because the ones I got from my institution technically reflect this conversion as if it occurred?

What so I do in terms of the 1099-R I enter for my 2021 return?   They include these double recharacterization conversions, correct?  Thanks 

[DanaB27]

That is true. If you remove the recharacterization and therefore your basis from 2020 but your wrong Form 1099-R has this false recharacterization amount included as conversion then the tax calculated will be higher because now you have an amount converted without a basis (which is taxable)

 It might be best to use the information/ Forms you have now to calculate you tax due with your extension and then when you get the corrected Forms then you can make the necessary adjustments and file your return.

@dhuynh44

[dhuynh44]

@DanaB27 

A few questions regarding 2021 return and I think i might be good to go:

1.  on 2021 return it asks "Any Nondeductible Contributions to IRA?"  I choose "Yes I tracked nondeductible contributions" and this next amount would be "Total Basis as of December 31, 2020" would be $1624 (Line 14 on form 8606 2020)?

2.  "Tell Us the Value of all your traditional IRA accounts"

          -  I had $500 at the end of year in the account (converted in 2022)

          - I contributed $1920 in January of 2022 for prior year 2021

However the next line down it asks "Include any IRA distributions I made in 2020.  The amount you enter must be at least the amount of your distributions".  What number or what exactly is this question asking?  Is this anything other than conversions?

Thank you!

[DanaB27]

1. Yes, "Total Basis as of December 31, 2020" would be $1,624 (Line 14 on your 2020 Form 8606).
2. Yes, your total value to the traditional IRA for the "Tell Us the Value of all your traditional IRA accounts" screen is your value on December 31, 2021 (from your year-end statement) plus the contribution for 2021 made in 2022. Please ignore 2nd part it doesn't apply to you.

@dhuynh44

[dhuynh44]

@DanaB27 

Thank you!  I will plug in all the numbers and see how it goes.   Thanks for all of your help.  I know what NOT to do going forward 

[dhuynh44]

@DanaB27 

Hi @DanaB27, I am still waiting for updates from our financial institution regarding any new forms for the double recharacterizations that were made for tax year 2020.  If possible, are you able to confirm my wife's 8606 numbers for 2020 and 2021?  The reason I am asking is bc she has a pro-rata rule for 2021 and is being taxed on $5420.  I understand that these might not be the right numbers but want to ensure we are doing it correctly while waiting for an extension.  Thank you.

2020:

$1000 contribution to traditional

$2500 contribution to roth (recharacterized this $2500 in 2021)

$3500 total contributions

1099-R  = $2108.95

Line 1, 3, and 5 = $3500

Line 13 = $1601

Line 14 = $1899

2021:

$4580 contribution to traditional

$16854.96 rolled over into traditional from a previous employer (pre-tax)

$18246.32 end of balance in traditional ($500 of which is after tax, converted to roth in 2022)

1099-R  = $7265.10

Line 1 = $4580

Line 2 = $1899

Line 3 = 6479

Line 5 = $6479

Line 13 = $1845

Line 14 = $4634

Line 16 = 7265

Line 17 = $1845

Line 18  = $5420

I believe I entered all the information correctly, just confirming the taxes owed of $5420 was correct.  Thank you!