Question on Recharacterization for 2023

[hxtudou]

Preparing taxes.

In 2023, had taken out some money from IRA and also contributed to Roth IRA. Realize over-contributed to Roth and thinking of doing a recharacterization to IRA for 2023.

If I recharacterize, it would be non-deductible IRA contribution (because of income level). Trying things out in TurboTax to see what happens if I report a re-characterization.

It seems the taxable portion of the IRA distribution is reduced. 😳

Looking deeper, it seems
1) recharacterized money becomes non-deductible IRA contribution for 2023。 reported in 8606 line 1.
2) I had taken out IRA money in 2023, so there is IRA distribution 
3) then seems to use 8606 / pub 590-b worksheet to figure out the taxable portion of IRA distribution.
 

Seems non-deductible IRA contribution (from recharacterization) partially reduces taxable portion of IRA distribution

Just very surprised from what I am seeing in TurboTax. Want to ask some experts here if what I am seeing is legit.  Doing my research.

[dmertz]

What you are seeing on Form 8606 is correct.  All of these transactions are treated on Form 8606 as if they occurred essentially simultaneously on December 31, 2023, so some of your basis acquired from the nondeductible traditional IRA contribution that results from the recharacterization will apply to the earlier traditional IRA distribution.

If you recharacterize, be sure that on the page where TurboTax asks for your year-end balance in traditional IRAs you also enter enter it the box for outstanding recharacterizations the gain/loss amount transferred from the Roth IRA to the traditional IRA as a recharacterization.  Failure to do this will result in the amount on line 6 of Form 8606 being slightly lower than it should be, causing an incorrect, lower taxable amount to be calculated.

[hxtudou]

@dmertz 

So lets say my IRA balance at end of 2023 is 36748.   The total recharacterization amount would be 4000 (3800 + 200 earning).

Then page where TurboTax asks for your year-end balance in traditional IRA, do I enter 36748 + 4000? Is that right?

[dmertz]

Correct, except that TurboTax provides separate boxes for entering the $36,748 and the $4,000 which it then totals on line 6 of Form 8606 if that part of Form 8606 is required to be included in your filing.  (The result would be the same if you just entered the total as your year-end balance and reported no outstanding recharacterization, but it provides a clearer record if you enter it as TurboTax intends for you to enter it.)