Backdoor Roth conversion - How to report taxes in Turbo Tax Software

[amit215]

Hello,

I put my contribution in Vanguard in Roth IRA in 2020 and purchase funds. I did not realize that i am not eligible for Roth IRA so i recharacterize the complete amount to Tradition IRA in 2021 (The money grow by now by couple of hundred dollars). Now i moved the money back to Roth IRA (backdoor conversion). I followed the same process for Year 2021 but immediately moved the money to Roth after putting in Traditional IRA so no amount add there. Vanguard told me that they will provide the 1099 R form for both transactions in 2022 so can I file taxes for the amount that grow before i make backdoor Roth conversion along with 2021 taxes or i need to add it in my 2020 taxes. If i need to add in 2020 taxes how can i do that in Turbo Tax software without 1099 R. if in 2022 (for 2021 taxes) can i include both forms (or single whatever Vanguard provides) that time? Please advise. Thanks

[macuser_22]

A recharacterization of a 2020 contribution done in 2021 must be reported on your 2020 tax return.   You should receive a 2021 1099-R with a code R in box 7 next year.

A 2021 1099-R with a code R in box 7 (Recharacterized IRA contribution made for 2020 and recharactorized in 2021) will tell you that you must amend 2020.

A code R 1099-R does nothing whatsoever if entered into the 1099-R section of an amended 2020 return. It does not get sent to the IRS and nothing goes on the tax return at all. The only purpose of the 1099-R is to report the recharacterization to the IRS, but it still must be reported on your 2020 tax return.

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.

The proper way to report the recharacterization and earnings which is to enter the 2020 IRA contribution in the IRA contribution interview section and then say yes to "Did you switch from a Roth to a Traditional IRA - recharacterize".

The amount The amount of the original Roth contribution must be entered - not any earnings or losses.

Then TurboTax will ask for an explanation statement where it should be stated that the original $xxx.xx plus $xxx.xx earnings (or loss) were recharactorized.

There is no tax or penalty on the before-tax earnings since the earning were simply switched into the recharactorized account.

That is the only way to prepare and attach the proper explanation statement for a code R 1099-R.

Enter IRA contributions here:
Federal Taxes,
Deductions & Credits,
I’ll choose what I work on (if that screen comes up),
Retirement & Investments,
Traditional & Roth IRA contribution.

OR Use the "Tools" menu (if online version under My Account) and then "Search Topics" for "ira contributions" which will take you to the same place.

Since the after-tax Roth contribution is now a Traditional IRA contribution it can be either a before-tax deduction if your MAGI allows a deduction which might result in an additional 2020 refund, or it will be an after-tax contribution reported on a 8606 form (line 1 & 14) as a "basis" in the Traditional IRA that will reduce the tax of future distributions.

[DanaB27]

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

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 and you only get a screen saying $0 is deductible)

Next year on your 2021 tax return you will report the nondeductible contribution to the traditional IRA:

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 “traditional IRA”
5. Answer “No” to “Is This a Repayment of a Retirement Distribution?”
6. Enter the amount you contributed
7. Answer “No” to the recharacterized question on the “Did You Change Your Mind?” screen
8. Answer the next questions until you get to “Any Nondeductible Contributions to Your IRA?” and select “Yes” since you had a nondeductible contributions before this tax year.
9. Enter the basis
10. 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 on "Search" on the top right and type “1099-R”
2. Click on “Jump to 1099-R”
3. Click "Continue" and enter the information from your 1099-R
4. Answer questions until you get to “Tell us if you moved the money through a rollover or conversion” and choose “I converted some or all of it to a Roth IRA”
5. On the "Your 1099-R Entries" screen click "continue"
6. Answer "yes" to "Any nondeductible Contributions to your IRA?" if you had any nondeductible contributions in prior years.
7. Answer the questions about the basis and value

The 2021 1099-R with code R in box 7 for the recharacterization belongs on the 2020 return but you can ignore it because a 1099-R with code R will not do anything to your return. You can only report it as mentioned above.

[amit215]

Hi All,

I was doing my 2021 Tax returns. I have received 2 1099-R from Vanguard. The one i received for Roth Ira has R in Code 7. Once i put this information in my 2021 returns, Turbo Tax is asking me to amend my 2020 tax return. Can you please guide me how and what do i need to amend? Are there any steps?

This is the link Turbo Tax pointing in Here's How but it seems very generic content

https://ttlc.intuit.com/community/amending/help/how-to-amend-change-or-correct-a-return-you-already-...

[DanaB27]

If you have already entered the recharacterization with the steps below then you can ignore Form 1099-R with code R and do not need to amend your 2020 return. A Form 1099-R with code R will do nothing to your return. You can only report it as mentioned below. Therefore, you can ignore the 1099-R with code R.

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 (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 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)

Please see How do I amend my 2020 return? if needed.

@amit215

[amit215]

Thanks @DanaB27 

I have actually filled the 2021 return as you have suggested in May 2021 earlier. Just wanted to check my understanding - 

1. I received 2 1099-R this year. One for Roth and another for traditional. Traditional had 13000 in it.

2. Once i filled them as you suggested and set the basis as 6000 then i only needed to pay tax on 1000 in my this year return (as that is i earned for 2020 backdoor Roth that i performed in 2021). Based on this is this correct? i know i had to pay tax and since i did not pay tax for this amount in 2020 as i did not have 1099R by then i have to pay this year?

Although turbo tax suggested me to amend my 2020 return but even if i am trying to amend by adding this 1099R, turbo tax is suggesting nothing changed. In that scenario do i need to send any paper form back to IRS or i can ignore that?

I am sorry if asking too many naive questions but this backdoor roth concept is too new for me.

[DanaB27]

If you filed the 2020 return as suggested in May 2021 then you do not need to amend your 2020 return.

Yes, it seems that you entered everything correctly on your 2021 tax return. Yes, you will have to pay tax on the earnings listed on line 4b of Form 1040.

If you have any further questions, I will be happy to answer them.

@amit215