How to report recharacterization from Roth to traditional nondeductible... and then ROTH conversion

[Random_Bunny]

Sorry for starting a new topic but I asked this question separately on the community but was not very clear in asking, because I did not clearly understand the advice. Hoping this time I am asking it correctly so that I can get correct advice.

1. I incorrectly contributed to Roth in 2019 and 2020, should not have.
2. Then in Jan 2020, I recharacterized Roth to traditional nondeductible IRA at a loss
3. Then in Feb 2020, I did Roth conversion at a loss

Received 1099-R with N and R code and also with 02 code.

I called TurboTax to help me file this properly... because I did something wrong and it was showing a big tax implication- this is all after tax, and conversion is at a loss, so should have ZERO tax implications. TurboTax customer support helped but I think there are still mistakes in how I have done this. This is also likely going to trigger amendment to 2019 return.

Can someone advice how to properly input all the above information  as I file my taxes in TurboTax Premium edition?

Thank you and very much appreciate the support. 

Random

[macuser_22]

You must report yiur 2019 recharacterization  on an amended 2019 tax return that will produce a 8606 reporting the 2019 non-deductible contribution.

You also report the 2020 recharacterization the same way.      The 1099-R with a code N and R do not do anything - they just inform the IRS.

The proper way to report the recharacterization and earnings which is to enter the  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 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.


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.

[macuser_22]

It does not good to import a code N or R.    They will be ignored by TurboTax.    As I said above the only purposes of the code N and R is for the financial institution to inform the IRS or the recharactorizatiin and they send you a copy.    It must still be reported on yiur tax return and the ONLY way to do that is as I posted above.

The code 2 1099-R must be entered and the box 1 amount may or may not be taxable depending if you reported the recharacterizations as non-deductible contributions.

[Random_Bunny]

Thank you. So once again, I incorrectly contributed to Roth, then recharacterized that to traditional and then did the Roth conversion.

This is what I did.

Under Deduction & Credits section, in Traditional & Roth IRA Contributions:

• For Traditional IRA part: I only marked Roth IRA check boxes >> Entered 6000 as the contribution >> Entered $5968 for amount switched from Roth to Traditional IRA >> Provided explanation that 6000 were contributed to Roth, when converted to Traditional, there was loss) >> Ignored subsequent screen if I want TurboTax to keep Roth basis >> also ignored value of my Roth IRA on Dec 31, 2020
• Then TurboTax said my MAGI puts me over the limit of IRA deductions. >> Then TurboTax said my MAGI puts me over Roth limit. It did some calculation and said $32I put in to Roth is considered excess contribution and I owe 6% penalty. {I am confused- not sure what this calculation is about}

Under Wages & Income section, I imported 1099-R from Vanguard (3 1099-Rs all together)

• code N (Roth to Traditional recharacterization for 2020)…. I deleted this since you said TurboTax ignores it.
• code R (Roth to Traditional recharacterization for 2019) …. I deleted this since you TurboTax ignores it.
• code 02 (Traditional to Roth conversion)…I filled information on this. And got this message from TurboTax: Even though you’re taking money out early, you don’t need to pay a penalty because of your situation. You may still need pay regular tax, but you avoided an extra 10-25%. We’ll factor in any taxes withheld when you took the money out and figure out the rest of your taxes. TurboTax then added to my tax liability.. I am not taking any money out early- it’s a Roth to Traditional recharacterization and then Traditional to Roth conversion. Should not have any tax liability on this. >> Yes to “I converted all this money to Roth IRA >>

Under Tax Tools, Federal Tax Summary

• Shows on 1040 line 4 a that I have IRA distribution that matches to what I entered from 1099-R with code 02 as above.
• Shows on 1040 line 4 b there is taxable amount from this

I am doing something wrong- I don’t know if this has to be done in any particular sequence inside TurboTax.

Also, wonder if Roth conversion tied to 2019 recharacterized Traditional IRA (1099-R with code R) has got anything to do with this. Also, did not get any question if recharacterization was nondeductible.

[macuser_22]

I suggest deleting everything that you entered and start over with 2019.

On your amended 2019 tax return that can only be done using the CD/download 2019 software installed on your computer enter the Roth contribution and say you switched it to a traditional IRA.    Enter the exact amount of the contribution not any gains or losses.   That should produce a 2019 8606 form with the contribution  amount on lines 1,3 and 14.

In 2020 enter the Roth contribution and and say you switched it to a traditional IRA.   

In 2020 enter the 1099-R code 2.

Answer the follow-up questions answer the question that you moved the money to another retirement. The screen will open up with choices of where it was moved. Choose you converted it to Roth IRA.

When asked if you have made any non-deductible contributions say " "yes" if you did then enter the non-deductible contributions made for tax years before 2020.

Enter the 2019 8606 line 14 value.

Enter the 2020 year end value of your Traditional IRA a "0" (zero) - if it is in fact zero - this tax free Roth conversion will not work if it is not zero -it will be partly taxable.

To amend 2019 see below.

2019 and earlier can only be amended with TurboTax using the CD/download version installed on a PC or Mac computer.

2019 amended Federal returns can either be e-filed or mailed. 2018 and earlier amended returns can only be mailed. It is suggested that it be mailed certified with return receipt (or other tracking service) to verify that the IRS or state receives it.

See this TurboTax FAQ for detailed amend instructions:
https://ttlc.intuit.com/questions/1894381-how-to-amend-change-or-correct-a-return-you-already-filed

-- Amended returns can only be mailed - allow 8-12 weeks - can take up to 16 weeks (4 months) for processing.

You can check the status of the amended return here, but allow 3 weeks after mailing.

https://www.irs.gov/filing/wheres-my-amended-return

[Random_Bunny]

You know what Macuser, I think you had advised me last year that I did not have to wait to get 1099-R for 2019, I could report my Roth contribution ($6000 no gain no losses reported) and say I switched to Traditional IRA. I remember doing that- so when I just downloaded my 2019 return, I see that I already have 8606 that shows line 1, 3 and 14. 

I will now try and follow your other insturctions above- but wanted to share this with you. I think this means I dont need to amend the 2019 return.

[macuser_22]

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@Random_Bunny wrote:

You know what Macuser, I think you had advised me last year that I did not have to wait to get 1099-R for 2019, I could report my Roth contribution ($6000 no gain no losses reported) and say I switched to Traditional IRA. I remember doing that- so when I just downloaded my 2019 return, I see that I already have 8606 that shows line 1, 3 and 14. 

I will now try and follow your other insturctions above- but wanted to share this with you. I think this means I dont need to amend the 2019 return.

---

That is correct.   You are fine for 2019.   Just use the box 14 amount for the conversion 1099-R  (you might not eve need to enter it if you transferred 2019 when you started 2020 - it might auto-fill the past years box.)

[ML Nana]

I'm not expert. I called TRPrice re conversion to Roth last Dec. I was in midst to data entry for 2020. TT gave me error and penalty message. He said go back and report the ROTH conversion as conversion NOT contribution. That put figures in different place eliminating the ineligible contribution and its penalty consequence. There is no income limit for a conversion. It's referred to as a "back door ROTH"

. No penalty etc. I think if you can amend your last yr filing to reflect a conversion [NOT ineligible contribution] that will correct for last yr. deleting ineligible contribution and its penalty. Then proceed with this yr filing based on the amended 2019 figures. That should get you on right path for 2020 filing.

[macuser_22]

---

@ML Nana wrote:

I'm not expert. I called TRPrice re conversion to Roth last Dec. I was in midst to data entry for 2020. TT gave me error and penalty message. He said go back and report the ROTH conversion as conversion NOT contribution. That put figures in different place eliminating the ineligible contribution and its penalty consequence. There is no income limit for a conversion. It's referred to as a "back door ROTH"

. No penalty etc. I think if you can amend your last yr filing to reflect a conversion [NOT ineligible contribution] that will correct for last yr. deleting ineligible contribution and its penalty. Then proceed with this yr filing based on the amended 2019 figures. That should get you on right path for 2020 filing.

---

Yes.  A *conversion* is reported as a 1099-R conversion.

But you must have something in a traditional IRA *to* convert  and the money gets into the traditional IRA with a *contribution*.

This thread is slightly more complicated because the contribution was NOT to the Traditional IRA but to a Roth IRA and then recharactorized to a Traditional IRA.     A recharactorization is treating the Roth contribution as if it never happened and it was a Traditional IRA contribution in the first place.     Properly reporting the recharactorization is confusing to many.

Then the Traditional IRA can be converted to a Roth.

[Random_Bunny]

This is what I did- please see below.

Under Deduction & Credits section,

I selected the check boxes for both Traditional and Roth IRA check box.

For Traditional IRA part

• What should I enter for how much I contributed to 2020 Traditional IRA 2020? Do I enter the amount after Roth to Traditional recharacterization which is less than $6000 that I had incorrectly contributed to Roth and converted to Traditional? If so, then this is $5969.. because between incorrect contribution to conversion to Traditional there was a loss. Or Do I enter original $6000 that I contributed to Roth and converted to Traditional with a loss?
• I said YES to any non-deductible contributions to Traditional IRA from 2019 or prior years. For cost basis as of Dec 31, 2019- I entered 2019 Form 8606 line 14 value.
• It says IRA basis from 2019 is different from the basis entered. Something wrong looks like.

For Roth IRA part

• I entered $6000 as Roth contribution- assuming this was the original $6000 contribution I incorrectly made. Is this correct?
• Then for How much I transferred to Traditional IRA, I entered $5968, because there was a loss of $32 by the time I did this conversion.
• Then on explanation statement, I entered the date of original contribution, data of recharacterization and amount recharacterized, etc.
• Then TurboTax said my MAGI puts me over the limit of IRA deductions. So I have excess contribution.  Then TurboTax said my MAGI puts me over Roth limit. TurboTax and said I put in to Traditional ($5968) is considered excess contribution and I owe 6% penalty.

Under Tax Tools, Federal Tax Summary

• Shows on 1040 line 4 a that I have IRA distribution that matches to what I entered from 1099-R with code 02 as above.
• Shows on 1040 line 4 b now shows 0, so no taxable amount.

So, as you can see there is something wrong still.

[macuser_22]

Then for How much I transferred to Traditional IRA, I entered $5968, because there was a loss of $32 by the time I did this conversion.

As I said twice before you enter the exact *amount* of the contribution -  not any gain or loss.   You must enter $6,000.  You explain any gain or loss in the explanation. 

(You are not *moving* money from the Roth to the Traditional IRA you are treating the original contribution as if it was Traditional IRA contribution to start with and that contribution was $6,000.)

[Random_Bunny]

I am sorry- I fixed that and entered $6000. But, TurboTax still says my MAGI puts me over the limit of IRA deductions. So I have excess contribution.  Then TurboTax said my MAGI puts me over Roth limit and said I put in to Traditional ($6000) is considered excess contribution and I owe 6% penalty. 

Also, then separately in Wages & Income section>>> when I enter I said YES to any non-deductible contributions to Traditional IRA from 2019 or prior years. For cost basis as of Dec 31, 2019- I entered 2019 Form 8606 line 14 value. It says IRA basis from 2019 is different from the basis entered (all this in income section)

So the bottom line is that in both places there is something wrong (1) Income section (IRA basis from 2019 is different from the basis entered) and, (2) Deductions section ($6000 is excess contribution and I owe 6% penalty)

I appreciate the help and your patience with me- this has become quite a situation.

[Random_Bunny]

I am sorry- I fixed that and entered $6000. But, TurboTax still says my MAGI puts me over the limit of IRA deductions. So I have excess contribution.  Then TurboTax said my MAGI puts me over Roth limit and said I put in to Traditional ($6000) is considered excess contribution and I owe 6% penalty. <<<<<<

This is the only problem left now.

[macuser_22]