Is Roth Recharacterization too late for 2021 Tax year?

[Wonderer1]

Hello,

I had performed a recharacterization/roth conversion back in December of 2021 for back door benefits. I have however around $2k in capital gains which I will be reporting as income. However, the Roth has now depreciated by -$1k. Is there a way to recharacterize and reconvert back to only pay taxes on the $1k instead of $2k ? I know this might be too late since I am talking in 2022 and the tax deadline is in < 2 weeks. Just trying to see a better option to reduce the income tax. Thanks! 

[DanaB27]

Please be aware, no you can not recharacterize a Roth conversion.

To verify, you made a nondeductible contribution to the traditional IRA and and then converted this to Roth IRA?

To enter 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” if you had a nondeductible contribution before this tax year.
9. If you had a basis in the Traditional IRA before then enter the amount.
10. On the “Choose Not to Deduct IRA Contributions” screen choose “Yes, make part of my IRA contribution nondeductible” and enter the amount (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).

To enter the 1099-R 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 from line 14 of your 2020 Form 8606 and the value of all traditional, SEP, and SIMPLE IRAs

Or did you make a Roth contribution, recharacterized as nondeductible traditional IRA contribution and then converted it to Roth?

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 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)

[Wonderer1]

@DanaB27 Thank you for the explanation. The second scenario is applicable to me (Roth contribution, recharacterized as nondeductible traditional IRA contribution and then converted it to Roth?) .

I still have a few questions please:

1) On the "Here's your 1099-R info" I deleted the ROTH IRA 1099 (from recharacterization), and only kept the one from traditional IRA. However, I changed the taxable amount to only excess capital gains (e.g was $7k, I only reported $1K). I believe this is the correct approach ?

2) I filled out the "Tell Us the Value of Your Traditional IRA" with amount on form 5498

After the above steps, I saw tax due increase by the amount associated with the capital gains ($1000) from the conversion which tells me I am on the right track. I would like to understand whether steps 1-9 you described on scenario 2 are still required  or  am I good to go ? Also, will form  8606 be autocompleted as well ?

Thank you!

[DanaB27]

Yes, if you recharacterized your Roth contribution then you will have to report it with steps 1-9 I mentioned above. Do not enter a contribution to the traditional IRA.

Yes, Form 8606 will be created when you select to make the contribution nondeductible (or it is made nondeductible because of your income).

No, please enter Form 1099-R for the conversion from the traditional IRA as shown on the form.

@Wonderer1

[Wonderer1]

@DanaB27 

This method is not working! If I upload both 1099 from ROTH IRA and Traditional IRA, It looks like I am getting taxed on $13k! And you are saying I should not select Traditional IRA and only do the ROTH:

Here is the part which requires me to select yes for both Traditional and Roth IRAs:

Did you Contribute To a Traditional IRA?

( Note: Answer yes if you contributed to a traditional IRA and later converted some or all of it to a roth)

This is unnecessarily complicated for such a simple task of only report the capital gains from the conversion as taxable income. I know there is something wrong, since tax due is increase by  more than the tax amount associated with the capital gain.

[DanaB27]

Please be aware, that the whole distribution will show as income in TurboTax on the summary screen which shows gross income, not taxable income. To verify that the entry is correct please look at Form 1040 line 4b (taxable amount), it should only have your gains entered as taxable. 

Please be aware, that if you had any pre-tax funds in the traditional IRA on December 31, 2021, then the pro-rata rule applies, and more than only earnings will be taxable. Please make sure you enter the value of all traditional/SEP/SIMPLE on December 31, 2021, after you enter your Forms 1099-R. You can find the value on your end-of-the-year statement.

You do not enter a traditional IRA contribution because you stated that you did not directly contribute to the traditional IRA for 2021. You stated you contributed to the Roth for 2021 and then recharacterized the contribution in 2021 as a traditional IRA contribution. Therefore, you will have to report it with these steps to report to the IRS what you did:

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" and enter the amount (since you 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)

If you enter this correctly then TurboTax will create Form 8606 with the nondeductible contribution amount (basis) on line 1, 3 and 5. For example, if you reported $6,000 to the Roth, recharacterized the amount, and make it nondeductible then you will have a basis of $6,000. Then when you convert the funds $6,000 won’t be taxable because of the basis but only if your traditional/SEP/SIMPLE IRAs are empty on December 31, 2021. Otherwise, some of the basis will be allocated to the amount left in the IRA.

@Wonderer1

[Wonderer1]

@DanaB27 

"Please be aware, that the whole distribution will show as income in TurboTax on the summary screen which shows gross income, not taxable income. To verify that the entry is correct please look at Form 1040 line 4b (taxable amount), it should only have your gains entered as taxable. "

This exactly the issue. I received 2 1099-R:

1) One from the recharacterization (roth to trad ira) and a second from roth conversion. This was around $6900. And it's gross (box 1) is $6900 and taxable income (box 2a) is $0.

2) The second is for the conversion (trad to roth) , and both box 1 and box 2a are $7000! 

This is the part that is confusing me. I think I should change the gross to $1000 from capital gains and only keep one of the 1099-R. Please help if you agree. 

Thanks!

[JohnB5677]

Yes, you can recharacterize the current year's individual retirement account (IRA) contributions from a traditional IRA to a Roth IRA, or vice versa. You must do the recharacterization before that year's individual income tax deadline. (April 18th, 2022)

See Recharacterization Publication 590-A (2021), Contributions to Individual Retirement Arrangements (IRAs)

[Wonderer1]

@JohnB5677  This is not applicable since it was already recharacterized in 2021. Please see previous reply to @DanaB27 if you could shed some light. It looks like reporting the capital gains $1k as gross income on the tax summary page is the only way this works. Please help and confirm. 

[DanaB27]

No, do not change how you enter the Forms 1099-Rs or they won’t match with what the IRS has reported.

To clarify, more than $1,000 earnings are reported on line 4b of Form 1040? What is shown on the summary page is irrelevant.

If yes, please verify that you have a basis of $6,000 shown on line 1 of your Form 8606. TurboTax should have created Form 8606 after you entered the recharacterization and made it nondeductible.

If you are still having issues you can send us a “diagnostic” file that has your “numbers” but not your personal information. If you would like to do this, here are the instructions for TurboTax Online: 

1. From the left menu select Tax Tools. 
2. Then select Tools below Tax Tools. 
3. A window will pop up which says Tools Center.  
4. On this screen, select Share my file with Agent. 
5. You will see a message explaining what the diagnostic copy is. Click okay through this screen and then you will get a Token number. 
6. Reply to this thread with your Token number. This will allow us to open a copy of your return without seeing any personal information.  

We will then be able to see exactly what you are seeing and we can determine what exactly is going on in your return and provide you with a resolution.

@Wonderer1

[Wonderer1]

@DanaB27  Please see token # 994303. The issue mainly with the income summary page, that shows both gross from recharacterization and roth conversion as gross income! It should only be net capital gains as the income, and no pro rata rule applies to me, and Traditional IRA balance is 0 as of 12/31/2021. Thanks again. 

[DanaB27]

I reviewed your return. You didn't enter the recharacterization. You will need to enter the recharacterization with the steps below and TurboTax will make it automatically nondeductible because of your income. TurboTax will create Form 8606 for you.

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.

Also, you didn't enter the conversion, you selected it was cashed. Please follow these steps:

1. Click on "Search" on the top right and type “1099-R”  
2. Click on “Jump to 1099-R”
3.  "Review your 1099-R info" screen click "edit" next to the 1099-R with code 2 in box 7
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 "Review your 1099-R info" 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 from line 14 of your 2020 Form 8606 and the value of all traditional, SEP, and SIMPLE IRAs

Please ignore the summary screen it is only important what is showing on line 4b of Form 1040  as taxable income. The total distribution amount shown on line 4a is for information only and has no effect on your return.

@Wonderer1

[Wonderer1]

@DanaB27 Thank for the directions. Could you please confirm this is correct now 994647. I want to ensure I am paying income tax on only the capital gains. Thanks!

[DanaB27]

I reviewed your file. It shows the correct taxable amount in line 4b of Form 1040 (gains of $2,298) but it still shows that you took a distribution (cashed it) instead of a conversion.

Please follow these steps to enter the conversion:

1. Click on "Search" on the top right and type “1099-R”  
2. Click on “Jump to 1099-R”
3.  "Review your 1099-R info" screen click "edit" next to the 1099-R with code 2 in box 7
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 "Review your 1099-R info" 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 from line 14 of your 2020 Form 8606 and the value of all traditional, SEP, and SIMPLE IRAs

@Wonderer1

[Wonderer1]

@DanaB27  I followed the directions and do see it now in line 4b. 996337 Thanks a lot!