Recharacterizing Roth IRA contributions made over several dates for 2022

[bigben3]

Hello,

I have to recharacterize a total of $6000 of Roth IRA contributions made over several dates during the year.  Do I need to create a separate Recharacterization for each contribution date *$2500, $3000, $500)?  If so, how does one calculate the earnings or loss (I'm sure it's a loss) on those contributions? 

I was able to calculate the total loss for the period from the date before the first contribution to the time I recharacterized... should I just apply the same rate to each contribution?

Thank you very much for any guidance.

[DanaB27 · Accepted solution]

You should be able to submit one recharacterization form to your financial institution and they should be able to calculate the earnings. You only need to know the earnings (or loss) for the explanation statement.

The calculation of the earnings will be more complicated since you had multiple contributions. Please see 26 CFR § 1.408-11 for details.

On your 2022 tax return, you will enter the recharacterization when you enter the contribution to the Roth IRA for 2022:

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 ‘Yes” on the “Roth IRA Contribution” screen
6. Answer “No” to “Is This a Repayment of a Retirement Distribution
7. Enter the Roth contribution amount 
8. Answer “Yes” to the recharacterized question on the “Switch from a Roth To a Traditional IRA?” screen and enter the contribution amount (no earnings or losses) on the next screen.
9. 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.
10. On the screen "Choose Not to Deduct IRA Contributions" answer "Yes" if you are thinking about doing a backdoor Roth. Otherwise, select "No". (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).

[bigben3]

Thank you Dana. Unfortunately, Merrill Edge's recharacterization form specifically says I am responsible for calculating the earnings or losses on the excess contributions, and to consult a tax advisor.  I researched and found some examples from Federalregister.gov and from Fidelity.  (Here's the federalregister example)   However, Merrill does not provide a value of the portfolio the day prior to my first contribution.  Contribution was made on Feb. 18, 2022, and the only portfolio value Merrill could provide is Feb 1, 2022, so I will have to use that value, I think.

In a related question, is there a required time by which I should do the backdoor Roth conversion after contributing or recharacterizing into a traditional IRA? I read this sentence in one of the answers to questions and unsure if it means I should initiate a backdoor conversion within 60 days of contributing to a traditional IRA: "There's almost always a time limit of 60 days to complete a conversion or rollover, with large penalties if the limit isn't met."

I wanted to do a Roth conversion for $1000 that I contributed to a traditional, plus the $6000 Roth contribution I am recharacterizing (with losses, it's $4500).  Both are not deductible because I am above the required income level last year.  The Merrill form to convert has questions about Withholding taxes.  Should I select not to withhold taxes since both contributions were not deductible in the first place?

Thank you very much.

[DanaB27]

That is unfortunate that they won't calculate the earnings or losses but your plan on how to calculate them sounds reasonable. 

The 60-day limit applies to when you take a distribution and return it to a retirement account. You can convert the funds sitting in the traditional IRA anytime but of course, be aware that any earnings will be taxable when you convert it therefore it is usually best to convert as soon as possible to avoid having earnings.

Yes, I would not withhold taxes since any taxes withheld and not replaced count as an early distribution and would be subject to the 10% early withdrawal penalty if you are under 59 1/2.

@bigben3 

[bigben3]

Thank you very much Dana. @DanaB27

Some quick follow up questions:
- am i supposed to get a 1099-R related to the recharacterization?  I did the recharacterization request last Wednesday but it has not reflected on my account yet. Am I ok to indicate it on my taxes before by April 18 even if the brokerage has not fulfilled the request?
- if I were to do a backdoor Roth conversion (I plan to do it after I file taxes so the movements are less confusing), am I limited to the $1000 non-deductible contribution plus the value of the recharacterization ($6000 - losses of $1500) if I want to convert only my non-deductible contributions?

Thanks again!  I'm  hoping I won't have to file for an extension and wrap this up Tuesday.

[DanaB27]

You will get a 2023 Form 1099-R in 2024 for the recharacterization with code R-"Recharacterized IRA contribution made for 2022" and this belongs on the 2022 return. But a Form 1099-R with code R will do nothing to your return. You can only report it as mentioned before. Therefore, you can ignore the 2023 Form 1099-R with code R when you get it in 2024. Box 1 on Form 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.

Yes, you can enter the recharacterization on your return. You have until the due date (including the extension) to make the recharacterization.

To clarify, do you have any pre-tax funds in any of your traditional/SEP/SIMPLE IRAs? As far as the IRS is concerned they are all one account. And if you had pre-tax funds in your traditional IRA then the pro-rata rule applies. This means that with each distribution/ conversion, you will have a taxable and nontaxable part. You can see the remaining basis on line 14 of Form 8606, this basis can be carried forward. Therefore, each distribution/conversion in the future will have a taxable and nontaxable part until the basis is all used.

The Backdoor Roth only works if your traditional/SEP/SIMPLE IRAs are empty.  If you plan to use this strategy in the future you might want to think about a reverse rollover where you rollover IRA money to a company plan, like a 401(k). Only pre-tax funds can be rolled from an IRA to a company plan. Therefore, you would isolate the basis and could start the Backdoor Roth procedure fresh. But it only works if your employer allows it, not all plans do.

@bigben3 

[bigben3]

Hello Dana @DanaB27 ,

Thanks you very much for the explanation on the 1099-R related to the recharacterization.

You are correct, my traditional IRA has a non-taxable portion resulting from a 401K rollover.  I will study the pro-rata rules you provided for when I am ready to do the conversion (after I file 2022 taxes as this is getting complex! haha)

Can you please explain what you mean by this sentence: "The Backdoor Roth only works if your traditional/SEP/SIMPLE IRAs are empty."  My understanding from the help pages is "A backdoor Roth IRA allows you to get around income limits by converting a traditional IRA into a Roth IRA. Contributing directly to a Roth IRA is restricted if your income is beyond certain limits, but there are no income limits for conversions." Do you mean if my traditional IRA has no pre-tax funds so there are no pro rata calculations after I remove the pre-tax funds currently in the traditional IRA?  

Appreciate your help and expertise!

[DanaB27]

Yes, the Backdoor Roth only works as intended if your traditional/SEP/SIMPLE IRAs are empty (don't have pre-tax funds). A backdoor Roth is supposed to be a tax-free conversion but this only works if you don't have pre-tax funds in the account since otherwise, the pro-rata rule applies and parts of the conversion will be taxable.

Yes, if you are able to remove the pre-tax funds from your traditional IRA with a reverse rollover to a 401(k) then you will be able to convert the funds in 2023 without any issues. Just make sure there are no pre-tax funds in any of your traditional/SEP/SIMPLE IRAs on December 31, 2023.

@bigben3 

[bigben3]

Hello @DanaB27,

I hope you are well.  I wanted to revisit this topic.  It's been almost a year since I recharacterized my Roth contributions to a traditional IRA.  I received a 1099-R in 2023 for my Roth account with Code R (recharacterized IRA Contribution made for 2022 and recharacterized in 2023).   

- Am I supposed to enter this 1099-R in my 2023 tax return?  (or just totally ignore it?)

- Box 1 shows the gross distribution (equal to original contribution less losses).  Should I have gotten a Form 5498 for my traditional IRA with the same amount?  (I didn't get one in 2022 and also none in 2023.  I did the recharacterization before tax due date in 2022.)

Also in the Turbo Tax interview, there is a question "Do you have excess Roth IRA contributions?  Tell us if you contributed more to a Roth IRA than was allowed in 2022 or any previous year."  Since I have already recharacterized my excess contribution last year, should I answer "No"?

Thank you!

P.S.  I didn't do the Backdoor Roth I asked about last year, partly because it sounded complicated with my pre-tax funds, and partly because I forgot all about it after I filed my taxes! 🙂

[DanaB27 · Accepted solution]

No, you don’t need to enter 2023 Form 1099-R with code R for a recharacterization because it won’t make any changes on your return. You already entered the recharacterization on your 2022 return in the IRA contribution section and that is the only way to report it.

Yes, you should have gotten a 2022 Form 5498 in 2023 since you made contributions for 2022. You might have to check with your financial institution. Please see What Is IRS Form 5498: IRA Contributions Information? for additional information.

Correct, you will answer “No” to "Do you have excess Roth IRA contributions?  Tell us if you contributed more to a Roth IRA than was allowed in 2022 or any previous year."

[bigben3]

Thank you @DanaB27 !

Just to clarify my question on the 5498, I did receive a Form 5498 in 2023 for my original Roth contribution.  It says $6000 in Box 10 for Roth IRA Contributions.

For simplicity, lets say the recharacterized amount (6000 - losses) is $4500.  The Form 1099-R for the Roth account has this value in Box 1 for Gross Distributions.  I did not receive a Form 5498 that shows $4500 as a recharacterized contribution in Box 4. 

Should this amount appear in the same Form 5498 I received for my Roth account mentioned above, or should it be a separate Form 5498 for my traditional IRA (to which the amount was transferred)?  The Form 5498 I received last year (5/2023) for my traditional IRA only included my contribution directly to it as well as a rollover, nothing in Box 4 for recharacterized contribution.

Thank you!

[DanaB27 · Accepted solution]

The recharacterization is reported on Form 5498 box 4 from the traditional IRA (IRS Notice 2000-30). 

[bigben3]

Thank you @DanaB27 !  This helps tremendously when I speak with Merrill again.  So far the people I have spoken with just repeat what is on the form and nothing more!

[bigben3]

Hi @DanaB27 

I just wanted to give you an update that I spoke with Merrill again.  They said that since the recharacterization of my contribution for 2022 from Roth to traditional was completed in April 2023, I will be getting the amount reflected in Box 4 when I receive my Form 5498 for 2023 in May 2024.  

I thought it would reflect in May 2023 because I completed it in April.

Thank you.