Roth IRA recharacterization with loss

[sphingalipid]

Hello,

I made a $6000 Roth IRA contribution in 2020, then realized 6 months later that I'm not eligible to contribute to Roth IRA due to income restriction. I recharacterized it to a traditional IRA. By the time I recharacterized it, the amount had decreased to $5811 due to the stock market decline in early 2020. 

When I entered this to Turbotax, I was told that there will be a tax penalty on the $189 because I put in $6000 but only recharacterized $5811, making it look like the $189 was still left in the Roth IRA as excess contribution while in reality, this $189 was due to stock market loss. Am I entering the information incorrectly? Where should I clarify this on Turbotax or did I do the recharacterization wrong and really should have switched $6000 to traditional IRA no matter what?

I entered Roth Contribution: 6000

Amount switched from Roth to Traditional: 5811

Roth IRA Explanation Statement:

Date of original contribution: x/xx/2020

Date of recharacterization: x/xx/2020

Amount recharacterized: 5811

The amount transferred (recharacterization plus earnings or losses): 5810.98

Reason for the recharacterization: not eligible for roth contribution

Thanks a lot for your help

[DaveF1006]

You cannot factor in the stock market loss into the recharacterization. Enter $6000 across the board. 

[sphingalipid]

Thank you Dave for the quick response! 

Do I enter $6000 even though I only recharacterized $5811 or should I go back and recharacterize another $189 to make the total amount $6000?

Thank you 

[sphingalipid]

I'm interpreting this as:

Amount recharacterized: 6000 (instead of $5811 as I entered previously)

The amount transferred (recharacterization plus earnings or losses): 5810.98

Is this correct?

Thanks

[DanaB27 · Accepted solution]

No, you will enter also $6,000 for the transferred amount (recharacterized amount).

Please review these instructions: 

1. Login to your TurboTax Account 
2. Click on the Search box on the top 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 $6,000
7. Answer “Yes” to the recharacterized question on the “Did You Change Your Mind?” screen and enter the contribution amount of $6,000 (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.

[sphingalipid]

Thank you for the thorough explanation, Dana. 

After entering all the information for IRA, I looked at form 1040 and saw that under line 4a "IRA Distributions", the distribution amount listed is $11,901. I just wanted to double check if this is correct and expected ( $11901 calculated from Roth transfer/recharacterization amount of $5811 to traditional IRA + backdoor Roth conversion of $6090 from traditional IRA). The taxable amount is only $90 which seems correct. 

[DanaB27]

To clarify, the conversion from traditional IRA to Roth was $6,090. If yes then 4a should only have $6,090 unless you got another 1099-R. Did you get/enter another 1099-R?

[sphingalipid]

Yes, I was sent two 1099-R: one for the Roth IRA for a total of $5810.91, which is the amount that was transferred from the Roth IRA to the traditional IRA for recharacterization; the other one is for the traditional IRA for $6089.87, which is the amount that I later convert from traditional IRA to Roth IRA for backdoor Roth.

[DanaB27]

Yes, then line 4a of $11,901 is correct.