Recharacterization of Roth IRA and backdoor of two years

[jctaxfile]

In April 2021 I found that my income was too high to qualify for Roth IRA. The contribution was for tax year 2020. I did a recharacterization Roth IRA to traditional IRA $7946 (the number is calculated by the broker). After 5 days, the number increased to  $7975. I did a conversion of all to Roth IRA.

In June 2021, I deposited $6000 to Traditional IRA directly, and after 5 days did a conversion of $6000 to Roth IRA.

In 2022, I received two 1099-R forms for tax year 2021. One is $7946 associated with the recharacterization, with distribution code "R". The other is $13975 ($7975 + $6000) associated with the conversion, with distribution code "2".

I run into multiple issues when using Turbotax.

1) Turbo tax suggest "I might need to amend my 2020 tax" -- I do have turbotax 2020 but how?

2)  After I entered both 1099-R forms, my tax increase a lot. It seems that I have to pay tax for ~$20000 which does not make sense to me.

3) Do I have to take the gaining of 7975-6000=1975 ou?

Thank you very much!

[DanaB27]

To verify, did you report the recharacterization on your 2020 tax return with the steps below:

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" (since you are 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 did then you do not need to amend your 2020 tax return.  A Form 1099-R with code R will do nothing to your return. You can only report it as mentioned above. Therefore, you can ignore Form 1099-R with code R. If you still need to report the recharacterization then please see How do I amend my 2020 return?

You should have a 2020 Form 8606 with a basis on line 14 this will have to be entered on your 2021 tax return.

To enter the nondeductible contribution to the traditional IRA:

1. Open your return
2. Click “Deductions &Credits” on the top
3. Click "I'll choose what to work on"
4. Scroll down to “Traditional and Roth IRA Contributions” and click “Start”
5. Select “traditional IRA”
6. Answer “No” to “Is This a Repayment of a Retirement Distribution?”
7. Enter the amount you contributed
8. Answer “No” to the recharacterized question on the “Did You Change Your Mind?” screen
9. Answer the next questions until you get to “Any Nondeductible Contributions to Your IRA?” and select “Yes” since you had nondeductible contributions before this tax year
10. Enter your basis in the Traditional IRA from your 2020 Form 8606
11. 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 (code 2): 

1. Click "Federal Taxes" on the top and select "Wages & Income"
2. Click "I'll choose what to work on"
3. Scroll down and click "Start" next to "IRA, 401(k), Pension Plan (1099-R)" 
4. Answer "Yes" to the question "Did You Have Any of These Types of Income?"
5. Click "I'll Type it Myself"
6. Choose "Form 1099-R, Withdrawal of Money from 401(k) Retirement Plans, Pensions, IRAs, etc."
7. Click "Continue" and enter the information from your 1099-R
8. Answer questions until you get to “What Did You Do With The Money” and choose “I moved it to another retirement account”
9. Then choose “I did a combination of rolling over, converting, or cashing out money.” and enter the amount next to "Amount converted to a Roth IRA account"
10. On the "Your 1099-R Entries" screen click "continue"
11. Answer "yes" to "Any nondeductible Contribution to your IRA?" if you had any nondeductible contributions in prior years.
12. Answer the questions about the basis from line 14 of your 2020 Form 8606 and the value of all traditional, SEP, and SIMPLE IRAs

[jctaxfile]

Thank you very much for your detailed explanation.

I did report the recharacterization in 2020 but Form 8606 box 1 is $6000, and form 14 is also $6000.

My received 1099-R with code R is ($6000 + $1946). I guess that I still need to amend 2020 tax?

Questions:

1) Do I have to do the 2020 amendment first then 2021 return? Certainly don't want to do 2021 return now, do 2020 amendment later, then find I have to do 2021 amendement again :(.

With regard to filling Turbotax, your reply has three parts (part 1 for 2020, part 2 for 2021 recharacterization, part 3 for 2022 conversion.)

1) Following part 1, I will amend 2020 tax return for the 1099-R with code "R", where I have ($6000 + $1946). If everything goes well, the correct 8606 line 14 should have number  ($6000 + $1946)

2)

a) Following part 2, in 2021 tax return, I will enter the nondeductible contribution to traditional IRA in 2021, which is $6000

b) Following part 2, in 2021 tax return, I do nothing with the 2020 recharacterized money, which is $6000 + $1946 + ~$29 increase. Should this also be in 2020 amendment?

3) My 1099-R conversion (code 2 ) reported value of $13975 ($7975 + $6000) . I should follow your part 2 to fill 2021 tax return, and report $6000 only, or report $13975?

Thank you

[DanaB27]

1) No, you do not need to amend your 2020 tax return for Form 1099-R with code R.  A Form 1099-R with code R will do nothing to your return. You can only report it as mentioned above. Your 2020 Form 8606 should have a $6,000 basis on line 14. The gains are treated as earned in the traditional IRA and are not part of the basis.

2) Yes, you will enter your $6,000 nondeductible traditional IRA contribution for 2021 on your 2021 tax return with the steps above. You will enter your $6,000 basis from your 2020 Form 8606 line 14 when TurboTax asks for prior nondeductible contributions.

3)You will enter your Form 1099-R (code2) as shown with the distribution of $13,975 with the steps above.

@jctaxfile

[jctaxfile]

@DanaB27 Thanks for your reply but I am a little confused here

In your first reply

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.

Since I didn't put the earnings in 2020 tax filing. I guess I have to amend it?

In your last reply

1) No, you do not need to amend your 2020 tax return for Form 1099-R with code R.  A Form 1099-R with code R will do nothing to your return. You can only report it as mentioned above. Your 2020 Form 8606 should have a $6,000 basis on line 14. The gains are treated as earned in the traditional IRA and are not part of the basis.

I guess what you mean is that, even I did the amendment of 2020, my 8606 line 14 is still $6000. In original 2020 tax return I only put $6000 there. But even I put $6000 + $1950 earnings, Form 8606 line 14 will still be $6000. Since only this $6000 will be entered to 2021 tax return, amending 2020 or not do not affect how I file 2021 returns.

[DanaB27]

No, since you have the correct basis of $6,000 on your 2020 Form 8606 and you stated that you entered the recharacterization on your 2020 tax return you do not have to amend your 2020 tax return. You don't enter the earnings except on the explanation statement. But you do not need to amend your return just for the explanation statement.

Yes, your basis on line 14 of your 2020 Form 8606 will be $6,000. You will enter it on your 20221 tax return.

@jctaxfile