Recharacterization of Roth IRA

[elisaheine77]

This year while using the TurboTax software, I found out that I had excess Roth IRA contributions. I contacted my Roth IRA trustee and submitted a recharacterization to a Traditional IRA. The contribution was in 2020 and the recharacterization was in 2020 (before April 15). 

I am confused about how to report this to the IRS. Here are my questions:

• I know I need to submit a 8606 form, but is there anything else I will need to submit?
• Do I need to submit a contribution then to the Traditional IRA even though it was a recharacterization?
• What are the implications for the 2021 tax year? Will I have to report this again or will there be a follow-up later this year?

[DanaB27]

I assume you mean the recharacterization was in 2021 (before April 15). No you do not enter a contribution to the traditional IRA, please follow the steps below to enter the recharacterization in TurboTax:

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 
7. Answer “Yes” to the recharacterized question on the “Did You Change Your Mind?” screen and and enter the 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.

If you considering to make as a backdoor Roth conversion in 2021 then answer "Yes" on the screen "Choose Not to Deduct IRA Contributions".

TurboTax will create all the forms you need for this transaction.

You will get a 1099-R 2021 in 2022 for the recharacterization with code R-Recharacterized IRA contribution made for 2020 and  this belongs on the 2020 return. But a 1099-R with code R will do nothing to your return. The box 1 on the 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.

[elisaheine77]

Thank you so much for the detailed explanation.

Just so I understand - all I will need to submit is 8606, which after following your instructions Turbo Tax will generate for me. How does the tax work on the recharacterization? Since it was a Roth contribution I already paid taxes on the principle amount. When moving it to a Traditional IRA through this process, will I have to pay taxes on it again when I take the money out? 

With the 1099-R form that I get in 2022 - this will show the recharacterization I did in 2020, but does not affect my 2021 return. Will I report the 1099-R form on my 2021 return or do I have to go back and amend my 2020 return? Is this form just a confirmation for the IRS that the recharacterization happened or does my financial institution need to send in documentation as well?

Thank you in advance!

[DanaB27]

Yes, TurboTax will create all the forms needed.

It depends, if you have to pay taxes when you withdraw the money out of your traditional IRA later.

• If you make it nondeductible then you will have a basis in your traditional IRA and the amount allocated to the basis won't be taxable.
• If you make it deductible then you will reduce your taxable income in 2020 but when you withdraw money then it will be taxable. (Please see IRA deduction limits if you had a retirement plan at work)

Yes, the 1099-R is a confirmation for the IRS that the recharacterization happened and it won't affect your 2021 tax return.

Please see How do I enter a backdoor Roth IRA conversion? and What Is a Backdoor Roth IRA? for additional information.

[elisaheine77]

Great- thank you! 

I was reading that there are limits to what can be deductible for the Traditional IRA. If someone makes over $75,000 then they cannot take an IRA deduction. In this case, for the recharacterization to a Traditional IRA because I make over $75,000 does this mean that I cannot take a deduction for this contribution to the Traditional IRA from the recharacterization? In that case, I would fall into the non deduction category. Does that mean when I take out the money from the IRA when I am in retirement then I can take out the money from the recharacterization without paying taxes on it? How is this tracked? 

Thank you for all of the help!

[DanaB27]

Yes, since you are over the limit and have a retirement account at work your contribution to the traditional IRA is nondeductible.

Only the amount allocated to the basis will be not taxable when withdrawn. The amount allocated to the earnings will still be taxable. You might want to consider the backdoor Roth IRA strategy if you want to withdraw money tax-free later.

IRA basis is required to be tracked on Form 8606, Nondeductible IRAs.

[nkathy7]

I followed the steps and explained my transfers to my regular ira and the excess. They later ask me if I have an excess to my Roth again. Would I say no since it was recharacterized . They also say I have a penalty for having an excess even tho it was recharacterzied 

[DanaB27]

You will answer no to the question if you had an excess contribution.

Please make sure you enter only the contribution amount as switched (do not include the earnings). The earnings will only be entered on the explanation statement. 

@nkathy7

[MLB481]

In my search box when I type IRA contributions I do not get a Jump to IRA contributions or an option to select 

"Roth IRA".  I opened a traditional nondeductible IRA and then converted it (re-characterized it) to a Roth IRA.  The program is telling me that I have excess contributions and have to pau penalty.   I have no other IRA 's.  I just want to open a back door Roth.   Any advice?  Thanks

[RaifH]

Converting and re-characterizing are not the same thing and can have drastically different tax consequences. A back-door Roth IRA is done through the conversion of an already existing IRA. Re-characterizing your contribution is saying I changed my mind, I originally contributed to a regular IRA but now I want to make it a Roth contribution. It's a subtle difference, but a re-characterization will result in the system telling you that you were ineligible to make a Roth contribution if your income was too high and will have to pay a penalty. 

To enter a contribution to an IRA, please use the following steps:

1. In the Deductions & Credits section of your Federal return, scroll down to Retirement and Investments. Click Show More and click Revisit/Start next to Traditional and Roth IRA Contributions.
2. If you converted to a Roth IRA, your original contribution was to a Traditional IRA. You then should have received a 1099-R for the conversion from a traditional IRA to a Roth IRA if you both made the contribution and the conversion in 2021. For a proper back-door Roth, you will want to select Traditional IRA.
3. Select No to Is This a Repayment of a Retirement Distribution?
4. Enter your contribution amount, making sure to put it in the appropriate box if you contributed in 2022.
5. Select No to Did you change your mind? For more details on the differences between conversions and re-characterizations, you can click on the TurboTax help article.
6. Navigate through the rest of the questions. This should be a Nondeductible contribution.

That will enter the contribution. As I mentioned earlier, if you converted it to a Roth in 2021, you should have received a 1099-R with the appropriate code and possibly a small taxable amount if there were any gains between your contribution date and the conversion date. This article walks you through entering the 1099-R into your tax return. 

@MLB481

[MLB481]

Thank you so much.  When I get to the window that ask  for the amount that I switched from a traditional IRA to a Roth do I enter $0?

[DanaB27]

Yes, if you converted a traditional IRA to Roth IRA you will enter $0 when TurboTax asks for the amount that you switched from a traditional IRA to a Roth in the contribution section. This question is referring to recharacterization.

 Please see What's the difference between a conversion and a recharacterization? for additional information.

Please review these backdoor Roth instructions if needed:

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 contributions 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.

To enter the 1099-R distribution/conversion: 

1. Login to your TurboTax Account 
2. Click on "Search" on the top right and type “1099-R”
3. Click on “Jump to 1099-R”
4. Click "Continue" and enter the information from your 1099-R
5. 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”
6. On the "Your 1099-R Entries" screen click "continue"
7. Answer "yes" to "Any nondeductible Contributions to your IRA?" if you had any nondeductible contributions in prior years.
8. Answer the questions about the basis and value

 @MLB481