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Level 5

Solved

Roth conversion plus recharacterization on 8606

Forum|Forum|5 years ago
March 27, 2021
1 reply
22 views

Hi,

My wife has the following activity for her IRA- Traditional and Roth.

4/12/19- contributed 5500 to traditional deductible IRA for year 2018

01/28/20- contributed 6000 to traditional 'non'- deductible IRA for year 2019

02/03/20- Converted all of the balance to Roth IRA- reported on 1099-R received in 2020

03/01/2020- Contributed 6000 to Roth IRA directly by mistake- for year 2020

03/03/2021- Recharacterized 6000 plus gains of 1700 for the 2020 Roth contribution to Traditional IRA

03/04/2021- Converted the full 7700 recharacterized amount back to Roth

The form 8606 in Turbo tax shows me the following:

Line 1- 6000 - for year 2020 contribution

Line 2- zero- is this correct?

Line 4- blank

Line 8- blank - is this correct given that i did convert (and i answered that in the Turbo tax interview)

Line 6 - 12 - blank - are these correct?

Line 13- 6000

Line 14- 15 - blank

Line 16- 11590

Line 17- 6000

Line 18- 5590

Are the above correct? How does it take care of the recharacterization?

Should the conversion of deductible IRA to Roth IRA be reported anywhere specifically. I do see IRA distribution on Line 4 in Form 1040.

Thanks,

Best answer by DanaB27

Hi,

I am still struggling with this. See my previous post for details.

At the end of Dec 2020, I had no T-IRAs but had a Roth which I recharacterized in Mar 2021. So what should i enter to the question on:

"Did you make a contribution to traditional IRA in 2020"- should this be Yes or No (i made a roth contribution by mistake and recharacterized)

"value of all Traditional IRA as on Dec 2020"- I entered zero. is this right?

Outstanding recharacterizations- I entered -6000 and my tax amount went up. Not sure why it would for my 2020 Roth contribution which was recharacterized in Mar2021.

But when I entered the distribution from my 1099-R, which has a total of 11590 (mix of deductible and non deductible IRA conversion) , it said I owe no tax. That does not sound correct since I had a 5590 conversion of deductible IRA (out of 11590). Should I not see 5590 added to my income?

Instead i see that it calculates the non taxable part differently and says that it is 7907 non taxable. How can it reduce tax on the deductible IRA contribution to Roth?

And do i need to create a form 1099-R for 2020 for the recharacterization?

Thanks for your help.

"Did you make a contribution to traditional IRA in 2020" should this be "No". You will enter the Roth IRA contribution and during the interview select that you switched/ recharacterized the contribution.

Open your return
Click on "Search" on the top right and type “IRA contributions”
Click on “Jump to IRA contributions"
Select “Roth IRA”
Answer “No” to “Is This a Repayment of a Retirement Distribution
Enter the Roth contribution amount
Answer “Yes” to the recharacterized question on the “Did You Change Your Mind?” screen and enter the contribution amount (no earnings or losses)
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.
On the screen "Choose Not to Deduct IRA Contributions" answer "Yes"

"Value of all Traditional IRA as on Dec 2020"- zero is correct

Outstanding recharacterizations $6,000 is correct. Your tax amount went up because this affects the amount that is allocated as your basis for the 2020 conversion. Some of your basis is allocated to the 2020 conversion and some of the basis is allocated to future conversions/distributions (in your case it will be the 2021 conversion).

No, should not see 5590 added to your income. You stated you had $3,683 on line 18 (taxable amount) on Form 8606. This will show as taxable amount on line 4b of Form 1040 and be included in your taxable income. Next year on your 2021 tax return when you convert the balance of the traditional IRA only $4,093 will be tax free the rest will be included in your taxable income.

No, you do not need to create a 1099-R for the recharacterization. You will get a 2021 1099-R with code R and it belongs on the 2020 return. But a 1099-R with code R will do nothing to your return. Therefore, you can ignore it. You can only report a recharacterization as mentioned above.

DanaB27

Level 15

No, your 8606 doesn't seem correct.

To clarify, you entered the $5,500 contribution as a nondeductible traditional IRA contribution on your 2018 tax return and $6,000 as a nondeductible traditional IRA contribution on your 2019 tax return, correct? This should have triggered the Form 8606 in those years and you have a basis of $11,500 for 2019.

Do not enter the 2020 $6,000 contribution as a traditional IRA contribution you will have to enter the recharacterization like this:

Open TurboTax
Click on "Search" on the top right and type “IRA contributions”
Click on “Jump to IRA contributions"
Select “Roth IRA”
Answer “No” to “Is This a Repayment of a Retirement Distribution
Enter the Roth contribution amount $6,000
Answer “Yes” to the recharacterized question on the “Did You Change Your Mind?” screen and enter the contribution amount $6,000 (no earnings or losses)
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.
On the screen "Choose Not to Deduct IRA Contributions" answer "Yes"

To enter the conversion from the 1099-R:

Click on "Search" on the top right and type “1099-R”
Click on “Jump to 1099-R”
Click "Continue" and enter the information from your 1099-R
Answer questions until you get to “What Did You Do With The Money” and choose “I moved it to another retirement account”
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"
On the "Your 1099-R Entries" screen click "continue"
Answer "yes" to "Any nondeductible Contribution to your IRA?"
Answer the questions about the basis ($11,500) and value

You will have on line 14 Form 8606 the $6,000 basis from the 2020 contribution and will enter your 2021 conversion with the steps above on your 2021 tax return (enter $6,000 basis in step 8).

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goyal_rajAuthor

Level 5

Thanks DanaB27.

To your question:

"To clarify, you entered the $5,500 contribution as a nondeductible traditional IRA contribution on your 2018 tax return and $6,000 as a nondeductible traditional IRA contribution on your 2019 tax return, correct?"

I entered 5500 as 'deductible' for 2018 and that's why there was no 8606 in 2018. And 6000 as non deductible in 2019 for which I have a 8606.

I also have a page with explanation for recharacterization created for 2020 based on Turbo tax interview. But it shows 6000 on line 1. I did answer yes to Did you change your mind.

With the above information, which part on my 2020 8606 is incorrect, if at all?

I converted the 2018 deductible and 2019 non deductible contribution to Roth in Mar 2020.

And should my 8606 show the conversion to Roth on 8606 on line 8?

DanaB27

Level 15

Your 8606 should show the $6,000 basis from 2019 on line 2.

Line 3 and 5 should be $12,000.

You should have a basis in line 14 since you recharacterized the 2020 contribution as a traditional IRA contribution and made it nondeductible.

It seems as if you entered the recharacterization correctly.

Please make sure you enter the prior basis, the value of the traditional IRA on December 31, 2020 and the outstanding recharacterization amount (step 9).

Login to your TurboTax Account
Click on "Search" on the top right and type “1099-R”
Click on “Jump to 1099-R”
Click "Continue" and enter the information from your 1099-R
Answer questions until you get to “What Did You Do With The Money” and choose “I moved it to another retirement account”
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"
On the "Your 1099-R Entries" screen click "continue"
Answer "yes" to "Any nondeductible Contribution to your IRA?"
Answer the questions about the basis $6,000 and value on December 31, 2020 and the outstanding recharacterization