Roth IRA excess contributions 2021

[Coconut Telegraph]

I contributed the $6,000 in my roth IRA in 2021. Upon filing taxes, I realized I cannot contribute anything towards a roth due to my income. That contribution earned $1,565 in interest in 2021. I recharacterized the $6,000 plus earnings ($1565) before filing this year. I realize the $1,565 is subject taxes, but when I input codes J and P in box 7, as you recommend, I'm being penalized 16%. I thought the earnings of $1,565 was only subject to 6%?

Since code J applies to "Early Distribution of Roth IRA", it seems incorrect to select code J.  Code N - "Recharacterized IRA contribution made for 2021", seems more appropriate. When I selected code N, my taxes owed equated to roughly 6% of the earnings made. Am I wrong in thinking this?

[DanaB27]

You will enter the recharacterization when you enter the contribution to the Roth IRA. You do not create a Form 1099-R for the recharacterization. You do not pay taxes on the gains during a recharacterization, you will pay when you take a distribution.

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" (if you are thinking about 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

You will get Form 1099-R  for the recharacterization with code R-Recharacterized IRA contribution made for 2021 and this belongs on the 2021 return. But 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 the Form 1099-R with code R when you get it in 2023. 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.

@Coconut Telegraph

[kbr1988]

@DanaB27 Thank you so much for all of your replies and help!! You have been so incredibly helpful in all of this.