Tax filing for Roth -> Trad IRA recharacterization to backdoor Roth IRA

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Topic Author
nmotion
Posts: 10
Joined: Mon Mar 30, 2015 1:39 am

Tax filing for Roth -> Trad IRA recharacterization to backdoor Roth IRA

Post by nmotion »

Hello Bogleheads!

I've been searching all over the forums as well as Google and I cannot find a clear answer as to how to file the recharacterization to backdoor Roth IRA for prior year. Here's my scenario:

I'm filing jointly with my spouse and our combined income surpasses the magi limit for direct ROTH contribution in 2020. I've already contributed $3600 to Roth IRA directly in 2020 and will need to recharacterize this to avoid the penalties.

1. I made a recharacterization request of $3600 contribution + $900 earnings for 2020 from Roth IRA -> Traditional IRA on January 16th, 2021
2. I've converted the money from step 1 to Roth IRA on February 22nd, 2021
3. I've topped up the 2020 contribution with $2400 to my tIRA to hit the $6000 limit on March 1st, 2021
4. I've converted the $2400 from step 3 of the tIRA to Roth IRA on March 4th, 2021

I'm filing my taxes soon with TurboTax and want to gauge what to report for 2020 and I am not confident how I should approach this. Do I just report $3600 on Form 8606 with a statement that $3600 + $900 earnings are converted to tIRA and the rest of the steps are reported in 2021?

What about the top up amount of $2400 for 2020? When does that get reported and how?

Thank you for your knowledge and time! It's a bit daunting so want to be clear how I should approach this regarding tax filing before I proceed.
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Duckie
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Joined: Thu Mar 08, 2007 1:55 pm

Re: Tax filing for Roth -> Trad IRA recharacterization to backdoor Roth IRA

Post by Duckie »

nmotion wrote:I'm filing my taxes soon with TurboTax and want to gauge what to report for 2020 and I am not confident how I should approach this. Do I just report $3600 on Form 8606 with a statement that $3600 + $900 earnings are converted to tIRA and the rest of the steps are reported in 2021?

What about the top up amount of $2400 for 2020? When does that get reported and how?
You need to read the 2020 Form 8606 instructions for recharacterizations which start on page 4. (Page 5 covers Roth to TIRA.) In your case, you tell TurboTax you made a $2400 contribution to a TIRA and that the contribution was non-deductible. "Non-deductible" will trigger Form 8606. Then you made a $3600 contribution to a Roth IRA and recharacterized $3600 to a TIRA. "Recharacterized" will trigger the required statement form. The statement will say something like:
  • I contributed $3600 to a Roth IRA for 2020 on DATE and recharacterized that $3600 plus $900 earnings to a TIRA on DATE by transferring $4500 to a TIRA in a trustee-to-trustee transfer.
Your Form 8606 will look like this:
  • Part I
    Line 1 -- 6000
    Line 2 -- 0
    Line 3 -- 6000
    Line 14 -- 6000
That's it for 2020. The conversion will be covered on your 2021 taxes.

Also, "If the recharacterization occurred in 2021, report the amount transferred only in the attached statement, and not on your 2020 or 2021 tax return."
Topic Author
nmotion
Posts: 10
Joined: Mon Mar 30, 2015 1:39 am

Re: Tax filing for Roth -> Trad IRA recharacterization to backdoor Roth IRA

Post by nmotion »

Thank you so much for the step-by-step, Duckie!

If you have the chance, can you expand more on this quote: "The conversion will be covered on your 2021 taxes" ? Does this mean in 2021, there is nothing else to report for transactions in 2021 even though all my transactions were completed in 2021 for the year of 2020?
ruud
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Joined: Sat Mar 03, 2007 12:28 pm
Location: san francisco bay area

Re: Tax filing for Roth -> Trad IRA recharacterization to backdoor Roth IRA

Post by ruud »

nmotion wrote: Tue Mar 16, 2021 12:22 pm even though all my transactions were completed in 2021 for the year of 2020?
Conversions are always taxed in the year in which they take place, regardless of what year the contribution that was converted was for.
.
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Duckie
Posts: 9777
Joined: Thu Mar 08, 2007 1:55 pm

Re: Tax filing for Roth -> Trad IRA recharacterization to backdoor Roth IRA

Post by Duckie »

nmotion wrote:If you have the chance, can you expand more on this quote: "The conversion will be covered on your 2021 taxes" ? Does this mean in 2021, there is nothing else to report for transactions in 2021 even though all my transactions were completed in 2021 for the year of 2020?
No. Since you converted in 2021 you do not report the conversion on your 2020 taxes even though you converted 2020 contributions. You report that conversion on your 2021 Form 8606 next year. The $6000 non-deductible basis will not be taxable but the $900 earnings will be.
Topic Author
nmotion
Posts: 10
Joined: Mon Mar 30, 2015 1:39 am

Re: Tax filing for Roth -> Trad IRA recharacterization to backdoor Roth IRA

Post by nmotion »

Hello Duckie,

Just want to say thank you for your guidance! I filed with Turbotax and your comment helped me correct my mistake ! If it wasn't for your comment I would have to pay taxes on post-tax dollars!
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