In 2022, I contributed $6,000 to my Roth IRA, which I recharacterized to a traditional IRA in March 2023. The recharacterized amount, including earnings, was $8,400. Initially, I believed that I had over-contributed to my traditional IRA since the total amount exceeded the $6,000 annual limit. Consequently, I withdrew the excess $2,400, which resulted in taxes and penalties on the earnings. Now, I have two questions regarding this matter: Should I fill out $6000(contribution) or $8400(contribution plus earnings) when asked about the "Amount switched from a Roth IRA to Traditional IRA"? Did I make an excess contribution to my traditional IRA after recharacterization?If it turns out that the recharacterization did not result in an over-contribution to my traditional IRA, how can I fix the mistake of removing the excess contribution?I have been struggling with these questions for some time. I would really appreciate any help in resolving this matter as the deadline of tax filing approaches.

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How to fix the mistake of removing the excess contribution

Forum|Forum|3 years ago
April 4, 2023
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In 2022, I contributed $6,000 to my Roth IRA, which I recharacterized to a traditional IRA in March 2023. The recharacterized amount, including earnings, was $8,400. Initially, I believed that I had over-contributed to my traditional IRA since the total amount exceeded the $6,000 annual limit. Consequently, I withdrew the excess $2,400, which resulted in taxes and penalties on the earnings. Now, I have two questions regarding this matter:

Should I fill out $6000(contribution) or $8400(contribution plus earnings) when asked about the "Amount switched from a Roth IRA to Traditional IRA"? Did I make an excess contribution to my traditional IRA after recharacterization?
If it turns out that the recharacterization did not result in an over-contribution to my traditional IRA, how can I fix the mistake of removing the excess contribution?

I have been struggling with these questions for some time. I would really appreciate any help in resolving this matter as the deadline of tax filing approaches.

Best answer by DanaB27

1. You will enter the contribution amount as recharacterized ($6,000) on the "Amount switched from a Roth IRA to Traditional IRA" screen. No, you didn't make an excess contribution.

You will enter the recharacterization when you enter the contribution to the Roth IRA:

Login to your TurboTax Account
Click on "Search" on the top right and type “IRA contributions”
Click on “Jump to IRA contributions"
Select “Roth IRA”
Answer ‘Yes” on the “Roth IRA Contribution” screen
Answer “No” to “Is This a Repayment of a Retirement Distribution
Enter the Roth contribution amount
Answer “Yes” to the recharacterized question on the “Switch from a Roth To a Traditional IRA?” screen and enter the contribution amount (no earnings or losses) on the next screen.
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" (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)

2. You withdrew part of your contribution and earnings and this cannot be undone. The earnings will be taxable on your 2022 tax return. You have until April 18th to make additional IRA contributions if you wish the max out your IRA contribution limit (make a new contribution for the amount of contribution that you removed).

You will get a 2023 Form 1099-R in 2024 with codes P and 1. This Form 1099-R will have to be included on your 2022 tax return and you have two options:

You can wait until you receive the 2023 Form 1099-R in 2024 and amend your 2022 return or
You can report it now in your 2022 return and ignore the 1099-R when it comes unless there is Box 4 Federal Tax withholding and/or Box 14 State withholding. Then you must enter the 2023 Form 1099-R into the 2023 tax return since the withholding is reported in the year that the tax was withheld. The 2023 code P will not do anything to the 2023 tax return but the withholding will be applied to 2023.

To create a Form 1099-R in your 2022 return please follow the steps below:

Login to your TurboTax Account
Click on the "Search" on the top right and type “1099-R”
Click on “Jump to 1099-R”
Answer "Yes" to "Did you get a 1099-R in 2022?"
Select "I'll type it in myself"
Box 1 enter total distribution (contribution plus earning)
Box 2 enter the earnings
Box 7 enter P and 1
Check the "IRA/ SEP/ SIMPLE" box
Click "Continue"
On the "Which year on Form 1099-R" screen say that this is a 2023 1099-R.

D

dmertz

Employee

Regarding question #1, no, you did not make an excess contribution. You recharacterized $6,000, not $8,400.

Regarding the $2,400 you withdrew, did you request a return of contribution (resulting in a gain/loss-adjusted amount being distributed or did you request a regular distribution?

If you requested a return of contribution of $2,400, it seems like somewhere around $3,360 would have been distributed to you, including $960 of gains that would be taxable. In that case you have contributed a net amount for 2022 of $6,000 - $2,400 = $3,600 and you have until April 18, 2023 to contribute a new $2,400 to make your contribution for 2022 be a full $6,000.

If you requested a regular distribution of $2,400 and you received $2,400, you have a distribution that is eligible for rollover provided that it would not result in a violation of the one rollover-per-12-months limitation.

L

LilinAuthor

Thank you for explaining.

To clarify, I recharacterized $6,000 contribution along with $2,400 earnings from my Roth IRA to a traditional IRA. After realizing that this exceeded the contribution limit, I requested a return of contribution of $2,400 from the traditional IRA to avoid excess contribution. If I had not requested the return, I could have converted the entire $8,400 back to the Roth IRA. My question is, is it possible to reverse the return of contribution of $2,400, so that it appears as if the return of contribution never happened?

D

DanaB27Answer

1. You will enter the contribution amount as recharacterized ($6,000) on the "Amount switched from a Roth IRA to Traditional IRA" screen. No, you didn't make an excess contribution.

You will enter the recharacterization when you enter the contribution to the Roth IRA:

Login to your TurboTax Account
Click on "Search" on the top right and type “IRA contributions”
Click on “Jump to IRA contributions"
Select “Roth IRA”
Answer ‘Yes” on the “Roth IRA Contribution” screen
Answer “No” to “Is This a Repayment of a Retirement Distribution
Enter the Roth contribution amount
Answer “Yes” to the recharacterized question on the “Switch from a Roth To a Traditional IRA?” screen and enter the contribution amount (no earnings or losses) on the next screen.
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" (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)

2. You withdrew part of your contribution and earnings and this cannot be undone. The earnings will be taxable on your 2022 tax return. You have until April 18th to make additional IRA contributions if you wish the max out your IRA contribution limit (make a new contribution for the amount of contribution that you removed).

You will get a 2023 Form 1099-R in 2024 with codes P and 1. This Form 1099-R will have to be included on your 2022 tax return and you have two options:

You can wait until you receive the 2023 Form 1099-R in 2024 and amend your 2022 return or
You can report it now in your 2022 return and ignore the 1099-R when it comes unless there is Box 4 Federal Tax withholding and/or Box 14 State withholding. Then you must enter the 2023 Form 1099-R into the 2023 tax return since the withholding is reported in the year that the tax was withheld. The 2023 code P will not do anything to the 2023 tax return but the withholding will be applied to 2023.

To create a Form 1099-R in your 2022 return please follow the steps below:

Login to your TurboTax Account
Click on the "Search" on the top right and type “1099-R”
Click on “Jump to 1099-R”
Answer "Yes" to "Did you get a 1099-R in 2022?"
Select "I'll type it in myself"
Box 1 enter total distribution (contribution plus earning)
Box 2 enter the earnings
Box 7 enter P and 1
Check the "IRA/ SEP/ SIMPLE" box
Click "Continue"
On the "Which year on Form 1099-R" screen say that this is a 2023 1099-R.

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L

LilinAuthor

Thank you for providing me with guidance!

I have a few questions that I hope you can help me with.

Should I use a substitute Form 1099-R(Form 4852) since the actual Form 1099-R for the removal won't be available until next year?
I removed $2400 earnings from the $8,400 total, which included a $6,000 contribution and $2,400 earnings. Should I enter $2,400 in both Box 1 and Box 2 of the 1099-R form?
In the interview, there is a question that asks, "Let's see if we can reduce your early withdrawal penalty." Since I should not have requested a return of contribution, should I select "Incorrect Early Distribution"? If I choose this option, I can avoid 10% penalty for early distribution.

D

dmertz

Employee

@Lilin , it's still not clear what kind of distribution you received. If the amount you received was $2,400, it seems that it was a regular distribution, not a return of contribution. If it was a regular distribution, because the distribution was received within the last 30 days or so, you still are within the 60-day period in which you can roll the distribution back into the traditional IRA provided that you rolled over no other similar distribution from a traditional or Roth IRA within the one-year period ending on the date of the distribution from the traditional IRA in March 2023.

If you are unsure of the type of distribution you received, contact the financial institution to find out what type it was. As I said previously, had you actually requested a return of $2,400 of your contribution for 2022, an amount somewhere around $3,360 should have been paid to you.

Don't do anything before determining the type of distribution you received, but do find that out before April 18, 2023 so that you can know your options to get money back into the traditional IRA. The questions you have asked imply that you may be jumping the gun a bit.