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Why is Recharacterized of Roth Contribution taxable

Forum|Forum|5 years ago
February 21, 2021
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My MAGI for 2019 was too high to make full Roth IRA contributions (for 2019). In January of 2020, my wife and I both Recharacterized part of our 2019 Roth IRA contribution ($298 of mine, and $302 of hers) as a non-deductable Traditional IRA contribution that we then immediately converted back to our Roth IRA's. We both got 1099-R's. They are identical, except for the amounts, names, and account information. Neither my wife or I have any Traditional IRA's with a balance. The only Traditional IRA's we have are the ones we used to Recharacterize and the Convert in January of 2020.

My 2020 taxes, line 4b shows that I have $302 of taxable IRA distributions. When I look at the IRA Info worksheet, line 35 (Conversion contributions taxable at conversion), it shows $302 as taxable in the Spouse column. The Taxpayer column is blank.

This seems wrong. Is this a BUG in TurboTax? I'm pretty sure that neither of our recharacterization and conversion is taxable. Why would one be, but the other isn't?

Best answer by rkierski

That is entirely possible depending on when yiu added the recharacterization and when you imported from 2019. Imported data must always be checked and corrected if necessary. That is why the 2020 1099-R in interview asks for the 2019 or earlier basis and if not correct allows you to change it to the correct mount.

I was asked this morning if my problem was resolved and if it was, to pick the answer that was most helpful.

Yes, my problem was resolved. I would say that the solution was found using information I got from some of the postings here. I would also say that @macuser_22 gave many good and informative responses, for which I am grateful.

But the solution to my problem was to go back and look at the forms and worksheets of my 2019 taxes and make sure the information that was transferred from the 2019 taxes to my 2020 taxes actually made sense. @dmertz had posted a response to a related question last year that I reread that was also helpful -- Ignore the Code-R 1099-R that I would get in 2020. Someone made a similar comment here -- that the Code-R 1099-R I got for in 2021 for 2020 isn't used in my 2020 taxes.

So... if someone has stumbled on this discussion because they feel the conversion of a previously recharacterized contribution shouldn't have been a taxable event, my advice would be to look at the lines related to "basis" for the tax year where the recharacterization was reported.

In my case, that meant looking at lines 1-3 and 18-21 of IRA Info Wks and line 14 of Form 8606 for Tax Year 2019 and comparing that information with lines 1 and 12 of IRA Info Wks and line 2 of Form 8606 for Tax Year 2020. Line 14 of Form 8606 for TY19 should have matched line 2 of Form 8606 for TY20.

macuser_22

Employee

If you entered the recharacterization properly in the Roth IRA contribution section then yiu should each have a 8606 form with the nondeductible amount on line 1.

The proper way to report the recharacterization and earnings which is to enter the 2020 IRA contribution in the IRA contribution interview section and then say yes to "Did you switch from a Roth to a Traditional IRA - recharacterize".

The amount The amount of the original Roth contribution must be entered - not any earnings or losses.

Then TurboTax will ask for an explanation statement where it should be stated that the original $xxx.xx plus $xxx.xx earnings (or loss) were recharactorized.

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**

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rkierskiAuthor

In a nut shell... I did exactly as you say. The difference being that I imported the 1099-R forms for our accounts. Upon more careful examination of the related TurboTax forms, form 5329-S shows the $302 as being an excess contribution to her Roth IRA for 2020. This seems to be because line 10 of IRA Info Wks shows an excess contribution in 2019 of $302... supposedly from line 24 or her 2019 5329-S. But I looked at line 24 of the 2019 form, and it's blank. And, as far as I can tell, I can't edit line 10 of IRA Info Wks to correct the value. So... somehow, it seems that her 1099-R that shows the recharacterization was interpreted as replacing the value of her 2019 form 5329. I don't know how that's possible.

As the result... I'm going to assume this is a bug or mistake somewhere... possibly in the way I jumped from "Ask-me-everything" mode to "I'll-tell-you-what-I-want-to-enter" mode... and back. And, unfortunately, I'm going to start over.... with a clean slate to see if the values get entered the same.

A little while later.....

I've gotten past the 1099-R income part of the interview. I'm following the "Ask-me-everything" mode, which is a royal pain, since I don't have most of the stuff they're asking... but none the less... the IRA Info Wks now has a blank line 10 for both T and S columns. So... maybe there was an interview question I was supposed to answer, but because I didn't have TT "ask-me-everything" it never got a chance to ask me... and assumed something wrong. But... why would it show values that it has supposedly transferred from my 2019 taxes incorrectly?

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rkierskiAuthor

That was a waste of time. I started my taxes over, and followed the "ask-me-everything" mode only to have it tell me again that $302 of my wife's contribution is taxable. But now, there's even less of an indication why it thinks it's taxable.

I am 100% sure that there is a bug. Since my wife and I did essentially the same transaction and got the same documentation from the broker... either both of the transactions would be taxable... or neither of them would be. And since we both recharacterized a 2019 Roth contribution, we've already paid the taxes on that money. What's more, after entering the information, I got a screen saying "The good news is that you don't owe any additional taxes"... for both sets of 1099-R's.

I'm trying to find an email, phone number, or some way to contact Turbo Tax customer support to report this as a bug. But I can't find anything except this TurboTax community page.