By Dr. Jim Dahle, WCI FounderMany doctors make a direct Roth IRA contribution, then later in the year realize their income is going to be higher than they thought and that direct contribution isn't going to be allowed. Here's an example from my email box:
Q. I am currently closing out my chief resident year and starting my Cardiology fellowship in July. I am doing my financial plan for next year. Last year I was fortunate to have the opportunity to moonlight and brought in an additional $60,000. Moreover, my wife received a raise and a bonus. Given this, we will be over the $206,000 Roth IRA contribution limit for 2020. I have been making the maximal contribution to our Roth IRAs for the past several years. I have not contributed to her Roth IRA for 2020 but have made the maximal contribution to my Roth IRA earlier this year before I realized that I would bring in this much extra money from moonlighting. I will be utilizing a Back Door Roth for her account so I can continue contributing there but I was curious if there is anything I can do retroactively for my account so I am not hit with any tax penalty.
It is really unfortunate since these doctors are trying to do the right thing. They are using a Roth IRA. They are funding it early in the year so there is more time for it to compound. They are busting their butt to get their income up. But then the IRS rules come down on them like a hammer. In fact, this circumstance is really common for people in the first year they do Backdoor Roth IRAs. A lot of people don't realize that anybody CAN do a Backdoor Roth IRA. It's just that high earners (along with people filing Married Filing Separately) HAVE to do a Backdoor Roth IRA. So if there is any doubt at all, do your Roth IRA through the Back Door, i.e indirectly. In fact, in 2010, the first year that the Backdoor Roth IRA was allowed, I did a Backdoor Roth IRA. I didn't have to, though; my income turned out to be lower than I expected that year.
More information here:
The Income Limit
The first thing to determine is whether this post even applies to you. If your income is below a certain amount, you can just contribute directly to a Roth IRA. That amount depends on several things. First, it is a MODIFIED Adjusted Gross Income (MAGI). That number is very similar to your Adjusted Gross Income (AGI). Remember how tax form 1040 works.
The first income line you come to is line 7b, your “Total Income”. When people think about income, this is generally what they think of. The third income line on the form is line 11b. This is your “Taxable Income”. This is what your tax bill is actually calculated from. It is basically your total income minus all of your deductions. In between those two, on line 8b, is another income, your “Adjusted Gross Income”. This is “the line” that people are talking about when they use the phrases “above the line deduction” and “below the line deduction.” If it comes out before your AGI is calculated, it is an above the line deduction. These are deductions such as self-employment tax, self-employed retirement plans, self-employed health insurance premiums, HSA contributions, student loan interest, alimony, tuition, and any IRA deductions. If it comes out after your AGI is calculated, it is a below the line deduction. These are EITHER your standard deduction OR your itemized deductions, like mortgage interest, state/local/property taxes, and charitable contributions. A MAGI is just a slight tweak to your AGI.
Here are the MAGI limits for 2020 for direct Roth IRA contributions. If your MAGI is below the first number, you can just contribute to a Roth IRA directly. If your MAGI is over the second number, you cannot contribute at all. If your MAGI is between the two numbers, you can make a partial direct contribution (most shouldn't bother with this, just do it all through the Back Door).
- Married Filing Jointly: $196,000-$206,000
- Married Filing Separately (and lived with spouse for at least part of year): 0-$10,000
- Single or Head of Household: $124,000-$139,000
If you think you'll be anywhere close to that first number, do yourself a favor and just do your Roth IRA contribution indirectly, i.e. through the Back Door (contribute to a traditional IRA and then convert that contribution to a Roth IRA). Since 2010, there has been no income limit on Roth conversions and there has never been an income limit on traditional IRA contributions, just your ability to deduct them.
So how does a MAGI differ from an AGI? It's a very slight difference. Bear in mind that there are other MAGIs out there. We're only talking about the one that affects Roth IRA contributions here. But to get your MAGI, you simply take your AGI, you subtract some income from it and you add back in some other income to it. The worksheet showing you how to do this is Worksheet 2-1 in Publication 590.
Basically, you subtract income from a Roth conversion and you add income from IRA deductions (not sure why you'd have this), student loan interest (if you are using this worksheet, you probably don't have this), tuition deduction (you probably don't have this), a couple of rare deductions for foreign income/deductions (you probably don't have these), some savings bond interest you probably don't have much of, and some employer-provided adoption benefits. As you can see, for most people your MAGI = your AGI since all of these deductions are pretty rare for the folks worried about this limit for direct Roth IRA contributions. So focus on your AGI. That means if you contributed directly to a Roth IRA but late in the year realized you probably should not have, one easy fix is to get your AGI below that limit by contributing to an HSA or a self-employed retirement plan like an individual 401(k) or SEP-IRA. Note that giving a bunch of money to charity is NOT a solution to this problem because that is a below-the-line deduction.
How to Do an IRA Recharacterization
If you can't get your MAGI low enough, you will have to do an IRA Recharacterization. With a recharacterization, as far as the IRS is concerned it is as though you never made the Roth IRA contribution at all, but made a traditional IRA contribution instead. You don't report a recharacterization separately, you just report a traditional IRA contribution. Keep in mind as you read on the internet about recharacterizations that there used to be two types of them—a recharacterization of a Roth IRA CONTRIBUTION and a recharacterization of a Roth IRA CONVERSION. The second type was outlawed in 2018, but the first one, the one we're talking about today, is still perfectly legal. If you decide you want to undo a Roth conversion these days, you're simply out of luck. Here is how you do a recharacterization of a Roth IRA contribution:
You tell Vanguard (or wherever your IRAs are) to recharacterize the Roth IRA contribution to a Traditional IRA contribution.
Yup. That's it. They take care of the rest. I mean, you can read all about all of the rules in Publication 590 Chapter 1 if you want, but that's basically what they say. Don't believe me? Fine. Here's the IRS instructions:
How Do You Recharacterize a Contribution?
To recharacterize a contribution, you must notify both the trustee of the first IRA (the one to which the contribution was actually made) and the trustee of the second IRA (the one to which the contribution is being moved) that you have elected to treat the contribution as having been made to the second IRA rather than the first. You must make the notifications by the date of the transfer. Only one notification is required if both IRAs are maintained by the same trustee. The notification(s) must include all of the following information:
- The type and amount of the contribution to the first IRA that is to be recharacterized.
- The date on which the contribution was made to the first IRA and the year for which it was made.
- A direction to the trustee of the first IRA to transfer in a trustee-to-trustee transfer the amount of the contribution and any net income (or loss) allocable to the contribution to the trustee of the second IRA.
- The name of the trustee of the first IRA and the name of the trustee of the second IRA.
- Any additional information needed to make the transfer.
In most cases, the net income you must transfer is determined by your IRA trustee or custodian.
See what I mean? It's just a phone call. Any earnings that the account had in between the contribution and the recharacterization just go over with the contribution. No big deal.
You have until your tax filing date to do this. Most of the time, that's April 15th of the next year. However, the IRS is even more lenient than that. You actually can do this for an extra six months after your tax filing date, but you will have to refile your return.
Where Do You Report a Recharacterization?
If you hire somebody else to prepare your taxes, you can skip this section. If you do it yourself, you'll need to make sure you report this correctly. According to Pub 590, you report it on our old friend Form 8606.
Pub 590 says this:
Actually, that's really misleading. If you read Form 8606, you will see that the only time it ever mentions a recharacterization is to tell you NOT to put it on the form.
So what is Pub 590 talking about? They're talking about this section in the 8606 instructions:
Reporting recharacterizations.
Treat any recharacterized IRA contribution as though the amount of the contribution was originally contributed to the second IRA, not the first IRA. For the recharacterization, you must transfer the amount of the original contribution plus any related earnings or less any related loss. In most cases, your IRA trustee or custodian figures the amount of the related earnings you must transfer. If you need to figure the related earnings, see How Do You Recharacterize a Contribution? in chapter 1 of Pub. 590-A. Treat any earnings or loss that occurred in the first IRA as having occurred in the second IRA. You can’t deduct any loss that occurred while the funds were in the first IRA….Report the nondeductible traditional IRA portion of the recharacterized contribution, if any, on Form 8606, Part I. Don’t report the Roth IRA contribution (whether or not you recharacterized all or part of it) on Form 8606. Attach a statement to your return explaining the recharacterization. If the recharacterization occurred in 2019, include the amount transferred from the Roth IRA on Form 1040 or 1040-SR, line 4a; or Form 1040-NR, line 16a. If the recharacterization occurred in 2020, report the amount transferred only in the attached statement, and not on your 2019 or 2020 tax return.
The bottom line is that you just report this recharacterized contribution on Form 8606 as if it were the regular old non-deductible traditional IRA contribution that you should have made in the first place. You also need to include a statement. What should your statement look like? I would write something like this:
To whom it may concern:
I made a 2020 Roth IRA contribution of $6,000 on March 13th, 2020, because I didn't know about the whole MAGI limit thing when I made the contribution. After becoming smarter, I recharacterized $6,137.14 (original contribution plus earnings) to a traditional IRA on November 4th, 2020, Thank you for helping our country fund its government. You're the best.
Hugs and kisses from your favorite taxpayer,
James Dahle
Seriously. It doesn't say what has to be on the statement, just that there is one “explaining the recharacterization”. You don't even have to tell them why you did the recharacterization. If you had a loss in the account between contribution and recharacterization, no big deal. It's still as though you made a $6,000 contribution to a traditional IRA and THEN it lost money. If you were able to deduct the contribution (you probably can't) you would get a $6,000 deduction. The IRA provider may also send you a Form 5498 (which has the recharacterized amount on line 4), but you don't actually do anything with it when you file your taxes. It's just an informational return.
Reconverting the IRA
Now here is where it gets interesting. You've now fixed your mistake in the eyes of the IRS, going from an illegal Roth IRA contribution to a legal traditional IRA contribution (that is probably not deductible for you). But you really aren't done with what you meant to do, which is put money into a Roth IRA. You now need to do a Roth conversion. You do it just like you normally would as if you had contributed originally to the traditional IRA. You can do it the very next day if you like. You can probably even do it the same day, just make sure there is a paper trail showing the money was actually in the traditional IRA at some point. There used to be a waiting period after a recharacterization before you could do a Roth conversion on that money, but that waiting period only ever applied to the recharacterization of a Roth CONVERSION (which is no longer allowed starting in 2018) NOT the recharacterization of a Roth CONTRIBUTION. So there is no waiting period. Just reconvert convert it and go on your merry way.
I hope this information helps you fix your mistake. Just do your Roth IRA contributions through the Back Door going forward and you won't have this problem again.
More information here:
How to Fix Backdoor Roth IRA Screw-ups
What do you think? Have you had to do a recharacterization of a Roth contribution? What happened?
How do I fix a recharacterization error made by my IRA custodian?
I requested that they recharacterize, from traditional to Roth, a $6,000 contribution made last year, along with about $1,000 in associated earnings. Instead, they recharacterized that approximately $7,000 amount as if it had been the contribution and then further recharacterized an additional amount as associated earnings.
I tried asking their customer service but they seem clueless. Any suggestions? Thanks
Keep calling and ask them to elevate you to their manager until you find someone who knows what they’re doing.
I am using Freetaxusa for my taxes. I got married and our combined income puts me over the roth IRA limits. So I had to recharacterize the roth to traditional IRA in order to do the backdoor. When inputting my Form 1099-R for the recharacterization, it asks this questions “Did you rollover part or all of this distribution into a traditional IRA or another qualified retirement account within 60 days of receiving this distribution?” is the answer yes for this question? thanks!
Yes.
On Form 1040 line 4a, if I did the IRA re-characterization from roth to traditional, then did the backdoor roth, does the IRA distributions stated on line 4a end up being the IRA re-characterization amount ( let’s say $6200 since there were some gains) + the backdoor roth amount ($6300 since there were some gains after the re-characterization) = $12500 on line 4a?
Never really cared much about 4a. Now 4b on the other hand…that’s where the rubber hits the road. What’s on 4b?
Hi,
Thank you so much for the information above. I am still not clear how to fill out 8606 with 1099R that I received.
my situation is:
In 2020, I contributed $500/month to Roth IRA directly and found out my income was over the limit at the end of Dec 2020 (I get paid hourly , don’t know exact my income every year ). In March 2021, the contribution in Roth IRA was recharacterized to traditional IRA then converted to Roth IRA .
I received 1099R of traditional IRA stating (Gross Contribution: $7,808.13, Taxable amount: $7,808.13, Distribution Code:2) and 1099R of ROTH IRA stating (Gross amount: $7,439.16, Taxable amount: $0.00, Distribution Code: R).
Is it correct that on filling out form 8606, contribution amount $6,000 and taxable amount is $0. and write a statement about recharacterization of $7,808.13. and then report $1,436.16 as gain on 1040 in 2022 tax filing???
Or on the 8606, contribution amount $6,000 , taxable amount $1,436.16 and including statement saying about Recharacterization of $7,808.13?? and then report $1,436.16 as gain on 1040??
looking forward to getting a reply. Thank you.
On the 2020 8606 you’ll report a $6K IRA contribution. On the 2021 8606 you’ll report a Roth conversion of ? $7808.13 and owe tax on $1808 (whatever it was more than $6K when you did the conversion).
But I think the 1099R is wrong so I’d contact whoever prepared it to fix it. You didn’t contribute $7808, you contributed $6K.
I contributed $6000($500 every months)to Roth IRA in 2020 but the balance was $7808 in Roth IRA the time of recharacterization (to traditional IRA). Once $7808 was converted to Roth IRA, I guess the balance was changed to $7439??
What you wrote doesn’t make sense to me. Does it make sense to you? If so, please explain. Are you saying the conversion was $7808 but then the value of the Roth IRA fell afterward as the market declined? Because your tax return doesn’t care about that.
I already called Vangaurd about it too. But they said it is correct. I will call and double check with them.
My concern is what to do with gains. Obviously I gain some at the time(March 2021) when I did recharacterization and Roth conversion of 2020 countribution. Do I pay taxes on? How?
I wish I watched your video before my 2020 contribution so that I contributed $6000(instead $500 monthly) to trad. IRA (instead Roth IRA).
Hi,
I am a new backdoor IRA diyer. Your posts provided most detailed and practical information on this topic. Thank you! Hope to get some clarifications from your professional opinion.
I did two backdoor IRA transactions in calendar year 2021
1st: 7k nondeductible tIRA contribution 05/10, for 2020, converted to rIRA 05/17
2nd: 7k nondeductible tIRA contribution 06/17, for 2021, converted to rIRA 06/24
Please comment if I understand correctly:
1) tIRA contributions have annual limit, so my contributions are split into 2020/2021
2) tIRA to rIRA conversion has no time limits, I can convert two years tIRA contribution to rIRA 14k in 2021 lump-sum
3) I have a basis 7k on 8606/2020 line14, due to late nondeductible contribution tIRA for 2020 on 05/10/2021.
4) During Turbo Tax 2021 filing, there is a question in “deduction and credit” section: “how much of the 7k you contributed to tIRA for 2021 did your SWITCH, or RECHARACTERIZE ( this does no include CONVERSIONS or rollovers) to an rIRA? my answer was 7k.
I am puzzled with the UPPERCASE phrases: wasn’t my rIRA transaction a CONVERSION? or these phrases can be interchangeable here?
Also why there is only 7k? understand Turbo Tax 2021 may only care this 7k for 2021 tax year, but total rIRA event involved 14k, where is the other half treated?
Appreciate your help, thanks
1. Yes
2. yes
3. Yes
4. None. You didn’t do a recharacterization did you? Should be $0. Conversion does not equal recharacterization.
Thank you very much, I corrected #4.
So for tax year 2021, I did not realize my spouse and my combined income exceeded MAGI and we both contributed $6000 to our individual Roth IRAs. Once I realized we exceeded our MAGI, I re-characterized them into our Traditional IRAs. Once those funds settled, I then back door’d them into our individual Roth IRAs.
This all took place in calendar year 2022 since I didn’t know we had exceeded our MAGI until we did our taxes. As such, we did not receive 1099-Rs from Fidelity.
Does anyone how one reports all this on their taxes? Especially TurboTax?
You report the contributions as IRA contributions made for 2021. The conversion will be reported on your 2022 8606.
https://www.whitecoatinvestor.com/how-to-report-a-backdoor-roth-ira-on-turbotax/
Thanks for that. I was under the impression that I also needed to report the conversion this year.
When I report my contributions, do I report them as contributions to my tIRA or rIRA? I’m a bit lost given the re-characterizations since they also took place in 2022.
Traditional. It’s as though it was always contributed to the traditional.
Hello WCI,
Have appreciated all of your posts on this topic. I’m in the process of recharacterizing my excess Roth contributions from 2021 via back-door Roth. Feel comfortable with what to do with 2021 contributions and gains. Have 3 short questions on the details of the process.
1. When I recharacterize my Roth contributions in Vanguard, the default is an in-kind conversion. My plan is to request conversion into my Trad IRA Money Market account instead to avoid any change in value during back-door process. Are recharacterizations to Money Market allowed legally or does it need to be an in-kind conversion? Want to make sure I’m not incurring any new tax events by avoiding in-kind.
2. Because I only discovered my excess contributions recently, I’ve also been contributing $500 to a Roth monthly in 2022 as well. Should I recharacterize this excess $1500 at the same time as the above? Does it matter? I’ve cancelled the recurring contribution and directed the rest ($4500) of my 2022 contributions to the Trad IRA for Roth conversion. I’m assuming recharacterization of 2021 contributions will remain part of 2021 tax return and anything done on 2022 contributions will be handled with next years filing.
3. Regarding Pro-Rata: I have a Rollover IRA stemming from an old employment 401k. If I’m understanding correctly, I will need to liquidate this IRA by the end of 2022 due to the Pro-rata rule. Liquidation can either take the form of Back-Door Roth Conversion (and paying associated taxes) or transferring to my current 401k holder and delaying the tax event.
Still looking for help on #3.
Somehow missed this comment this Spring.
1. I don’t know, but apparently now you do. I’m curious what Vanguard said. But even if it is in-kind, you could just sell in Roth before the recharacterization so you’re recharacterizing cash.
2. Yes, you have to fix those too.
3. Yes, that’s correct. Either option works.
I made $4000 contribution to Roth IRA last year only to realize when doing my taxes this year that I am over by $1640. I recharacterized that same amount to traditional IRA along with the gains. I have also contributed an additional $2000 for 2021 $6K max to the traditional IRA. I would like to now do a backdoor Roth IRA. As I am filling out taxes for 2021, I am reporting the recharacterization as well as the traditional IRA contributions on form 8606. For the Roth IRA conversion that I plan to do for those 2021 funds, am I right to think that that will be reported on 2022 taxes which I will do next year?
That’s right.
To clarify an issue: My situation:
1) I continued full plus catch-up money ($7000) to my Roth IRA in January. Later in the year I realized I’d be over he MAGI for Roth.
2) I recharacterized the entire contribution plus earnings, thus $8266 went from Roth to traditional IRA.
3) QUESTION: to do the backdoor Roth, am I limited to converting only $7000 back to Roth from the established traditional IRA, or can I put the entire amount in, knowing I must pay taxes on it (either $7000, or 8266)?
No limit on conversions. Convert all $8,266. Pay tax on $1,266.
This is about my partners Roth IRA. I have always done back door!
She contributed $6k to her Roth directly between Jan – June 2021 and since we were not married back then I saw no problem with it.
We got married 11/1/2021 (impromptu Vegas wedding to get her on my health insurance)
As I am filing my taxes, I see the mess: our MAGI is above the Roth threshold.
Unfortunately to make matters worse she ended up contributing another $600 (six hundred) in Jan 2022 directly into her Roth for this year.
My plan is to call Vanguard 4/18/22 to recharacterize her $6k to a Traditional IRA (will have to open a new one for her as she’s never had an IRA) and subsequently call Vanguard again in Jan 2023 to recharacterize the $600 (six hundred)
Question 1. I am contemplating filing an extension to filing my taxes as well or would it be better to rather file an amendment to clean this mess.
Question 2. I am planning on recharacterizing the $6000 from Roth to traditional this year and subsequently converting it to Roth this year. Will this conversion be reported on my 2022 returns (to be filed in 2023)? Also, will this trigger the prorata rule?
Question 3. I am planning on recharacterizing the $600 from Roth to traditional in Jan 2023 add another $5400 to the traditional IRA in Jan 2023 and then converting to Roth. Will this be reported on my 2023 returns (to be filed in 2024)? (Note: I will leave the $600 in a money market fund to minimize gains to avoid further complications)
If you see a flaw with any of the above please educate me.
I really appreciate this post and the information on your website. I refer to it every year I contribute via back door Roth.
You don’t need to wait until Jan 2023 to do the second recharacterization. Do it now.
1. Always a good idea to extend.
2. Yes. Not based on what you’ve told me.
3. The conversion will if you wait until 2023. But I have no idea why you’d wait that long. Do it now.
If I recharacterize the entire amount of $6600 to traditional IRA and convert to Roth then won’t I be over contributing for 2022?
There is no limit on conversions, just the original contributions. She was below the limits for both 2021 and 2022, so no overcontribution.
thank you for this information. This is exactly what I was explaining to a client that we need to do and this is a perfect summary of the process. It is nice that it is out there as a back up to what I was advising.
Thank you!
Matt
My pleasure.
1. Is there a requirement to do the Roth IRA recharacterization at the same company that received the contribution?
I made a contribution, transferred it to another custodian and then made another contribution before I realized that my wife and I will be going over the income limits.
Do I need to send the funds back to the original custodian to have them do the recharacterization.
2. When I submit the forms for the recharacterization, there is a delay between the time i calculated the loss / profit and the time the custodian actually performs the recharacterization. My other funds invested will have gone up or down during that processing time. Will the IRS have a problem with this deviation?
Thanks
1. I don’t think so, but why add a complication? I’d do the recharacterization and get it all sorted out. Then do a rollover at a later date.
In your case, I’d call the second custodian and explain what happened. They should be able to sort it out. It’s not that complicated.
2. The amount at the time of recharacterization doesn’t matter. The amount of the original contribution matters. And the amount when you do a future Roth conversion matters. But nobody cares what the recharacterization amount is. So however they want to deal with it is fine.
Hi,
First off I am here because I made a mistake and am trying to fix my over contribution. Yes, yes, I didn’t pay attention and realized that I will be over the income limit for direct contribution into the Roth IRA. I will need your advice and go through the backdoor route.
I have a few detailed question that I wanted to get some clarification.
In fixing my direct contribution, I have to recharacterize my contribution to a traditional IRA and then reconvert back to Roth IRA. That much I understand. Do I have to fill out the form 8606 twice? Once for the recharacterization and another for the reconversion? I know there are instructions on how to fill out 8606 for a regular backdoor IRA on your YouTube channel, but is there one on how to do the 8606 for excess contribution?
If I call vanguard for the recharacterization, in that same phone call I can ask them to then reconvert to Roth IRA? Or is the first a phone call (recharacterization) and the second one (reconvert) done on their website?
No. With a recharacterization it is treated by the IRS as though it was simply contributed to the traditional IRA in the first place. Just the one 8606 per person per year.
I don’t know if they’ll let you do that or not. I’d just do the recharacterization on the call, then reconvert a few days later online to try to keep them from screwing it up.
Good afternoon,
Question. I’m a resident that will be over the income limit. This is what happened:
1/20/2022 – Contributed 6000 directly to Roth IRA
5/16/2022 – realized that our income will be over the limit and requested ETRADE remove the 6000 from the Roth IRA as Excess to a normal brokerage account (694 dollars will be taxed on a gain). So I removed the entire excess contribution from the Roth IRA.
12/20/2022 – Contributed 6000 to a traditional IRA. The capital settles on 12/23/2022.
Now when I call ETrade back on 12/23.. Do I submit a request for an IRA Recharacterization to the ROTH IRA (since I removed all excess Roth funds anyway) or do I submit a request for an Roth IRA Conversion to the Roth IRA? The 6000 in the traditional is contributed with post-tax income. ETrade can’t seem to give me a straight answer on this.
Additionally, Is there any special form for the IRS I have to fill out?
Thanks for your help.
Why would you recharacterize from traditional to Roth IRA? You can’t make a contribution to a Roth IRA directly. Why wouldn’t you just do a Roth conversion from traditional to Roth now like everyone else doing the Backdoor Roth IRA process?
I wasn’t sure of the rules since I removed the excess contribution directly to a normal brokerage account, rather than recharacterize it to a traditional which is what most people do, then convert, but I didn’t discover your wisdom before hand (didnt know if different rules applied).
So I will submit a request for a Roth IRA conversion from Traditional to the Roth IRA & not a rechacterization when the funds settle. Not knowing where income limits are going to be for the year, I think I will do Backdoor method at the start of the year.
I mistakenly contributed $6000 to a Roth IRA in October 2022 as I was unaware of the married income limit. I did a recharacterization at vanguard to a traditional IRA of what I thought was the entire contribution. After that processed, there is 32 cents left in the Roth. The was my first year contributing, so it should be at zero after accounting for gains (which it did somewhat, it moved about $6400). Do I just need to call them to get it figured out?
Nah. I’d ignore it. 32 cents rounds to zero on every tax form I’ve ever seen. You’re going to convert the money back int here anyway aren’t you?
Hello! First of all, thank you so much for this wonderful article. May I ask you a couple of questions?
2022 was my first full year working as a PA. In February 2022, I rolled over about 1.6k PARS retirement into my Roth IRA. In the same year, not knowing that my income would be above the income limit, I also contributed 6k into my Roth.
I am currently reviewing Fidelity’s term and conditions for recharacterization into IRA. It says:
You may not convert, recharacterize, and then reconvert to a Roth IRA within the same tax year. If you convert and subsequently recharacterize, you may not reconvert back to a Roth IRA before the later of:
– The taxable year following the taxable year in which the amount was first converted to a Roth IRA; OR
– The end of the 30-day period beginning on the day you recharacterized from the Roth IRA to the non-Roth IRA.
1) I don’t understand what Fidelity means by this, does that mean there is a waiting period for reconversion? Could you clarify this for me?
2) Would I have to recharacterize only the 6k contribution, or my 1.6k PARS rollover as well?
Thank you again.
1. You’re not recharacterizing a conversion, you’re recharacterizing a contribution. In fact, you no longer can recharacterize a conversion. Is the page you’re reading from up to date? Doesn’t sound like it. Maybe I can help with a link.
2) Only the $6K.
Thank you in advance for any insight. I have a question regarding a bit of a situation I put myself in. I have read and re-read the posts and comments, but still am unclear. Here is my situation:
I have been maximally contributing to Roth IRAs directly for my wife and I for the past 3 years (2020, 2021, 2022… I did a backdoor Roth for 2023 in early January 2023 as I expect to be over MAGI for direct Roth contribution). For 2020 and 2021, we made under the MAGI limit, so the contributions were direct. In 2022, I did not think we would exceed the MAGI limit, but we did (my wife picked up another job and made more money than expected). However, I didn’t realize that we exceeded the limit until late January 2023 (after I already did a backdoor Roth for 2023 contributions).
In January 2022, I contributed directly to both of our Roth IRAs. In late January 2023, upon realizing we exceeded the MAGI for 2022, I called Vanguard and had the 2022 Roth IRAs contributions recharacterized to Traditional IRAs. The next day, I converted the Traditional IRAs to Roth IRAs. Unfortunately, we had lost money (original contribution of $6k, recharacterized amount of $5800).
For 2022 taxes, I believe I just have to report the recharacterization and do not need to complete form 8606 as I did not make a Roth IRA conversion in 2022 (the 2022 contribution conversion took place in 2023 after the recharacterization)
I believe I have really complicated my situation when it comes to 2023 taxes, however. I now have 2 Roth conversions taking place in 2023 (one for the 2022 contributions that I recharacterized into a Traditional IRA and then converted to Roth (with a loss) and one for the 2023 contribution that I backdoored upfront).
– Is it correct that I do not need to file form 8606 and simply report the recharacterization for my 2022 tax return?
– How will I fill out form 8606 for 2023 tax return?
You don’t report recharacterizations. You just treat them as though they originally went into a traditional IRA. But yea, you’re going to need to file an 8606 for 2022 and 2023.
You report the 2022 contributions on the 2022 8606s. You report the 2023 contributions and the entire conversion (all the conversions done in 2023) on the 2023 8606s.
Thank you for all the information. I, like many others, made a Roth contribution for 2022 early in the year, finished residency and got my first attending job, got married, and found out I was over the income limit. Following the advice here, I recharacterized the contribution to a traditional IRA. I ended up with $6036.60 with the earnings added for the year. I now am planning to back door Roth this money back into my Roth IRA.
1. I know I will need to pay taxes on the 36.60 that is over the limit to contribute for 2022. Is this tax a one time thing or is it continual as long as that money remains in the Roth IRA? I ask because while initially filling out Turbo Tax with my Roth contribution, they said I would be taxed 6% per year as long as the original $6000 remained in the Roth (not sure where they got 6% from). Is this the case with tax I will have on the $36.60?
2. Does this overage get calculated into my basis going forward? My basis for 2022 will be $6000, as I understand it. I plan to contribute for 2023 the increased amount of $6500 and again do the conversion to my Roth as my 2023 contribution. When I fill out my Form 8606 for the 2023 tax year, will the extra $36.60 be on there?
Your assistance is greatly appreciated as it as all ready helped me immensely learning an important lesson.
I’m trying to stop you all from making mistakes, but it’s hard since there are so many to make!
https://www.whitecoatinvestor.com/first-backdoor-roth-ira/
1. One time thing. You didn’t contribute too much, you just owe taxes on the $36.60 it earned while it “sat in the traditional IRA” (remember a recharacterization is treated as though it was originally contributed to the traditional IRA. The 6% per year tax is for an excess contribution. You didn’t do that. You contributed $6K.
2. That $37 will be on the Roth conversion line, but not a basis line (neither 2 nor 14).
Thank you for your assistance. I reached the re-converting stage of this ordeal and got myself confused. When I got to the “this is a taxable event” I was offered a hundred and one options how to tax myself. I called TDAmeritrade and the person I spoke with was not very knowledgeable about this situation. My understanding is to say no tax due and then deal with the extra $37 on Form 8606 and my taxes in 2024. I proceed as I would with the extra money like I would as if I were making the correct conversion without the extra money.
Thus I would not withhold any taxes during the transfer, but would settle with the IRS on my 2023 taxes next year, correct?
Thanks!
I would not have any money withheld. Yes, a conversion is always a taxable event. Sometimes no tax is due. Sometimes (like in your case) a little tax is due. Sometimes a lot of tax is due. But you can always just pay it separately later, you don’t have to have it withheld as part of the transaction despite the scary message that pops up.
Hello, Thank you so much for your hard work in dealing with all of us!
I am in the category of people who only just found out about all this. I am recharacterizing my 2022 $6k Roth contribution to Traditional and reconverting to Roth. I spoke with Vanguard and they determined that my contributions lost about $300, but I plan a simply rounding that up to $6k to make the numbers nice and doubly ensure it’s enough. On this year’s 8606, will I say that I did NOT make any 2022 Roth IRA conversions and thus skip to Line 14? (is that because it will actually have happened in 2023?) How then does this play out for next year? Line 2 will be 6000?
Thanks again!
You’re not allowed to round like that on your taxes. Just use the numbers as they are and carry that loss forward for a while. On your 2023 8606 line 2 will be 6000. And yes, your 2022 8606 will not have any conversions on it.
I made contributions of $4500 to Roth IRA in 2022 and recharacterized the total amount to Traditional. The market value ended up being 3900 because of losses. I did a CONVERSION of that $3900 from Traditional back to Roth. Do I report $4500 in part 1 of 8606 or $3900? My 1099-R reports a distribution of $3900.
Depends on the line. Your contribution was $4500. The amount converted was $3900.
If I understand it correctly, line 1 should be $4500, and Line 8 should be $3900 (“net” amount converted)? I have zero in other traditional IRAs. Thank you!
Yes. Note you’ll be carrying that loss forward on form 8606 indefinitely.
I see so Line 14 will have 4500-3900 = $600 which I will report in next years 8606 line 2? And from my understanding in previous comments, it seems like the only way to fix that is to get gains of at least $600 in a traditional IRA then do a conversion?
Hey Johnny,
I am in a similar situation. My contribution/recharacterization amounts are $6000/$5943.5, but my 1099-R (From Fidelity) has 5943.5 for both Box 1 and Box 2a. Do you have $3900 for you on both these boxes as well?. I am using turbo tax for filing and am wondering if I manually need to edit to show my contribution amount at $6000?
Thanks
1099-Rs are issued for conversions and recharacterizations. So while the 1099-R may say $5943.50, that doesn’t change what you put on line 1 of your 8606. That line doesn’t ask “what’s on your 1099-R?”, it asks how much you contributed. The answer to that is $6,000.
I see so Line 14 will have 4500-3900 = $600 which I will report in next years 8606 line 2? And from my understanding in previous comments, it seems like the only way to fix that is to get gains of at least $600 in a traditional IRA then do a conversion?
Pretty much. Kind of a pain, but hardly the end of the world to carry that forward. You may do another Roth conversion in the future where you’ll be glad you have it.
Last year I got married. I had already been using the back door Roth IRA because my MAGI was an attending salary. My wife usually put directly into her roth IRA account, which she did last year when we got married but because we filed jointly, she was not eligible to go directly into the roth and we had to fix this. She recharacterized the 6000 from the Roth into a traditional with fidelity. Problem is that it had gained 400 dollars in the interim, so 6400 was the actual amount recharacterized. Now this year we are getting statement on a 1099R from fidelity for that 400 dollars. In 2021, we put down that we recharacteized and convert 6400 on form 8606. We are being told that this will be an issue every year until we pull out that money. In addition, we already paid taxes on that 400 last year. We are told we could also contribute less this year (2023) and that would resolve the issue. None of these seem right and we cannot get a straight answer from fidelity.
You owe tax on that $400, but you only owe it once. If you did the conversion in 2022, then it is reported on your 2022 tax return. But if you did it in 2021, I don’t understand why it’s still an issue. That seems wrong. Get into the details here and I bet you’ll figure out where the mistake is and then hopefully can talk Fidelity into correcting it if it’s theirs.
In December I made a mistake and fat fingered a contribution ($6000) into my Roth IRA directly instead of my IRA at Fidelity. I called and setup a recharacterization which went through on the 29th of December. Because my Roth is all invested in the market I lost about $56.5 as part of the recharacterization after which I converted it to my ROTH the very same day.
Based on this article I expect the 1099-R for my IRA to have $6000 in Box 1 as it is meant to effectively cancel the ROTH contribution and set it up as though I directly contributed to the IRA. Instead the amount is $5943.5 which is the recharacterized amount. Did Fidelity mess up the form or is my understanding incorrect?
Thank you for your help!
I read through some of the previous comments and I have a better understanding now. Fidelity did the right thing and this is the distribution. My contribution is still $6000 and I need to report it with my deductions part.
One heads up on an update from turbo tax regarding “Tell us how much you contributed” section. In the Do Not Enter note they have added another line item to not report the contribution if it was a recharacterization. This was not the case earlier and I think reading this part and redoing my IRA section worked for me.
Thanks for all help responding to comments. Reading through them helped a lot.
1099-Rs are issued for conversions and recharacterizations. So while the 1099-R may say $5943.50, that doesn’t change what you put on line 1 of your 8606. That line doesn’t ask “what’s on your 1099-R?”, it asks how much you contributed. The answer to that is $6,000.
Hi — I had to do a recharacterization from my Roth to Traditional IRA. I was wondering if you know whether I can mail in my recharacterization letter separately and e-file my taxes or if I have to print the whole tax return and mail it together? Thanks!
If you’re doing it after filing your taxes, I think you better do a 1040X, i.e. an amended return.