IRA/ROTH Tax Q: Reporting recharacterization & withdrawal of contributions

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gurusw
Posts: 90
Joined: Sun May 11, 2008 9:37 am

IRA/ROTH Tax Q: Reporting recharacterization & withdrawal of contributions

Post by gurusw » Fri Mar 09, 2018 10:54 pm

Hi,

Status: MFJ
In the year 2017, I contributed $5500 to ROTH & contributed $5500 to wife's TIRA.

In January 2018, it became clear that we should not have done so because my income is above the threshold to make ROTH contributions and deductible TIRA contributions on wife's name.

In Feb 2018, I recharacterized my ROTH contributions to Non-deductible IRA. Fidelity took out $5500 of contributions plus the earnings on that amount from ROTH, and deposited all the money in my non-deductible IRA.
In the same month, wife took her TIRA contributions out. Vanguard took $5500 of contributions plus the earnings on that amount from TIRA, deducted 10% of taxes from the earnings, and deposited the rest of the amount in her taxable account.

Can someone please guide me on how do these need to be reported in Turbo Tax for tax purproses?
Also what needs to be reported in 2017 & what in 2018?

Thanks.

gurusw
Posts: 90
Joined: Sun May 11, 2008 9:37 am

Re: IRA/ROTH Tax Q: Reporting recharacterization & withdrawal of contributions

Post by gurusw » Sat Mar 10, 2018 10:34 pm

Hi,

Can someone please help shed light on my situation above?
So far I have found this myself.
gurusw wrote:
Fri Mar 09, 2018 10:54 pm
In Feb 2018, I recharacterized my ROTH contributions to Non-deductible IRA. Fidelity took out $5500 of contributions plus the earnings on that amount from ROTH, and deposited all the money in my non-deductible IRA.
I entered my ROTH contributions in TurboTax, and it asked me whether I recharacterized them to TIRA. Upon answering yes, it has generated form 8606 for non-deductible IRA contributions. From what I read elsewhere, this sounds correct to me.
gurusw wrote:
Fri Mar 09, 2018 10:54 pm
In the same month, wife took her TIRA contributions out. Vanguard took $5500 of contributions plus the earnings on that amount from TIRA, deducted 10% of taxes from the earnings, and deposited the rest of the amount in her taxable account.
However for TIRA contributions, I am not getting any further questions asking me whether I withdrew this amount or not. So I am not sure whether to enter the TIRA contributions at all. Also Vanguard had said they will send 1099-R for year 2018 for this transaction. So I am not sure what to do with this scenario in tax year 2017.

ivk5
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Re: IRA/ROTH Tax Q: Reporting recharacterization & withdrawal of contributions

Post by ivk5 » Sun Mar 11, 2018 3:16 am

I am not sure why you chose to withdraw wife's non-deductible tIRA contribution, but in any case that transaction is reported on your 2018 return. For 2017 make sure you have Form 8606 properly completed for both of you reflecting your non-deductible tIRA contributions and basis.

gurusw
Posts: 90
Joined: Sun May 11, 2008 9:37 am

Re: IRA/ROTH Tax Q: Reporting recharacterization & withdrawal of contributions

Post by gurusw » Sun Mar 11, 2018 12:24 pm

So for 2017 returns, for my wife's part, am I supposed to report her non-deductible contribution to tIRA as well?
Or am I supposed to skip that since I withdrew that amount before the tax filing deadline.

ivk5
Posts: 479
Joined: Thu Sep 22, 2016 9:05 am

Re: IRA/ROTH Tax Q: Reporting recharacterization & withdrawal of contributions

Post by ivk5 » Sun Mar 11, 2018 12:38 pm

Yes, you need to report your wife's 2017 non-deductible tIRA contribution.

Unlike a recharacterization, the withdrawal and penalty are 2018 events and do not change what happened in 2017. You'll report those on 2018 return.

Katietsu
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Joined: Sun Sep 22, 2013 1:48 am

Re: IRA/ROTH Tax Q: Reporting recharacterization & withdrawal of contributions

Post by Katietsu » Sun Mar 11, 2018 2:26 pm

I am surprised you have not got more response. But you are right. Removing your wife's contribution before the filing deadline is different than if you removed the funds in November. The previous respons does not seem to address this. I do remember having to include an explanation when I did this a few years ago. The only part subject to taxes and penalty will be the earnings.

Alan S.
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Location: Prescott, AZ

Re: IRA/ROTH Tax Q: Reporting recharacterization & withdrawal of contributions

Post by Alan S. » Sun Mar 11, 2018 2:42 pm

gurusw wrote:
Sun Mar 11, 2018 12:24 pm
So for 2017 returns, for my wife's part, am I supposed to report her non-deductible contribution to tIRA as well?
Or am I supposed to skip that since I withdrew that amount before the tax filing deadline.
For your 2017 return, you need to report:
1) For you, File Form 8606 to report a 5500 non deductible contribution. Your return should include an explanatory statement indicating the date amount of your Roth contribution, that you recharacterized the entire contribution as a TIRA contribution, and the amount that transferred to the TIRA. By doing this, you will not have to report any of this activity on your 2018 return. The 1099R you will get in Jan 2019 will be coded to indicate that the recharacterization was for a 2017 contribution.

2) For your wife, since she had her TIRA contribution made in 2017 returned with earnings, the earnings received will be taxable on your 2017 return and subject to penalty unless she is over 59.5. You will have to get the earnings from her IRA statement and will obviously be the amount she received in excess of the 5500 contribution. Since her contribution was returned, it should not be reported on Form 8606, but an explanatory statement similar to yours should be included with your 2017 return. As in your case, since this activity applies to 2017 it is not reported on your 2018 return. Her 1099R will be coded to show that the earnings were taxable in 2017.

Yes, some of the info provided to you earlier was incorrect.

Turbotax should ask if your wife had her contribution returned, and also provide a screen to include the explanatory statements for each of you. Perhaps someone that has used the program can provide guidance on what you need to do to access those questions.

ivk5
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Re: IRA/ROTH Tax Q: Reporting recharacterization & withdrawal of contributions

Post by ivk5 » Sun Mar 11, 2018 3:02 pm

OP: did wife simply do a conventional withdrawal from the account? Or did she have the custodian return it as an excess contribution? Perhaps I misinterpreted.

gurusw
Posts: 90
Joined: Sun May 11, 2008 9:37 am

Re: IRA/ROTH Tax Q: Reporting recharacterization & withdrawal of contributions

Post by gurusw » Sun Mar 11, 2018 10:20 pm

First of all, Alan, thanks for the detailed reply.

For me, TurboTax has taken care of the situation correctly. I just have a small query on this. I had made monthly contributions to ROTH in 2017 Jan to Nov ($500 each), and TurboTax is asking me date of ROTH contributions. What shouldm I answer?

I think I need to call TurboTax since I am not able to make it ask me whether the tIRA contribution was returned!

ivk5,
For my wife, I can recheck with Vanguard whether the withdrawal was conventional or was it return as excess contribution. However since only the earnings on $5500 are taxed, I think I correctly told them to do excess withdrawal of entire $5500 contributions in 2017.

Alan S.
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Location: Prescott, AZ

Re: IRA/ROTH Tax Q: Reporting recharacterization & withdrawal of contributions

Post by Alan S. » Sun Mar 11, 2018 10:34 pm

gurusw wrote:
Sun Mar 11, 2018 10:20 pm
First of all, Alan, thanks for the detailed reply.

For me, TurboTax has taken care of the situation correctly. I just have a small query on this. I had made monthly contributions to ROTH in 2017 Jan to Nov ($500 each), and TurboTax is asking me date of ROTH contributions. What shouldm I answer?

They really need the year, not the exact date. Just pick a date in the middle such as May something. They want to make sure that you did not make your 2017 contribution in 2018.

I think I need to call TurboTax since I am not able to make it ask me whether the tIRA contribution was returned!

You entered it as your wife's, not yours, correct?

ivk5,
For my wife, I can recheck with Vanguard whether the withdrawal was conventional or was it return as excess contribution. However since only the earnings on $5500 are taxed, I think I correctly told them to do excess withdrawal of entire $5500 contributions in 2017.

If you asked for the return of 5500 and received somewhat more (earnings) it had to be a return of the specific contribution and the 1099R will be coded appropriately.

gurusw
Posts: 90
Joined: Sun May 11, 2008 9:37 am

Re: IRA/ROTH Tax Q: Reporting recharacterization & withdrawal of contributions

Post by gurusw » Sun Mar 11, 2018 11:02 pm

Alan S. wrote:
Sun Mar 11, 2018 10:34 pm
You entered it as your wife's, not yours, correct?
Yes, entered as my wife's.
Also I am now able to get "1099-R entry screen" in Turbo Tax that allows me to enter all the amounts myself plus the explanation.

Btw I see 10% taxes were withheld plus 10% penalty on the taxes. Does that sound correct?
The 1099-R entry screen does not have any way to enter the penalty. Should I combine tax+penalty in Federal Taxes box#4 on 1099-R?

Katietsu
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Re: IRA/ROTH Tax Q: Reporting recharacterization & withdrawal of contributions

Post by Katietsu » Mon Mar 12, 2018 12:23 am

Just to be clear, there are two options.

1. You can ask for a return of the 2017 contribution plus earnings. You do this before the due date. If this is done correctly, there are no taxes on the withdrawal of the contribution. Taxes and a penalty if under 59.5 yrs are only due on the earnings. This is what Alan S and I assumed you did.

2) You just tell the institution that you want to withdraw $5500 . Or you personally decide that there was $100 in earnings, so you withdraw $5600. Now, you do have two separate transactions that are somewhat unrelated TaxWise. You have a Non-deductible contribution on your 2017 taxes and an early withdrawal on your 2018 taxes. You are going to have witholding. If there is deductible money in the IRA, then you have the pro rata rule too. If this is the case, and you did this in the last 60 days, you probably want to get that withdrawal back into an IRA and treat it as a rollover. Then you can separately take the steps described in option 1.

—————-
Now, if the withholding was done in 2018, then that will have to wait until next year's taxes to get credit for it. So that will not be reported now at all.

gurusw
Posts: 90
Joined: Sun May 11, 2008 9:37 am

Re: IRA/ROTH Tax Q: Reporting recharacterization & withdrawal of contributions

Post by gurusw » Mon Mar 12, 2018 8:30 pm

Katietsu wrote:
Mon Mar 12, 2018 12:23 am
Just to be clear, there are two options.

1. You can ask for a return of the 2017 contribution plus earnings. You do this before the due date. If this is done correctly, there are no taxes on the withdrawal of the contribution. Taxes and a penalty if under 59.5 yrs are only due on the earnings. This is what Alan S and I assumed you did.

2) You just tell the institution that you want to withdraw $5500 . Or you personally decide that there was $100 in earnings, so you withdraw $5600. Now, you do have two separate transactions that are somewhat unrelated TaxWise. You have a Non-deductible contribution on your 2017 taxes and an early withdrawal on your 2018 taxes. You are going to have witholding. If there is deductible money in the IRA, then you have the pro rata rule too. If this is the case, and you did this in the last 60 days, you probably want to get that withdrawal back into an IRA and treat it as a rollover. Then you can separately take the steps described in option 1.

—————-
Now, if the withholding was done in 2018, then that will have to wait until next year's taxes to get credit for it. So that will not be reported now at all.
Katietsu,
I have done #1. My wife's earnings were $862.48 (on 2017 contrib of $5500) as I can see from the transaction history. In Feb 2018, VG deposited $5500 + $767.60 in her taxable account (which means 10% taxes plus penalty on the earnings came out to be $94.88).

I am assuming my wife is liable to report earnings of $862.48 & tax deduction of $94.88 on our 2017 joint returns using fake 1099-R that Turbo Tax allows me to create. Is that correct?
Hopefully 1099-R from Vanguard for tax year 2018 will be coded to indicate that the earnings/taxes belonged to tax year 2017.
Let me know your inputs.

Katietsu
Posts: 1660
Joined: Sun Sep 22, 2013 1:48 am

Re: IRA/ROTH Tax Q: Reporting recharacterization & withdrawal of contributions

Post by Katietsu » Mon Mar 12, 2018 10:40 pm

So are you saying that $6362.48 was withdrawn from your wife’s IRA account? This would represent $5500 + $862.48? But then $6267.60 was deposited back into the taxable account? Thus your assumption is that $94.88 was withheld for taxes? You could be right though that seems an odd amount of witholding. You might want to verify those numbers with Vanguard if possible.

The witholding happened in February of 2018. Therefore, the witholding will be credited to your wife’s 2018 taxes. I do not think that you can enter the the witholding now on your fake 1099-R. Everything else can be dealt with now but not that piece. So you will report and pay the taxes on the earnings now, but not get credit for the withholding until next year.

A quick search shows some very good answers in TurboTax that help with using the software for your situation.

gurusw
Posts: 90
Joined: Sun May 11, 2008 9:37 am

Re: IRA/ROTH Tax Q: Reporting recharacterization & withdrawal of contributions

Post by gurusw » Tue Mar 13, 2018 12:52 am

Katietsu wrote:
Mon Mar 12, 2018 10:40 pm
So are you saying that $6362.48 was withdrawn from your wife’s IRA account? This would represent $5500 + $862.48? But then $6267.60 was deposited back into the taxable account? Thus your assumption is that $94.88 was withheld for taxes? You could be right though that seems an odd amount of witholding. You might want to verify those numbers with Vanguard if possible.
Yes to all questions :) I think $94.88 is tax + penalty. That's why it's odd (11% of 862.48). I can confirm with Vanguard though.
Katietsu wrote:
Mon Mar 12, 2018 10:40 pm
The witholding happened in February of 2018. Therefore, the witholding will be credited to your wife’s 2018 taxes. I do not think that you can enter the the witholding now on your fake 1099-R. Everything else can be dealt with now but not that piece. So you will report and pay the taxes on the earnings now, but not get credit for the withholding until next year.

A quick search shows some very good answers in TurboTax that help with using the software for your situation.
Understood. I found this link about TurboTax: https://ttlc.intuit.com/questions/38632 ... e-due-date
I am mostly following that link, but it was my idea to report the withheld taxes in addition to other things :) I can skip that, and only mention earnings.

evident
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Joined: Thu Feb 21, 2013 11:14 am

Re: IRA/ROTH Tax Q: Reporting recharacterization & withdrawal of contributions

Post by evident » Tue Mar 13, 2018 1:47 am

I am in the same situation as you, except that after i re-characterized back to a Traditional IRA, I did a backdoor back to the Roth.
Basically Roth -> realized i made too much then recharacterized into Trad IRA -> Backdoor to Roth.

I'm really not sure how to fill out my taxes in turbo tax either, waiting for the transaction to complete before i take a look at it.

gurusw
Posts: 90
Joined: Sun May 11, 2008 9:37 am

Re: IRA/ROTH Tax Q: Reporting recharacterization & withdrawal of contributions

Post by gurusw » Sat Mar 17, 2018 11:26 pm

I called Vanguard & they gave explanation about $94.88 deduction.
Fed withholding is $86.25 and State withholding is $8.63. There is no penalty.

TurboTax is asking me Vanguard's Fed ID & State ID, and the rep wasn't able to provide me that... meaning he did not know. Do you know if I can leave these blank, or should I call them again & try to get these IDs.

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