5498 IRA Recharacterization Contribution Question

[fred2017]

Dear Bogleheads:

I have another tax return question:

In 2021 tax return, due to excess income, my wife's Roth IRA contribution was recharacterized and converted to traditional IRA (in April 2022 before the due filing date), and that information is reported in the 2021 tax return.

I assume because the recharacterization was done in 2022, so we received 2022 Form 5498.

Do I need to report the information from 2022 Form 5498 into 2022 tax return ?
I assume not - as it was already covered under 2021 tax return.

Thanks.
Hill

[fred2017]

Update:

I did a search - actually Form 5498 is not required for tax return.

But instead, we received 2022 1099-R for this recharacterized contribution, due to stock loss, the amount distributed to Traditional IRA was less than $6000 (Roth IRA contribution).

I just entered this 1099-R into TurboTax, it suggested "Looks like you may need to amend your 2021 return".

Since there was no interest from Roth IRA from its contribution ($6000) to transfer into traditional IRA, rather this was a loss, I assume I do not need to amend my 2021 tax return.

Is my understanding correct ?

Thanks again!

[secondcor521]

I'm not sure of the answer to your question, but it'd probably be really helpful to everyone else if you gave (at least approximately) the amounts on the various boxes of the 1099-R, especially boxes 1, 2a, 2b and the code in box 7. Also please confirm that the 1099-R has tax year 2022 in the upper right.

[Alan S.]

Update:

I did a search - actually Form 5498 is not required for tax return.

But instead, we received 2022 1099-R for this recharacterized contribution, due to stock loss, the amount distributed to Traditional IRA was less than $6000 (Roth IRA contribution).

I just entered this 1099-R into TurboTax, it suggested "Looks like you may need to amend your 2021 return".

Since there was no interest from Roth IRA from its contribution ($6000) to transfer into traditional IRA, rather this was a loss, I assume I do not need to amend my 2021 tax return.

Is my understanding correct ?

Thanks again!

Her 1099R for the recharacterization should be coded R in Box 7, which indicates that a 2021 contribution was recharacterized.

Your 2021 return should have included an explanation of the recharacterization, and Form 8606 should have been filed showing a presumably non deductible TIRA contribution of 6000. Makes no difference that the amount transferred was different than 6000 since the original contribution was 6000. If you did not include an explanatory statement, it's too late now, but the 2021 8606 must be filed to get credit for the ND contribution that would reduce taxes on the 2022 conversion. That's best done with a 1040X per the 8606 instructions.

Since the conversion was done in 2022 it must be reported on a 2022 8606 for wife. If she had no other non Roth IRA balances in 2022, the conversion (less than 6000) will be non taxable, and she will have a small amount of TIRA basis left over for future years.

Keep the 5498 for the recharacterized contribution, as it negates the original 5498 for 2021 showing a regular Roth IRA contribution. Instead, wife's Roth IRA basis for this is 2022 conversion basis (less than 6000), and no regular contribution basis.

[fred2017]

Her 1099R for the recharacterization should be coded R in Box 7, which indicates that a 2021 contribution was recharacterized.

Your 2021 return should have included an explanation of the recharacterization, and Form 8606 should have been filed showing a presumably non deductible TIRA contribution of 6000. Makes no difference that the amount transferred was different than 6000 since the original contribution was 6000. If you did not include an explanatory statement, it's too late now, but the 2021 8606 must be filed to get credit for the ND contribution that would reduce taxes on the 2022 conversion. That's best done with a 1040X per the 8606 instructions.

Since the conversion was done in 2022 it must be reported on a 2022 8606 for wife. If she had no other non Roth IRA balances in 2022, the conversion (less than 6000) will be non taxable, and she will have a small amount of TIRA basis left over for future years.

Keep the 5498 for the recharacterized contribution, as it negates the original 5498 for 2021 showing a regular Roth IRA contribution. Instead, wife's Roth IRA basis for this is 2022 conversion basis (less than 6000), and no regular contribution basis.

Yes, the code is R in Box 7 of 1099R (box 1 is $5450.70, which is same as Form 5498 line 4 recharacterized contributions)
Yes, there is a recharacterization explanation for line 4a,1040 at end of my 2021 tax return. 1040 line 4a had "STMT" added. But I could not find Form 8606 in my 2021 tax return. Instead, it seems that $6000 was added to Schedule 1 Line 20 IRA deduction, which transferred to 1040 Line 10 Adjustments to income from Schedule 1 Line 26.

It is a little complicated, since it is a loss ($5450.70 vs $6000), I assume we can keep as is (give up the chance to get credit), and do not need to amend 2021 tax return?

Thanks again !

[Duckie]

Yes, there is a recharacterization explanation for line 4a,1040 at end of my 2021 tax return. 1040 line 4a had "STMT" added. But I could not find Form 8606 in my 2021 tax return. Instead, it seems that $6000 was added to Schedule 1 Line 20 IRA deduction, which transferred to 1040 Line 10 Adjustments to income from Schedule 1 Line 26.

If her income was too high to make a direct Roth IRA contribution it was also too high to make a deductible TIRA contribution. So that needs to be fixed.

It is a little complicated, since it is a loss ($5450.70 vs $6000), I assume we can keep as is (give up the chance to get credit), and do not need to amend 2021 tax return?

An amended 2021 tax return needs to be filed adding the missing Form 8606 to report the $6000 non-deductible contribution and removing the $6000 Schedule 1 deduction.

As for the difference, $5450.70 vs $6000, it means she has a basis to track when making future conversions.

[fred2017]

An amended 2021 tax return needs to be filed adding the missing Form 8606 to report the $6000 non-deductible contribution and removing the $6000 Schedule 1 deduction.

As for the difference, $5450.70 vs $6000, it means she has a basis to track when making future conversions.

We used TurboTax for 2021 tax return and followed its instruction, and really unsure why TurboTax reported on Schedule 1 but not using Form 8606.

I just had a check for 2021 tax return, actually it was still within the income limit to contribute Roth IRA. After further examining, the fact was that Roth IRA $6000 was recharacterized into Traditional IRA with the purpose to reduce tax, due to excess of AMT tax by exercising and holding ISOs, even though my wife was still qualified to contribute Roth IRA in 2021 (probably a very bad choice).

With above situation, will there still be need to amend the 2021 tax return?

Thanks !

[Duckie]

We used TurboTax for 2021 tax return and followed its instruction, and really unsure why TurboTax reported on Schedule 1 but not using Form 8606.

Since, based on the following paragraph, she intentionally took the deduction to reduce taxes, Form 8606 would not be required. And yeah, that was probably a bad idea. It just complicates things.

I just had a check for 2021 tax return, actually it was still within the income limit to contribute Roth IRA. After further examining, the fact was that Roth IRA $6000 was recharacterized into Traditional IRA with the purpose to reduce tax, due to excess of AMT tax by exercising and holding ISOs, even though my wife was still qualified to contribute Roth IRA in 2021 (probably a very bad choice).

With above situation, will there still be need to amend the 2021 tax return?

If she was covered by a workplace retirement plan and you jointly made less than $105,000 in 2021 then she could deduct the entire $6000 contribution. If she was not covered by a plan but you were, the joint income limit goes up to $198,000. If you are under the limits I don't know why TurboTax thinks you need to amend the 2021 return. Does it hint why?

The fact that after her recharacterization her TIRA showed a loss and now has a basis (which can be used in the future) does not change the amend issue.

[celia]

In 2021 tax return, due to excess income, my wife's Roth IRA contribution was recharacterized and converted to traditional IRA (in April 2022 before the due filing date), and that information is reported in the 2021 tax return.

Do you mean your Taxable income was too high or that she contributed more than $6,000?

If the latter, an excess contribution is NOT corrected by a recharacterization. It is corrected by a Removal of the Excess Contribution.

A recharacterization means you want to change where the original contribution was made. For example, if she had contributed $6,300 to a Roth IRA when the limit was $6,000 (for those under age 50), a recharacterization of the entire contribution (regardless of it's later value) makes it the same as if she had contributed $6,300 to the tIRA. The excess contribution is still there!

But maybe the situation was not an Excess Contribution to begin with. If all the Roth contributions were done at the same custodian, they would have prevented the Excess Contribution from being made since all the custodians tend to track the cumulative contributions for the year and prevent you from adding more than the limit. I would guess that some of the contributions might have been for the previous year (2020), meaning there never was an Excess Contribution. But if she contributed to Roth IRAs at more than one custodian, it could have happened.

It is more likely that your income was too high to make the entire contribution, but both of you could have contributed less than $6,000 (ie, were in the phase out area for eligibility purposes). In that case, a recharacterization moved the excess contribution to the tIRA, as discussed above in this post and hasn't been removed yet.