Roth IRA conversion of previously recharacterized Roth-to-Traditional funds

Submitted by Thomas Stewart on Fri, 2021-04-16 19:20

I’m wondering if anyone can help answer a IRA tax question that has been stumping me for a while. Specifically, I’m wondering how much tax I can expect to owe when converting my Traditional IRA account fully to my Roth IRA account (both in TD Ameritrade).

To further complicate the matter, the only reason I have a Traditional IRA to begin with is because I accidentally overfunded my Roth IRA in 2019 and 2020, which I corrected in 2020 by recharacterizing the overfunded amount + earnings from the Roth to a new Traditional IRA. Now that those tax years are behind us, I’m looking to move the funds back over to the Roth, where I can expect tax-free growth on investments over the long-term.

My question is specifically whether or not I’ll owe taxes on this Roth Conversion. I found [this form](https://www.schwab.com/ira/understand-iras/ira-calculators/roth-ira-conversion) from schwab.com which helps predict the long term impact of a Roth Conversion. The “Amount of nondeductible contributions” field directly impacts the amount of taxes owed for the conversion, and I’m not sure whether my situation is that _all_ of my Traditional IRA contributions are nondeductible or _none_ of them are. Could you help me answer this question to identify whether I will owe taxes on the Roth Conversion?

I have my 2020 1099R from TD Ameritrade if that helps. It specifies “$0.00” for item 2a “Taxable amount”, which may indicate that my contributions are “nondeductible” and therefore I wouldn’t owe any taxes when converting them, but I’m not sure.

Any help is appreciated! Thanks in advance.



Submitted by Alan - IRA critic on Fri, 2021-04-16 22:28

When you convert the TIRA, any amount by which the balance exceeds your basis will be taxable. Typically, when a Roth contribution is recharacterized to TIRA, the TIRA contribution cannot be deducted due to income. As such a Form 8606 should be filed for the year of the recharacterized Roth contribution showing the non deductible TIRA contribution.  For example, if you recharacterized a 6000 Roth contribution that had gained 500 to TIRA and converted back right away, the taxable amount would be 500. But you probably now have more gains, so if the TIRA is now worth 8000, your conversion will have a taxable amount of 2000. The key is to have filed the 8606 reporting the ND contribution. If you did not do it, the IRS has been accepting retroactive 8606 forms which can be mailed in without a 1040X.
TDA does not know or care what your TIRA basis is. This is between you (your tax return’s Form 8606) and the IRS. TDA is required to show the same amount in Box 2a of the conversion 1099R as Box 1. You then report the conversion on Form 8606 for the conversion year, and the from calculates your actual taxable amount. Consider Box 2a of the 1099R as only a provisional taxable amount which you override if you have recorded your TIRA basis. 
If you have a 1099R with 0 in 2a, you are probably looking at the recharacterization 1099R. If so, in Box 7 there would be a recharacterization code (see the back of the 1099R).

Submitted by Thomas Stewart on Tue, 2021-04-20 00:30

Thank you so much!
You are right that the TIRA contribution I made (which was from a Roth recharacterization) cannot be / was not deducted due to income.
You are right that the 1099R are for the recharacterizations made in 2020. They are separated into 2 sheets, each with a different code in Box 7: “N” (for the recharacterization which recharacterized my 2020 Roth contribution) and “R” (for the recharacterization which recharacterized my 2019 Roth contribution). Both have $0 in 2a, but it sounds like that’s because I needed to instruct TDA what to put in there.
After checking my 2020 tax return (filed with Turbotax), I did include a Form 8606, but I’m not sure it’s filled out correctly. Boxes 1 and 2 both have $6000, which makes boxes 3 and 14 both $12,000. Not sure how Turbotax came up with these values, but it probably has to do with me trying to indicate that my TIRA contribution was from a Roth recharacterization.
Back to the original question, how does my filing of the 8606 described above affect the amount of taxes I would owe on a Roth Conversion? Do you think I need to correct this 8606 based on my situation?

Submitted by Alan - IRA critic on Tue, 2021-04-20 01:32

Showing 0 in Box 2a for the recharacterization 1099Rs is correct because a recharacterization is a non taxable transfer, so those figures will always be 0. You did not have to provide any instructions to TDA other than which contributions were to be recharacterized.
Your 2020 8606 is also correct, since you now have made 2 years of 12,000 non deductible contributions to your TIRA via recharacterizing what were Roth contributions.
Therefore, you are ready to convert. Since your contributions probably have gains both for the time they spent in the Roth IRA and then in the TIRA after recharacterization, you would have more than 12,000 as a TIRA balance. Say it’s 15000. You then convert the entire 15000 and 3000 will be taxable, but the 12,000 from non deductible contributions will be non taxable. Your conversion will also be reported on a current 8606 Parts I and II and the 8606 calculates the taxable amount. So it should be quite simple from here.

Submitted by Thomas Stewart on Tue, 2021-04-20 21:35

Ah, thank you so much for these responses! I’m finally feeling confident in converting the TIRA back to the Roth, bringing an end to this 2 year saga of IRA issues 🙂

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