Excess Roth contributions 2020 recharacterized in 2021 how to report

Submitted by B Smith on Wed, 2021-04-28 21:10

MFJ clients. Taxpayer made $6,000 and Spouse made $4,000 in nondeductible TIRA contributions in 2020 (latter part of year for these). Earlier in 2020, Spouse had made $2,000 in Roth IRA contributions. MAGI is in excess of income limits to contribute to a Roth, so clients had the Spouse’s $2,000 in Roth contributions recharacterized to her TIRA on March 19, 2021. The contributions plus earnings amounted to $2,336. Do I prepare 8606 as if the $2,000 were contributed in 2020 and if so, where does that leave the $336? I have it reported as income on line 4b (assuming that’s correct), but I’m wondering does it matter that an additional $336 went into her account.

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Permalink Submitted by Alan - IRA critic on Wed, 2021-04-28 22:51

This doesn’t indicate that the TIRA contributions could not be deducted, but in most cases where spouses do not qualify for Roth contributions due to income, they also cannot deduct TIRA contributions. If that holds true here each spouse would file an 8606 to report 6000 in 2020 ND contributions. The gain of 336 that transferred to the TIRA does not show on the 8606 and is treated as pre tax TIRA contributions. A recharacterization is always a non taxable transfer, so the 336 is not currently taxable and should not be on 4b. By IRS Regs, the net gain or loss on a regular contribution must also transport along with the excess amount itself. It is then treated as if a 6000 TIRA contribution had been made originally that gained 336 after the contribution. However, the 2020 tax return should include an explanatory statement on the recharacterization, indicating the date and amount of the Roth contribution for spouse, the date of the recharacterization of that contribution and the amount that transferred to the TIRA (2,336.)