Loss in Rrecharacterization
Gains or losses on the account for the time the funds are in the account that are attributable to the contribution must also be recharacterized. A net amount is recharacterized.
If the October 15th date has passed, this will be your only option for removing the funds. However, you no longer have to calculate gains or losses. You only remove the amount of the contribution. This is good if you have gains in the account, bad if you have losses
In 2019 when I was not eligible for direct Roth contribution , I did mistake so to revert back in March 2020 before filing taxes I did recharacterization and moved that amount back in Non deductible Traditional account to do Back door Roth later.
But at that time there was $1194 loss on this $7000 contribution.
That time I did not know that I had put 1194 dollars from my pocket during recharacterization.
Now this year when I tried to do Back door Roth, it shows penalty on this amount to me on tax forms.
How can I correct this now? Does it mean that every year I am now disallowed to do any 100% back door Roth or Megabackdoor Roth and if done Pay the penalty?
Or there is still a way to correct this mistake?
Thanks in advance
—Sam
Permalink Submitted by Alan - IRA critic on Tue, 2022-01-25 16:24
There should not be a penalty or taxes due. You should have filed Form 8606 for 2019 showing a 7000 non deductible TIRA contribution. Your conversion of the 5806 balance in your TIRA will leave a remaining basis of 1194, not counting any 2020 contributions or distributions. In other words, your unused TIRA basis remaining in your IRA can be applied later on. For example, if in 2020 you also did a back door Roth and had to recharacterize your 2020 contribution which had a gain of 1194, you could convert 8194 tax free since the basis you carried over to 2020 would be applied to any later conversions.
Again, your 8606 must be correct from prior years to avoid problems being carried forward. You do not owe tax or penalty, but your tax returns are likely incorrect which results in the incorrect penalty.