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  • Side Door Roth Re-Re-Characterization Conversion

    I have an odd tax issue on a roundabout back door Roth and hopefully someone can confirm I reported things on my 2016 tax return correctly...

    In 2016 I made two $5500 traditional IRA deposits, one for tax year 2015 and one for tax year 2016.  Instead of the $11000 conversion that I requested, the brokerage did a recharacterization (they gave me the wrong paperwork, so technically my fault), but we are above the income limit.  I submitted a second recharacterization to undue the error, and then a conversion.

    My 1099s and 5498s track the roundabout way of the conversion, and the numbers flow correctly on my return (in spite of Turbotax questions).  Basis is correct, had no other IRA balances, and all monies/securities/earnings went from traditional to Roth to traditional and back again, including a couple hundred dollars in gain I am reporting and paying the tax on.  However, Turbotax seems confused by the switcharoo, and suggests that I need to amend my 2015 return because I had earnings from a contribution in 2015 (don't think the software can account for the double recharacterization).

    So I am hoping my 2016 and 2015 tax returns are correct (and I wouldn't have to arbitrarily create account values at each recharacterization and report) and the amendment suggestion is just a software flow issue (not the first one I have encountered on Turbotax).  Thoughts?

  • #2
    I'm not sure how the broker recharacterized the 1st time. A recharacterization is a move that "undoes" a change from one kind of IRA to another. Since you had only contributed to TIRAs, there was nothing to recharacterize to. What kind of accounts did you have after the 1st "recharacterization"?

    Perhaps this is why TT is struggling with this scenario.
    Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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    • #3
      The brokerage (Scottrade) certainly seems to have pulled it off.  Maybe I should have been a little more cautious when the staff had no clue what a backdoor Roth was.    I have 1009-R for each step with (what I believe are) the correct distribution codes (noted below), so unless Scottrade is going to fail an audit, I presume the recharacterization really works both ways and Turbotax just can't handle the mess.

      The process flow (by the time the conversion completed my balance was actually about 11.5k, but Scottrade couldn't track actual account values between steps):

      1. TIRA=11k; Roth=0

      2. recharacterization: 1099 code R, IRA box checked (2015 contrib made in 2016 and rechar)

      3. TIRA=0; Roth=~11.2k

      4. (re)recharacterization: 1099 code R (2015 contrib made in 2016 and rechar)

      5. TIRA=~11.3k; Roth=0

      6. conversion: 1099 code 2, IRA box checked (early dist, exception applies)

      7. TIRA=0; Roth=~11.5k

      8. taxes: 11k untaxed conversion, .5k taxed conversion

       

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      • #4
        I don't know why you/they didn't leave it where it was after the 1st recharacterization. Wouldn't you have accomplished the same result? I'd just treat is as a 2-step backdoor Roth conversion with .5k taxable rather than entering each individual step. Sounds as if it will make TT happy and you can finish your return.
        Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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        • #5
          From what I understand, leaving it in place after the intial recharacterization would have been the the same as if we had submitted directly to a Roth, which we can't do because of the income limit.

          I believe I entered the return as you noted, somewhat ignoring the Turbotax oddities and multiples of recharacterizations and just showing a typical backdoor Roth conversion with the appropriate basis and converted taxable amount.

          In any event, the tax return is officially submitted, so I should find out if there was an issue in a couple weeks.  :-)

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          • #6




            From what I understand, leaving it in place after the intial recharacterization would have been the the same as if we had submitted directly to a Roth, which we can’t do because of the income limit.

            I believe I entered the return as you noted, somewhat ignoring the Turbotax oddities and multiples of recharacterizations and just showing a typical backdoor Roth conversion with the appropriate basis and converted taxable amount.

            In any event, the tax return is officially submitted, so I should find out if there was an issue in a couple weeks.
            Click to expand...


            I think everything will be fine. Seems like all your custodian should have done was to recode rather than create such a mess since you can really recharacterize a contribution that was never in a Roth to begin with. But better to be safe, I suppose. Glad you're submitted. And I hate to tell you this, but you won't find out in a couple of weeks if there is a problem. Maybe a year or 2. But I believe it's a safe bet that you'll never hear a peep.
            Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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