Accounting for taxable earnings on a recharacterized BDR IRA?

[TeachMeThings]

Peds is probably going to yell at me, but I swear I've been doing a lot of reading.

Situation:
1. Contributed directly to rIRA throughout the 2020 tax year
2. Made over the income limits
3. Realized I made over the income limits
4. Opened a tIRA
5. Recharacterized my rIRA contributions and it's earnings to a tIRA ($6,XXX) - I've completed this step

Game plan moving forward:
6. Execute a Roth conversion by converting my tIRA ($6,XXX) back to a rIRA for the 2020 contribution and pay taxes on the earnings ($0,XXX).
7. Fill out Form 8606
8. Don't screw this up again

My question is, how are the earnings accounted for when doing my taxes? Is it capital gains even though it's not realized earnings?

[jacoavlu]

“6” is not a recharacterization. It’s a Roth conversion

earnings amount taxed at ordinary income rate

[TeachMeThings]

“6” is not a recharacterization. It’s a Roth conversion

earnings amount taxed at ordinary income rate

Yes, thank you.

Can you provide more detail on to account for it when performing my taxes? What type of income is it?

[jacoavlu]

Yes, thank you.

Can you provide more detail on to account for it when performing my taxes? What type of income is it?

see your step 7 above

[Peds]

Why are we yelling??!!

It's like W2 income.... ordinary.

[TeachMeThings]

You guys are making this sound super obvious, but I'm not sure I understand entirely...

Is Line 1 of my 8606 $6,000 or the value of everything that will be converted back to a rIRA?

[jacoavlu]

You guys are making this sound super obvious, but I'm not sure I understand entirely...

Is Line 1 of my 8606 $6,000 or the value of everything that will be converted back to a rIRA?

form 8606 has its own set of instructions. Did you read them? I think they’re pretty clear

[TeachMeThings]

Yes, I have read the instructions, but I don’t find them particularly clear for my situation. After digging deeper it may make more sense for the total value of the tIRA to go in line six. If you’d be willing to explain a little further I’d really appreciate it.

[jacoavlu]

forget that the Roth part ever happened. Pretend you did things the right way.

now proceed with 8606

is it still unclear?

[Peds]

Yes, I have read the instructions, but I don’t find them particularly clear for my situation. After digging deeper it may make more sense for the total value of the tIRA to go in line six. If you’d be willing to explain a little further I’d really appreciate it.

again, start from the beginning. you contributed 6K. it grew to 6,010. you convert 6,010. which means you report 6,010 because you owe tax on the growth.

the recharacterization (while had to happen to keep above board) does not impact the 8606. the 8606 doesnt know you did any of that.

[jfoxcpacfp]

I would like to take this opportunity to yell at you, but only for including an apostrophe incorrectly in "its".

You will receive a Form 1099R for the recharacterization. It will report $6,010. You will pay tax only on the $10. It shouldn't be that difficult when you enter it into your tax s/w.

[TeachMeThings]

again, start from the beginning. you contributed 6K. it grew to 6,010. you convert 6,010. which means you report 6,010 because you owe tax on the growth.

the recharacterization (while had to happen to keep above board) does not impact the 8606. the 8606 doesnt know you did any of that.

You will receive a Form 1099R for the recharacterization. It will report $6,010. You will pay tax only on the $10. It shouldn't be that difficult when you enter it into your tax s/w.

I think I'm catching up now. So, line one would be $6,010? Or essentially the value of everything that was converted from traditional to Roth.

[jfoxcpacfp]

I think I'm catching up now. So, line one would be $6,010? Or essentially the value of everything that was converted from traditional to Roth.

Yes, on p2 of Form 8606, you will report the amount converted from your 1099R, which w/b $6,010.

[jacoavlu]

I think I'm catching up now. So, line one would be $6,010? Or essentially the value of everything that was converted from traditional to Roth.

no

earnings are not contributions

have you worked through and completed the form? It should become obvious that line 1 $6010 is not correct because if you use that number, ultimately you would get to a Taxable amount zero, which should strike you as incorrect

[TeachMeThings]

no

earnings are not contributions

have you worked through and completed the form? It should become obvious that line 1 $6010 is not correct because if you use that number, ultimately you would get to a Taxable amount zero, which should strike you as incorrect

I cannot overstate how much I appreciate people responding and trying to help me out, but your smug responses are starting to get under my skin. Respectfully, if I understood how to complete the form or understood the IRS's instructions for completing the form I wouldn't be asking these questions. You seem to have been doing this a while. I'm fairly new. I'd love to be in your shoes some day. Your wiseacre approach is not helping me understand how to complete this form properly.

I understand I need to pay taxes on my earnings. I understand how to fill out a 8606 for the average BDR IRA all done in the appropriate calendar year and without earnings. Unfortunately, my situation this year isn't that simple and looking for someone who is willing to walk-the-dog vice telling me how dumb I am.