Contributed by: RachelR, FreeTaxUSA Agent, Tax Pro and Henry, FreeTaxUSA Agent, Tax Pro
This article applies to 2024 and later years
Here are the steps for entering a backdoor Roth including a recharacterization.
First: Add the 1099-R for the Roth to traditional recharacterization
- When your recharacterization from traditional to Roth is completed during the tax year (for example, if your 2024 Roth contributions were recharacterized to a traditional IRA during calendar year 2024), you will receive a 2024 1099-R reporting this recharacterization. Enter this 1099-R following this menu path: Income > Common Income > Retirement Income (1099-R). Click “Add a 1099-R” to enter it. Box 7 should have code N. Fill out all the boxes, then click “Save and Continue”. In this example, we have recharacterized an original Roth contribution of $6,500. Our original contribution had earnings of $50 while it was in the Roth account, so there was $6,550 in the Roth when we did the recharacterization to traditional.
- The next page asks, “Is this a rollover?” No, this is not a rollover. A recharacterization is a different thing. Save and Continue.
- Continue until you come back to the page where you can add an additional 1099-R.
Second: Add the 1099-R for the traditional to Roth conversion
- Now add the second 1099-R. This 1099-R will show the total amount of money that was converted from traditional to Roth. Enter the information exactly as you see it on your Form 1099-R. Your 1099-R most likely shows an amount in Box 1, an amount in Box 2a, a code in Box 7, and the IRA/SEP/SIMPLE box will be checked. Click “Save and Continue” to go to the next screen. In this example, our recharacterized contribution of $6,550 had earned an additional amount of $50, so there was a total of $6,600 in the traditional IRA when we did the conversion to Roth.
- The next page asks “Is this an inherited IRA?” For most people, this answer will be “No”. Save and Continue.
- Next, you’ll be asked “Is this a Roth conversion?” (conversion from a traditional IRA to a Roth IRA). Yes, that’s exactly what it is! You’ll enter the amount of the distribution that you converted. In most cases of a backdoor Roth, this will be the entire amount from Box 1 of the 1099-R, as all of it (the contribution plus any earnings) becomes Roth money. Save and Continue.
- Now you’ll be back at the main page where you can enter more 1099-R forms. Click “Continue” if the two you have already entered were the only 1099-R forms you received. Otherwise, enter others that you have.
- The following page asks about Prior Year IRA Contributions. Answer that according to your situation. If you’re not sure if you had any nondeductible IRA contributions in the past, check last year’s tax return to see if it includes Form 8606. If you have it, line 14 of this form would show any prior nondeductible contributions. If this year is the first time you’re contributing to an IRA, this would be “No”. Save and Continue.
- On the next page you’ll be asked about disaster distributions. Answer again according to your situation, but for most people this will be “No”. Save and Continue.
- You are now done entering the second 1099-R. Note that at this point, your tax return might be showing the total converted amount as taxable. That’s okay. We’re not done entering everything just yet.
Third: Enter the IRA Contribution
- Follow this menu path: Deductions/Credits > Common Deductions/Credits > IRA Contributions (if the Deductions/Credits tab is gray and can’t be clicked, that just means you need to finish up the screens in the Income tab before you can access it). Answer “Yes” to the question, “Did you make any traditional or Roth IRA contributions during the year?” Answer for both you and your spouse, if applicable. Then answer the “Excess IRA Contributions” question on that page. It’s fairly rare to have something to enter there. Save and Continue.
- Next, enter the amount of your original IRA contributions for the year. In this example, $6,500. Enter the amount in the box for the type of IRA you originally contributed to, even if the money is no longer in that type of account. In this example, our first contributions were to a Roth IRA. Then we recharacterized them to traditional, and then we converted them back to a Roth. But we’ll enter them in the Roth IRA box because that’s where they first began.
- Further down on that page, it asks, “Did you recharacterize any IRA contributions?” You would choose “Yes” here.
- The following page asks about your IRA recharacterizations. “Did you recharacterize any of the $6,500 (of Roth contribution) to a traditional IRA?” Yes, you did! Choose “Yes” here.
- Fill in all of the details to explain the recharacterization: date of original contribution, date of recharacterization, amount of contribution recharacterized, and the total amount transferred (this may be more or less than the total recharacterized if the account had gains or losses). Then explain why you recharacterized. All of this information will be used to generate and attach a statement to your tax return, as required by the IRS. Save and Continue.
- The next page asks if you withdrew any contributions. Answer according to your situation. If all you did was this recharacterization plus a backdoor Roth, this would be “No”. Withdrawing is removing the contribution and treating it as though it was never made, which is not the same as converting. Save and Continue.
- On the IRA Basis and Value page, you’ll enter any basis information you have in your IRA from prior tax years. If this is your first year contributing to a Roth, that will be $0. If you do have IRA basis from prior years (probably from contributions to a traditional IRA that you couldn’t deduct), you’ll get that information from Form 8606 from your prior tax returns and enter it here. You’ll also need to fill out the other boxes on the screen according to your situation. Save and Continue.
- The next page is your IRA Deduction Summary. If you’re employing this backdoor Roth strategy, that is probably $0 as well.
Conclusion
And that’s it – you are done entering everything that’s needed. Let’s take a quick look at the forms to make sure they are accurately showing what happened during the year. On almost any screen in FreeTaxUSA, click on the three buttons at the top right of the screen, then choose “Preview Return” from the drop-down menu.
The first page you’ll see is Form 1040. Look at line 4a. This should show the total amount of distributions from all retirement accounts. It will look like it’s doubling the money up – because it will show the total from the recharacterization 1099-R, plus the total from the conversion 1099-R. This is reported correctly – since the money moved twice, the total of the two 1099-R’s is reported here. However, this doesn’t mean that you’re being taxed on it twice.
Next, look at line 4b. This should show only the portion of the distribution that is taxable. If some time passed between when you contributed to the Roth originally and when you converted to the Roth again, there were probably some earnings in the account. In our example, there was $100 of total earnings between those dates (increase in value from $6,500 to $6,550 prior to the recharacterization, then another increase in value from $6,550 to $6,600 prior to the conversion). So $100 is taxable, which makes sense.
Next, find Form 8606 within the tax return. This form shows your nondeductible IRA contributions on Line 1 ($6,500 in this example). This becomes your “basis”, or the amount that counts against your $6,600 distribution and makes $6,500 of it not taxable. Finally, look at Part II of the Form 8606 (second page). This shows your total conversion ($6,600), the basis ($6,500), and the taxable amount of earnings ($100).
Finally, find the recharacterization statement. It should be toward the last few pages of the federal tax return. It includes all the information you entered about your recharacterization. It will be filed with your tax return as required by the IRS.
