Sometimes, your recharacterization isn't completed until the tax year is already over. As an example, let's say you made a Roth IRA contribution for 2023 during the 2023 tax year. You don't realize until March 2024 (when you're preparing your taxes) that you shouldn't have done this. At that point, you do the recharacterization and conversion for the 2023 funds. The reporting will look slightly different in this case because the tax effects will be spread across two tax years on two tax returns.
If this is what happened to you, here's how to report the Backdoor Roth in the software for the year of the contribution (in this example, 2023):
Enter the IRA Contribution
1. Follow this menu path: Deductions/Credits > Common Deductions/Credits > IRA Contributions (if the Deductions/Credits tab is gray and can’t be clicked, that means you need to finish up the screens in the Income tab first before you can get access the Deductions/Credits tab). 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.
2. Next, enter the amount of your original IRA contributions for the year. 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 our case, 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 very first started.
3. A few more questions down on that page, it asks, “Did you recharacterize any IRA contributions?” You would choose “Yes” here.
4. Next, answer the “Excess IRA Contributions” questions on that page. It is fairly rare to have something to enter there. Click “Save and Continue”.
5. The next 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.
6. Fill in all of the details to explain the recharacterization including the 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 a statement that the IRS needs, and will be attached to your tax return. You won’t have a 1099-R yet that reports this information, but you can contact your financial institution to get the information if you don’t have it. Save and Continue.
7. The next page asks if you withdrew any contributions. Answer according to your situation. If all you did was this recharacterization plus the 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.
8. 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.
9. The next page is your IRA Deduction Summary. If you’re employing this backdoor Roth strategy, that is probably $0 as well.
That’s it for the IRA contribution and the recharacterization.
As for the Roth conversion step in this example, you will not get the 1099-R for this until early 2025, because it occurred in 2024. The 1099-R conversion will need to be reported on your 2024 tax return, essentially completing the other half of the reporting for this backdoor Roth.
Let’s take a quick peek at the forms to make sure they are accurately showing what happened during the year. On almost any screen in FreeTaxUSA, click on the 3 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. Take a look at lines 4a and 4b for IRA distributions. Note that they are both blank. Since the recharacterization and conversion didn’t happen until after the tax year was over, they are not reported directly on the tax return. However, the recharacterization is reported here on a statement (see the “SEE STMT” note next to line 4a).
Next, find Form 8606 within the tax return. This form shows your nondeductible IRA contributions. The amount on line 14 ($6,500) becomes your “basis”, or the amount that counts against your future distribution and makes $6,500 of it not taxable.
Next year when you’re preparing your tax return, you’ll report the other half of the transaction. You’ll get a Form 1099-R showing the conversion you did. You’ll report that Form 1099-R on your 2024 tax return. You’ll also need to enter the $6,500 amount that carries over from Line 14 of the 2023 Form 8606. This will make it so that $6,500 of the conversion amount won’t show as taxable to you.
Finally, find the recharacterization statement. It should be toward the last few pages of the federal tax return. It includes all the information that you entered about your recharacterization. It will be filed with your tax return as required by the IRS.
Here’s a quick overview of what to expect next year when you’re doing your taxes:
- You’ll get a 1099-R with code R for the recharacterization.
- You’ll get a 1099-R, most likely with Code 2, showing the amount converted from Traditional back to Roth
- You’ll need to enter your basis from line 14 of the Form 8606 included with your 2023 tax return.
