Here are the steps for entering a Backdoor Roth including a recharacterization.
First: Add the 1099-R for the Roth to Traditional IRA Recharacterization
1. When your recharacterization from traditional to Roth is completed during the tax year (for example, if your 2023 Roth contributions were recharacterized to Traditional IRA contributions on or before December 31st), you will receive a 2023, Form 1099-R reporting the recharacterization. Follow this menu path to enter the 1099-R: Income > Retirement Income (Form 1099-R) > “Add a 1099-R;." Box 7 should have code N. Fill out all other boxes just as they are on your 1099-R then “Save and Continue”.
2. The next page asks, “Is this a rollover?” No, this is not a rollover. A recharacterization is a different process. Save and Continue.
3. Continue until you get to the page where you can add an additional 1099-R
Second: Add the 1099-R for the Traditional IRA to Roth Conversion
1. After entering the first 1099-R, you'll select “Add a 1099-R” again to add the second one. The second 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 will most likely show an amount in Box 1, an amount in Box 2a, a code in Box 7, and the IRA/SEP/SIMPLE box will be checked. “Save and Continue” to go to the next screen.
2. The next page asks, “Is this an inherited IRA?” For most people, this answer will be “No”. Save and Continue.
3. Next, you’ll be asked “Is this a Roth conversion?” (conversion from a Traditional IRA to a Roth IRA). Yes, that is exactly what it is! You’ll enter the amount of the distribution that you converted. In most cases of the 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.
4. Next, you’ll be back at the main page where you can enter more Form(s) 1099-R. Select “No, Continue” if the two forms you already entered were the only two you had. Otherwise, enter any other Form(s) 1099-R that you have.
5. The next page asks about Prior Year IRA Contributions. Answer 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 the form, line 14 will show any prior nondeductible contributions. If this year is the first time you’re contributing to an IRA, this would be “No”.
6. 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”.
7. You are now done entering the 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
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'll need to finish up the screens in the Income tab before you can get access to 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 IRA, 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 started.
3. A few more questions down the page it asks, “Did you recharacterize any IRA contributions?” Choose “Yes” here.
4. Next, answer the “Excess IRA Contributions” questions on that page. It's quite rare to have something to enter there. “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 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 amount if the account had gains or losses). Next you explain why you recharacterized. All this information will be used to generate a statement the IRS needs, and will be attached to your tax return. 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 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 on 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, this is probably $0 as well.
And that's it! You're done entering everything that you need to. Let’s take a quick peek at the forms to make sure they're 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 line 4a. This will show the total amount of distributions from all retirement accounts. It will look like it’s doubling up the money because it will show the total from the recharacterization 1099-R, plus the total from the conversion 1099-R. This is reported correctly because the money moved twice, and the total of the two 1099-R’s is reported here. However, it doesn't mean you’re being taxed twice.
Next, look at line 4b. This will 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 (or maybe even some losses). In our example, there was $100 of earnings between those dates (increase in value from $6,500 to $6,600). 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 non 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 that you entered about your recharacterization. It will be filed with your tax return as required by the IRS.
