The Backdoor Roth strategy gets a bit more complicated when a recharacterization is also involved. A recharacterization is when you treat an IRA contribution (either Roth or Traditional) as though it was originally made to the other type of IRA. You accomplish a recharacterization by working with the financial institution that holds your IRA. Usually, you’ll have to fill out a form telling them to move the money to the other type of IRA.
Here’s a common situation where you would need to do a recharacterization.
Early in the tax year, you contribute to a Roth IRA. You choose a Roth because you prefer your future distributions to be tax-free. However, later in the year, you realize that you’ll be making more income during the year than the allowable limit to contribute to a Roth.
https://www.irs.gov/retirement-plans/amount-of-roth-ira-contributions-that-you-can-make-for-2023
However, you still want to contribute to a Roth. You fix this by first recharacterizing your Roth contributions to Traditional IRA contributions (this makes it as though you’d contributed to a Traditional IRA in the first place). Then, you implement the Backdoor Roth strategy by converting the Traditional IRA funds back to a Roth. This approach allows you to get the money back to a Roth, where you wanted it to be originally. It’s a rather complicated way to do it, but it gets the result you want.
These are the steps to use to get the problem resolved with your financial institution. But given all those steps, how do you accurately report it in the software?
There are two different paths you can follow, depending on whether you did the recharacterization during the tax year (on or before December 31st), or after the tax year ended (after December 31st, but before the April tax deadline). Choose the first link below for a recharacterization made during the year. Choose the second link below for a recharacterization made after December 31st.
Backdoor Roth Plus a Recharacterization – Basic Scenario
Backdoor Roth Plus a Recharacterization – Recharacterization Happens After December 31st