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 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.
However, you still want to contribute to a Roth. You fix this by recharacterizing your Roth contributions to traditional contributions (this makes it as though you’d contributed to a traditional 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.
So, this is how you got the problem resolved with your financial institution. But given all those steps, how do you accurately report it in the software?
Here is how:
There are 2 different paths, 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 one which applies to your situation.
(below are clickable links to 2 other articles)
Backdoor Roth Plus a Recharacterization – Basic Scenario
Backdoor Roth Plus a Recharacterization – Recharacterization Happens After December 31st