Roth IRA to Traditional IRA Recharacterization & subsequent rollover back to Roth IRA

[rosemarie]

My client recharacterized Roth IRA contributions to Traditional IRA due to possibility of approaching maximum income limit.  Since they did not reach the maximum, they rolled over the Traditional IRA back to the Roth IRA.  I'm having trouble with entering the multiple transactions for Form 8606.  Proconnect is calculating now that no Roth IRA contribution is allowed since non-deductible traditonal IRA was listed.  How can I enter the multiple transactions to be able to calculate the Roth IRA contribution allowed?

[qbteachmt]

"they rolled over the Traditional IRA back to the Roth IRA"

That's a conversion. That's not a new contribution. It would be pro rata taxable based on all of their Trad IRA, SEP IRA and SIMPLE IRA basis to FMV, as well. It's like doing a late backdoor Roth.

[rosemarie]

The Roth IRA distribution #1 shows as a recharacterization from Roth IRA to Traditional.  So if they later converted the Traditional IRA to a Roth IRA since they didn't really want traditional, should the software show that they are eligible for a $6500 max Roth IRA contribution?  Instead, the software shows that they made traditional IRA contributions so they have reached the maximum contribution.   What I'm trying to figure out is how to code the Adjustments to Income IRA worksheet on Proconnect to show the multiple recharacterization and then conversion.  I'm trying to figure out how to enter it so that it doesn't show that the maximum has been contributed, since the maximum was eventually converted to a Roth again..  I am confused because the form asks for contributions and recharacterization numbers, and I think I need help in working it so that they are eligible for Roth IRA.  Instead the letter to client shows that they are contributing to a traditional IRA.  This is more of a mechanical forms issue for the software.

Thank you for any advice you can offer.

[qbteachmt]

"should the software show that they are eligible for a $6500 max Roth IRA contribution?"

For 2023, the total contributions you can make to all of your traditional IRAs and Roth IRAs can't be more than: $6,500 ($7,500 if you're age 50 or older) or your taxable compensation for the year, if less.

A contribution is New money. Conversions = moving around existing money.

"so that they are eligible for Roth IRA"

That's meaningless, now that they took all those actions.

For the tax year that they first put that money into Roth, that was the contribution for that tax year. Then, they recharacterized it, changed the account it is in, but still as part of the total limit for that year's for contribution. This is more like a correction to an error.

Conversions don't count against contribution limits. They  can put in $7k, and convert $500,000, for example.

So, they already made their contribution. The only difference between if they had left it in the Roth and conversion, is that their conversion might be a pro rata taxable event. Otherwise, the conversion is not deductible how they did it the first time, nor how they recharacterized it.

Their end goal is accomplished. They don't get to make another contribution for that same tax year, unless it was not as much as they qualify to put away?

[rosemarie]

Thank you for your reply.  I understand that the taxpayers are only limited to making $6500 maximum Roth IRA contributions and they did that.  I'm not trying to figure out if they are eligible for any other contributions.  I'm just trying to determine what needs to be entered on the Adjustments to Income screen so that form 8606 is generated properly. 

If the Roth IRA recharacterization to Traditional IRA was eventually converted back to Roth IRA, does the traditional IRA contribution that was converted, need to be entered as a nondeductible contribution on Form 8606?  

[qbteachmt · Accepted solution]

"on the Adjustments to Income"

A Roth contribution doesn't adjust income. That's also why recharacterizing it to Trad IRA also means nondeductible. It's post-tax dollars. There is no tax benefit for putting away those funds. It will be Basis.

"If the Roth IRA recharacterization to Traditional IRA was eventually converted back to Roth IRA,"

Fixed it for you. It is converted to Roth, the same as any other funds would be converted. There is nothing special about it, because it came from Trad IRA. Each step along the process stands alone, and not in reference to the earlier.

"does the traditional IRA contribution that was converted"

Take them one at a time.

The amount put to Roth is moot, since it was recharacterized = Oops, I made a mistake.

The amount converted from Trad IRA is going to trigger a 1099-R, because a conversion is a distribution, even if a direct transfer to the other account or trustee.

"need to be entered as a nondeductible contribution on Form 8606?"

Yes, it was a nondeductible Trad IRA contribution. That's the place were it is contribution. It's Basis = post-tax. That's why I keep bringing "pro rata taxable" into the discussion.