So I contributed $6000 to 2019 and $6000 to 2020 into a Roth IRA. I bought some ETFs with the $12000 and it’s currently earning. Let’s say the balance is now $13000. Can I transfer $6000 to the 2019 Traditional IRA contribution? And can I transfer $6000 to the 2020 Traditional IRA contribution? Will this reduce how much I owe in taxes for 2019 and 2020? And would I receive some penalty for doing this? Hypothetically, based on the earnings from the total $12000 contribution, only $1000 would remain in the Roth. Thanks in advance.
What you are looking to do is called a "recharacterization" of your IRA contributions, and you are in luck; you still have time to recharacterize your 2019 Roth contributions. The idea is pretty simple. You tell your brokerage company how much money out of your previous Roth contributions you want to recharacterize as traditional. They will take that money and any earnings attributable to those contributions and move them to a traditional IRA account. For your tax purposes, they'll be considered as if they were traditional contributions all along. If you recharacterize all of your Roth contributions, your 2019 and 2020 income will each be reduced by $6000 (assuming your MAGI is such that traditional IRA contributions are deductible. If you're single and your income is greater than $64,000 or married and your joint income is greater than $103,000, traditional IRA contributions may not be fully deductible). There is no penalty for recharacterizing.
There are a few catches here:
The deadline for recharacterization is the tax filing deadline for that year plus any extensions. So your last chance to recharacterize 2019 Roth contributions is October 15, 2020.
If you have already filed your tax return for 2019, you will have to file an amended return to get the tax break for recharacterizing your 2019 Roth contributions.
You can't just recharacterize the contributions and leave the earnings in Roth as your plan seems to have been. When you recharacterize contributions, earnings attributable to those contributions also become part of a traditional IRA. So if you want to leave $1000 in your Roth account, you will have to leave enough of your contributions in there such that they plus their earnings equal that amount. Your brokerage company is able to do the calculations to figure this out for you. Whatever contributions you leave in your Roth IRA will not be tax deductible.
If this seems like what you want to do, you can call up your brokerage company and tell them you'd like to recharacterize your 2019 and 2020 Roth IRA contributions. They'll be able to take care of that for you.