I've accidentally landed myself in a super confusing situation with Roth IRA recharacterizations and would appreciate any pointers.
One simplifying factor is that there are only 2 accounts total across all of this: A single traditional IRA and a single Roth, all at the same broker. There are 2 recharacterizations, but nothing was left in the traditional IRA after either.
Here what happened:
- In late 2020 I opened a traditional IRA for the first time, and deposited $5,500 in it.
- A week later I accidentally deposited $550 in it that was intended for a taxable account, and quickly withdrew it.
- In December 2020 I realized I was probably over the income limits for the traditional IRA, so I filed a form w/ my broker to recharacterize everything remaining into a new Roth. Unfortunately that wasn't processed until Jan 2021. This left the traditional IRA balance at $0.
- In April 2021 I filed my taxes w/ TurboTax, it seemed to go fine. I remember entering an explanation for why I withdrew the accidental $550.
- In October 2021 I deposited $6000 cash in the traditional IRA and quickly recharacterized it, also in October, to the Roth. My traditional balance again went to $0.
So in 2021 I recharacterized twice, in Jan and Oct.
But now I am filing my 2021 taxes and have a lot of confusion:
- I received a single 1099-R from my broker covering both transactions. It has a gross distribution and taxable amount both equal to exactly the sum of the two recharacterizations. This is surprising because other than about $100 of gains while stock was still in the traditional IRA, this was all post-tax money. The 1099-R also has the following entries and is otherwise blank:
- Boxes are checked for taxable amount not determined and total distribution
- The IRA/SEP/SIMPLE box is checked
- The distribution code is 2 (Early distribution, exception applies (under age 59½).).
- State/Payer's State Number is MA
- When I enter the 1099-R into TurboTax my taxes due go up significantly as if it is all taxable.
- I started digging deeper and saw that form 8606 for my 2020 tax return unexpectedly has only $550 for nondeductible contributions leading to $550 for "This is your total basis in traditional IRAs for 2020 and earlier years". It's blank other than that. Shouldn't it have been $5,500 since I didn't recharacterize by Dec 31 2020? It seems like somehow the way I answered questions in TurboTax led to my accidental contribution being listed here but not the main contribution, although I don't actually know if it's wrong.
I'm not sure if it matters because I moved everything to the Roth, but I don't want to hurt my Roth distributions when I retire.
So I guess my questions are:
- Does any of this seem wrong to you? What is going on here? How big a hole did I dig myself?
- How would you proceed in TurboTax or otherwise?