Recharacterized Roth Contributions to Traditional IRA

[David]

Client made 2008 Roth contribution for $3,450 and recharacterized it to a traditional IRA in 2009 due to income limitation. Client also made a 2009 Roth contribution for $600 and recharacterized it to a traditional IRA in 2009.

The 2009 1099-R for the 2008 recharacterized contribution shows $3,413 Roth distribution code R. The 2009 1099-R for the 2009 recharacterized contribution shows $594 Roth distribution code N. The amounts reported as Roth distributions on the 1099-Rs are lower than the original contributions since the account incurred losses.

Client also made a $6K contribution to her traditional IRA in 2009. Client is over age 50.

Client's husband had wages of $214K and has a retirement plan through his employer. Client had $13K Sch C profit. Client also made a SEP contribution for $2,500.

The ATX program reports the 2009 recharacterized Roth distribution of $594 on line 7 of Form 8606. Why is this?

The ATX program is also reporting a portion of the $594 (Form 8606 line 7)as taxable income on Form 1040 line 15b. Why is this?

The program isn't reporting this for the 2008 Roth contributions recharacterized in 2009.

The client prepared and filed her own 2008 and 2009 tax returns but did not correctly prepare Form 8606. She wants help with the 2009 Form 8606. The 2008 Form 8606 shows nondeductible IRA of $3,450. The 2009 Form 8606 should show the nondeductible IRA contribution for $6,000 as well as the $3,450 nondeductible amount from 2008. However, I'm not sure why the program reports $594 on line 7 of Form 8606. I want to make sure the Form 8606 is correct before I get back to the client.

One last question - can the client make a $6K traditional IRA contribution in addition to the $2,500 SEP contribution? The ATX program is allowing this. However, I thought an IRA contribution was not available if the TP has a retirement plan through their employer, including a SEP for their business.

Thanks for your help.

[Pacun]

From the top of my head, I will answer ONLY the last question. By contributing to the SEP, she is under a retirement plan with "her employer". She doesn't qualify for deductible IRA, but I have noticed that ATX allows it by mistake.

Since this taxpayer is not making that much money on her Sch C (and husband makes a bunch), she will be better off by contributing $6,000 to a regular IRA instead of $2,500 to a SEP.

[David]

Thanks for your help on this.

The $6,000 is reported on Form 8606 as a nondeductible IRA contribution. I realize that she isn't allowed a deductible IRA contribution. However, is she allowed a $6,000 nondeductible contribution in addition to the SEP contribution?

Does anyone know why the $594 2009 Roth recharacterization (code N on the 1099-R) is subject to tax on Form 1040 line 15b when the 2008 Roth recharacterization (code R on the 1099-R) is not?

Thanks.

From the top of my head, I will answer ONLY the last question. By contributing to the SEP, she is under a retirement plan with "her employer". She doesn't qualify for deductible IRA, but I have noticed that ATX allows it by mistake.

Since this taxpayer is not making that much money on her Sch C (and husband makes a bunch), she will be better off by contributing $6,000 to a regular IRA instead of $2,500 to a SEP.