Convert Traditional IRA 2020 contributions to Roth because of AGI?

[supernintendochalmers]

I am in the process of filing my 2020 return (yes, I procrastinated once I knew the deadline was extended!) and am now realizing that my AGI has bumped above $75,000, so none of my 2020 $6,000 Traditional IRA contribution will be deductible. Much as I try to read Mad Fientist articles, my feeble brain just can't seem to quite process what I should do here. Should I convert the 2020 contributions to my Roth account? Should I leave things as-is for 2020, but change my approach for 2021? (currently contributing to Traditional again - a few hundred every other week with the intent of maxing by years' end - should I contribute to a Roth again instead?).
Not sure if there's a hard and fast rule for folks with AGIs where the tax deduction benefit of Traditional contributions is non-existent?

[terran]

Assuming you're a single filer who's covered by a workplace retirement plan and has MAGI over $75k meaning you're ineligible to deduct traditional IRA contributions, but also have a MAGI under $125k, meaning you are eligible to make Roth IRA contributions then you should recharacterize your 2020 contributions to Roth. The broker where you have your IRA(s) can help with this. It's important that you tell them you want to recharacterize your 2020 contributions, NOT that you want to convert from traditional IRA to Roth IRA as there are different things and you want to recharacterize. Recharacterizing makes it as if you have contribute to the IRA type you recharacterize to in the first place.

When you file your taxes you'll need to attach a statement explaining what you've done. Here's the one I use:

Taxpayer {supernintendochalmers} contributed $XXXX to a traditional IRA on xx/xx/2020 for the 2020 contribution year. On 04/xx/2021 all $XXXX of the contribution was recharacterized by transferring $YYYY to a Roth IRA in a trustee-to-trustee transfer. The Roth IRA contribution of $XXXX was not deducted on form 1040.

For this year you could hold off and just contribute the full amount between the end of the year and your tax filing deadline when you have a better idea of your income, or contribute to whichever IRA type you think is most likely what you'll want to contribute to and you can always recharacterize again next year. While it's a little better to get money into tax advantaged accounts as soon as possible, I've decided to start waiting until the next year to make my contributions so I don't have to deal with recharacterizing in the future.

[supernintendochalmers]

@terran  Thanks so much for the info and sample statement! Your assumptions are all correct (workplace 401k, MAGI between $75-$125K, single filer). That definitely makes more sense, now that I'm reading more about the difference between converting and recharacterizing. I had hoped that maybe because I haven't filed yet, that I could do something like that and not have to do an amended return. So that sounds like the way to go. Some things to chew on for this year, too. I can see your point in both approaches - contribute to whichever knowing I could recharacterize again if it made sense, or just hold off and make the contribution at the start of next year, prior to filing for 2021. Will give that some thought for sure.

[supernintendochalmers]

Unearthing this old post. @terran You did me a solid in providing guidance last year, so perhaps I can ask for the same kindness now...
This is probably a dumb question. I did the recharacterization of the full amount contributed to my Traditional IRA to a Roth IRA last year, prior to filing my 2020 tax return. I included on that return my statement explaining what I did. I assumed all was good.
Fast-forward to this year, I received a 2021 1099-R from the broker that states the gross distribution amount (matches my amount from my statement attached to the 2020 return) and that $0.00 is taxable, that it's code "R" (recharacterized IRA contribution made for 2020 and recharacterized in 2021). I got this and assumed it's for record-keeping and I don't need to do anything with it, but for the sake of being thorough, I entered it into the tax return software while working on my 2021 return, and was shown an error that because of code "R" I couldn't include this on my 2021 return and instead needed to file an amended 2020 return and include it there. Am I totally missing something?? Is that just a bad error (erroring on the "R" code but not taking into account everything else), or does this recharacterization really necessitate an amended 2020 return even though I performed it prior to, and included a statement about it ON my 2020 return already?

[terran]

It sounds like you already handled it appropriately. Keep the 1099R for your records, but you already reported the recharacterization last year by attaching a statement as you should have. I don't see any need to file an amended return.

[supernintendochalmers]

Thanks! I figured as much, and assume the software error was a result solely triggered by the 2020-specific code, rather than recognizing it as a non taxable event, but then I started reading IRS webpages and form instructions and got confused and started second-guessing. I appreciate your help - again.