Alan S. wrote:OK - your overall plan will work as long as you can roll your rollover IRA into your current plan before the end of 2013.
1) The earnings on your recharacterization of the 2012 conversion will be determined by the formula. The formula reflects the earnings generated on all assets in your Roth during the accumulation period of the conversion to be recharacterized. By adding these other Roth rollovers, the earnings % will usually be diluted since the other contributions had less time to generate earnings. However, any combination of results is possible because the formula is a simplifed approach rather than a totally equitable number. You might want to determine the amount of earnings to be transferred back to your TIRA before ordering the recharacterization. The larger the amount, the less attractive recharacterization is because you will be moving potentially tax free earnings into a pre tax IRA.
Thanks again for the reply. Yes, I ran through the calculation (this time taking into account the rollover contributions in the Adjusted Opening Balance) and it came out to around $18,500 or so, so the gains are about $3,500. Not too large to discourage me from moving forward with the recharacterization. Without taking the rollver contributions into account in the Adjusted Opening Balance, that number was *significantly* higher.
Alan S. wrote:2) Your taxable amount of 12k on the 15k conversion is correct if you followed the Form 8606 conversion taxation instructions.
Alan S. wrote:3) The amount you would ideally roll into your current 401k plan is your total TIRA value less your basis from non deductible contributions. You indicated 15k was your total basis. If your rollover IRA value is much less than your total TIRA value less 15k, you should roll the difference into the rollover IRA before doing the transfer, since that will make your conversion of the 15k totally tax free. Otherwise you would pay tax on the amount remaining in your IRA in excess of 15k. For a couple thousand, it's probably not worth doing this adjustment, and you also must be sure that your plan does NOT restrict incoming rollovers to only a rollover IRA as you would not want to mess with the rollover IRA and endanger acceptance by your current 401k.
I'm a bit confused here, but I maybe did not give you enough information. In March 2012, Vanguard showed an account for a Rollover IRA worth $57,000 and a TIRA account of ~$15,000 (that's money from TIRA non-deductible contributions in 2010, 2011, and 2012, plus minimal gains that were made). I then converted all of the money in the TIRA account to Roth IRA. So in April 2012, Vanguard showed an account for a Rollover IRA worth $57k, and a TIRA account of $0 (this is still at $0 today). The rest of the year I started doing the rollover contributions directly into Roth IRA from the after-tax 401(k).
I now want to recharacterize the $15,000 (which, as noted above, will actually be a recharacterization of $18,500) so that my TIRA account will contain $18,500. Then I will roll over the Rollover IRA (the $57,000) into my company's pre-tax 401(k), and after 30 days from my recharacterization, reconvert the $18,500 in the TIRA account into Roth IRA. This will leave my Rollover IRA *and* my TIRA account with a balance of $0.
In the quote above, you say it would be ideal to roll over my total TIRA value less my basis from non deductible contributions into my company's pre-tax 401k. Does the "total TIRA value" you'e referring to contain the Rollover IRA + the current value of my TIRA? If so, that is $57k + $0k.
From your question, I am wondering if I accidentally led you to believe that the specific TIRA account (as opposed to the Rollover IRA account) was not $0. It is $0.
Alan S. wrote:4) Re 2012 and prior tax reporting - be sure you reported each of those prior non deductible contributions on Form 8606 for the years made, as that is how basis must be documented with the IRS. Your 2012 8606 will show your 2012 non deductible contribution in Part I, and add your prior 10k of basis to get your total basis of 15k. The 8606 will NOT show your TIRA conversion if you recharacterize it, and it will not show your rollover of after tax 401k contributions either because they came directly from a non IRA plan. Do NOT confuse your conversion of 15k with the REGULAR IRA Contribution limit, as there is no limit to your conversion amount. The end result in the forms view for Ttax would be that line 16a would show your gross rollover from the after tax 401k contributions and 16b would show the taxable amount in Box 2a of the 1099R. 2a includes earnings on your contributions before you did the rollovers to your Roth. Line 15 will not have an entry if you recharacterize the 15k conversion, but you should add an explanatory statement to your return (Ttax has a screen to enter this) indicating the date and amount of your 15k conversion, and the date and amount of your conversion that was recharacterized, and also the value that transferred to the TIRA. You will get this info from your IRA activity statements after the recharacterization is done. With a correct statement, you will not refer to your recharacterization again on your 2013 return because your 1099R for the recharacterization will be coded to apply to 2012, not 2013.
I just checked my past tax returns, and I have indeed reported each of the prior non-deductible contributions on Form 8606. I understand now what you mean about the difference between conversion and contribution limit, but what I am still not clear on is when I should pay taxes for the earnings that the conversion made while in the Roth (i.e. of the $18,500 that I will recharacterize, $3,500 is gains). You mention that "Your 2012 8606 will show your 2012 non deductible contribution in Part I." I assume I will just put $5k there? I will of course explain in a note the numbers that you suggest, but doesn't that $3,500 have to be reported on either my 2012 or 2013 taxes? I ask because you say that for my 2013 taxes, I won't have to reference the recharacterization again. When Vanguard sends me a 1099R in January 2014 for the recharacterization, I should just keep that for my records and not mention the recharacterization for the taxes due April 2014? When do I pay taxes on the $3,500?
Alan S. wrote:5) There are some other threads here that cover what you need to enter into TTax to get the above result correct. It can be tricky, so it's good to know what your 8606 and 1040 should look like after your input.
I will try to dig up these threads.
Thanks again for your time!