tax question: recharacterization vs conversion

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tax question: recharacterization vs conversion

Postby wolingfeng » Wed Jan 30, 2013 9:40 pm

Hey Guys,

I am in the process of filing my tax via Turbotax, and encountered a problem while I was reporting my contribution. I am married filing jointly. Our adjusted gross income is going to be around 230k. So my contribution to traditional IRA would be non-deductible anyway. And I had zero dollar in my traditional IRA. This year I contributed 5k to my traditional IRA, then transferred the money to the roth IRA account. When I was filing the tax, they consider this recharacterazation instead of conversion.

After reading and doing some research on it, from what I understand, it's only could be called conversion if I am transfering money that has stayed more than 1 year in traditional IRA. If it's less than one year, it's recharacterization. Could anyone shed some lights on this?

Thank you guys as always!
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Re: tax question: recharacterization vs conversion

Postby SSSS » Wed Jan 30, 2013 10:02 pm

wolingfeng wrote:After reading and doing some research on it, from what I understand, it's only could be called conversion if I am transfering money that has stayed more than 1 year in traditional IRA. If it's less than one year, it's recharacterization. Could anyone shed some lights on this?


I have never heard of this before. I do contributions followed by conversions just a few days later, and so do a ton of other people here. You probably answered one of the questions wrong. Run through again & look carefully at the questions about recharacterizaiton and conversion. It should only consider it a recharacterization if you tell it it's a recharacterization.
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Re: tax question: recharacterization vs conversion

Postby grabiner » Wed Jan 30, 2013 10:03 pm

You are allowed to convert a Traditional IRA to a Roth IRA on the day you deposit the money; in fact, Form 8606 doesn't ask you when you put the money into the Traditional IRA, although it does ask for the balance. TurboTax should handle this correctly, although I haven't done my own TurboTax yet to check.

However, you might have done the transaction as a recharacteriztion with your brokerage; if so, you need to correct it before April 15. You can recharacterize a contribution only up to the due date of the tax return; that is, you can contribute to a Roth IRA, and then change the contribution as if it was made to a Traditional IRA in the first place, or vice versa.

If you recharacterized a Traditional IRA as a Roth IRA, then you need to go back and recharacterize the Roth IRA contribution as a Traditional IRA contribution, as you are over the Roth income limits. You may then convert the Traditional IRA to a Roth IRA.
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Re: tax question: recharacterization vs conversion

Postby Alan S. » Thu Jan 31, 2013 5:27 pm

Actually, you cannot recharacterize an already recharacterized contribution. Per Pub 590:

Effect of previous tax-free transfers. If an amount has
been moved from one IRA to another in a tax-free transfer,
such as a rollover, you generally cannot recharacterize
the amount that was transferred. However, see Traditional
IRA mistakenly moved to SIMPLE IRA below.
CAUTION
!
Page 30 Chapter 1 Traditional IRAs


Since the codes on your 1099R apparently indicate that you did recharacterize (did NOT convert) your specific TIRA contribution as a Roth IRA contribution, and if your MAGI is too high for a Roth contribution, all you can do now is to request a return of an excess contribution with any earnings. You will get back the net earnings adjusted amount, and if the earnings are positive, they are subject to tax and penalty in 2012. Ttax should flag you if your MAGI is too high for the Roth contribution, but you would then have to suspend the return until you process the corrective distribution, and you also need to include an explanatory statement regarding the recharacterized TIRA contribution to Roth and the return of your excess Roth contribution. Then when you get the contribution returned, you can decide whether to re contribute it again as a non deductible TIRA contribution and then convert it to Roth or not. The conversion is what you obviously should have done the first time, and it would have saved some time and expense. There are just alot of rules that trip people up when it comes to IRA rules and plenty of people fall victim.
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