roth recharacterization - think I made a mistake?

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matthewmon
Posts: 44
Joined: Mon Nov 07, 2016 10:38 pm

roth recharacterization - think I made a mistake?

Post by matthewmon » Thu Jan 11, 2018 12:12 pm

I did some reading on this site and thought I had figured out a way to reduce my taxable income in 2017 to get the full savers credit...but now I think I have realized what I did probably wasn't correct or proper and needs to be fixed??? Was it okay or do I need to do something to fix the situation ASAP before doing 2017 taxes?

If you can only do a roth recharacterization on money that has been converted from a Traditional IRA to a Roth IRA then what I did was wrong because I have never converted from a Traditional to a Roth. I never had a Traditional IRA until 2017 when I opened one at TDAmeritrade. I had a Roth IRA since like 2007 at TDAmeritrade. I filled out and mailed in the Roth Recharacterization form to recharacterize $5,500 from my Roth to the Traditional IRA. So on 4/25/17 there was an internal transfer of cash from my Roth account to to my new Traditional account of $5,799.20. I messaged TDAmeritrade to find out how they got that amount and got this reply-

"Hello. I just wanted to follow up with you on your previous IRA inquiry. The IRA team has indicated that with a recharacterization a calculation is done to see if there are any earnings or losses on the contribution. In this case there were earnings on the $ 5,500.00 contribution so those earnings have to go with the original contribution. This is not considered an over contribution or excess."


Is this correct or was what was done wrong? Seems to me that if $5,500 after tax is changed to $5,799 in a pretax account I am getting screwed (would lose money if I tried to convert back to Roth IRA and had to pay taxes on it...) and should have never attempted this action? In my mind I was converting the $5,500 I contributed to the Roth IRA in January 2017 which hadn't been invested. Seems like I have made a major mistake and I would just like the $5,500 put back into the Roth IRA. Any advice is greatly appreciated thanks!

kaneohe
Posts: 4707
Joined: Mon Sep 22, 2008 12:38 pm

Re: roth recharacterization - think I made a mistake?

Post by kaneohe » Thu Jan 11, 2018 12:46 pm

Sounds correct to me.........there are 2 types of recharacterizations: you are probably thinking of recharacterizing a conversion from TIRA to Roth. You can also recharacterize a contribution either from Roth to TIRA or from TIRA to Roth if you change your mind for a variety of reasons......this sounds like what happened.

Not really a major deal......if you can get TDA .....to "correct" the error, that's probably the best tho since it's been so long, you would be lucky if they agree. If they don't, if you are eligible for a full deduction on TIRA, you can deduct the full amount 5500 and convert the full value now , say 6K which would be taxed. If you had kept in Roth, you would have paid tax on the 5.5K original contribution anyway, so now you are just paying additional tax on the earnings of 500 which would have been eliminated if you had kept in the Roth. It's not like you are paying tax on the 5K in one case and not the other so no double taxes.

A) Income =INC; contribute 5.5K to Roth. Pay taxes on INC
B) Income = INC; contribute 5.5K to Roth. Recharacterize to TIRA w/ value of 6K due to earnings. Convert 6K to Roth.
Deduct 5.5K for TIRA contribution; Convert 6K to Roth which produces additional income of 6K. These two net to 0.5K extra income
Total income =INC + 0.5K. Pay taxes on this so differs from tax in A) by the tax on 0.5K
Last edited by kaneohe on Thu Jan 11, 2018 6:25 pm, edited 1 time in total.

matthewmon
Posts: 44
Joined: Mon Nov 07, 2016 10:38 pm

Re: roth recharacterization - think I made a mistake?

Post by matthewmon » Thu Jan 11, 2018 1:14 pm

ok...I suck at taxes and think I just got confused. I will just leave it as is if everything is fine. Thanks!

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