Roth IRA Recharacterization

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ejvyas
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Roth IRA Recharacterization

Post by ejvyas »

I wanted to get a quick sanity check to make sure I do this right.I have read the Backdoor Roth IRA, Recharacterization of Roth IRA articles + searched the forums for this topic. Here's my story:

Contributions to Roth IRA
Jan 2015 - 5500 (me), 5500 (spouse)
Jan 2016 - 5500 (me), 5500 (spouse)

Due to some unexpected income we crossed the barrier for Roth IRA (married filing jointly).

Now I believe I need to take the following steps to rectify:
1. Open tIRA with Vanguard
2. Call Vanguard to recharacterize Roth IRA to tIRA
3. Once it posts convert it to Roth IRA

Questions
1. Does my procedure look ok?
2. What tax forms will be generated for 2015 and 2016?
a. I believe it will generate two 1099-R in 2015 and two 1099-R in 2016?
b. I think I need to report the following on taxes
i. His 2015 Form 8606 reporting a non-deductible contribution to IRA for 2015; note about re-characterization
ii. Her 2015 Form 8606 reporting a non-deductible contribution to IRA for 2015; note about re-characterization
iii. Roth conversion done in 2016
Last edited by ejvyas on Mon Apr 11, 2016 3:48 pm, edited 1 time in total.
Alan S.
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Re: Roth IRA Recharacterization

Post by Alan S. »

Looks good.

All your 1099R forms will be issued in Ja, 2017, but the recharacterization 1099R will be coded to show that you recharacterized a 2015 contribution. With your 2015 return you include an explanatory statement indicating the date and amount of the Roth contribution, the date you recharacterized it as a TIRA contribution, and what that contribution was worth on the recharacterization date.

For your 2016 return, because you explained the recharacterization as above, all you need to do is report the conversion on Form 8606. That conversion may have a modest taxable amount to it. If your TIRA is worth more than 5500 when you convert, the amount in excess of 5500 will be taxable.

Above applies to each spouse separately, although you could combine the explanatory statements.
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ejvyas
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Re: Roth IRA Recharacterization

Post by ejvyas »

Alan S. wrote:Looks good.

All your 1099R forms will be issued in Ja, 2017, but the recharacterization 1099R will be coded to show that you recharacterized a 2015 contribution. With your 2015 return you include an explanatory statement indicating the date and amount of the Roth contribution, the date you recharacterized it as a TIRA contribution, and what that contribution was worth on the recharacterization date.

For your 2016 return, because you explained the recharacterization as above, all you need to do is report the conversion on Form 8606. That conversion may have a modest taxable amount to it. If your TIRA is worth more than 5500 when you convert, the amount in excess of 5500 will be taxable.

Above applies to each spouse separately, although you could combine the explanatory statements.
Oh!
1. I thought I would have to file 8606 in 2015 and 2016. Is it that I have to file the 8606 in 2016 return only ?
2. Does taxact help with the note? Where do I add a note in taxact?
Alan S.
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Re: Roth IRA Recharacterization

Post by Alan S. »

You DO have to file the 2015 8606 to report the non deductible contribution. I only commented on the things that warranted comment or clarification. Most of what you posted is correct.

I don't use Tax Act, but most of these programs provide a screen to use for a narrative explanatory statement.
Assuming you can pull up that screen your statement would follow this format:

"In January, 2015 both spouses contributed 5,500 to our Roth IRAs. In April, 2016 we each recharacterized our entire contributions to traditional IRAs. At the time of recharacterization these contributions were worth $x."

Note that the statement only addresses your 2015 contributions since this is your 2015 return. You will have to do the same thing when you file 2016 taxes. I am also assuming that the Roth contributions were FOR the year in which they were made, not for the prior year.
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ejvyas
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Re: Roth IRA Recharacterization

Post by ejvyas »

Alan S. wrote:You DO have to file the 2015 8606 to report the non deductible contribution. I only commented on the things that warranted comment or clarification. Most of what you posted is correct.

I don't use Tax Act, but most of these programs provide a screen to use for a narrative explanatory statement.
Assuming you can pull up that screen your statement would follow this format:

"In January, 2015 both spouses contributed 5,500 to our Roth IRAs. In April, 2016 we each recharacterized our entire contributions to traditional IRAs. At the time of recharacterization these contributions were worth $x."

Note that the statement only addresses your 2015 contributions since this is your 2015 return. You will have to do the same thing when you file 2016 taxes. I am also assuming that the Roth contributions were FOR the year in which they were made, not for the prior year.

Got it. Thank you

yes you are right - Roth contributions were FOR the year in which they were made, not for the prior year
DeliciousDuck
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Re: Roth IRA Recharacterization

Post by DeliciousDuck »

ejvyas wrote: Oh!
1. I thought I would have to file 8606 in 2015 and 2016. Is it that I have to file the 8606 in 2016 return only ?
2. Does taxact help with the note? Where do I add a note in taxact?
You can use these instructions to add the note:
https://www.taxact.com/support/18594/20 ... erization/
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ejvyas
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Re: Roth IRA Recharacterization

Post by ejvyas »

Thanks to all who helped me :) I am still learning. This is what I did in 2015. I havent thought about 2016 and will wait to decide depending on MAGI

my spouse account had earnings so I did recharacterize it to tIRA and I ll convert to rIRA tomorrow


However, my account has ~200 loss. Is it worth removing the contribution and contributing full amount 5500 to non-deductible tIRA?
Can I claim the ~200 loss on my taxes? I guess not as its a MISC deduction and I dont itemize
Alan S.
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Re: Roth IRA Recharacterization

Post by Alan S. »

ejvyas wrote:Thanks to all who helped me :) I am still learning. This is what I did in 2015. I havent thought about 2016 and will wait to decide depending on MAGI

my spouse account had earnings so I did recharacterize it to tIRA and I ll convert to rIRA tomorrow


However, my account has ~200 loss. Is it worth removing the contribution and contributing full amount 5500 to non-deductible tIRA?
Can I claim the ~200 loss on my taxes? I guess not as its a MISC deduction and I dont itemize
You do have a choice here to either recharacterize the contribution and then convert the ~5300 you received and let the remaining 200 basis carry over, or request a return of your Roth contribution, then recontribute it along with 200 to bring your non deductible contribution up to 5500. If you want to do the latter, the custodian may be able to handle your request without actually returning the contribution. They should be able to recontribute it to TIRA according to your instructions, and there is a tight time constraint on this because the new contribution must be made by 4/18 for a 2015 contribution. On the other hand, a recharacterization can be done as late as 10/15 provided you either filed your 2015 return on time or filed an extension on time. In other words, what you prefer to do may have time issues at this point and could limit your options.
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ejvyas
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Re: Roth IRA Recharacterization

Post by ejvyas »

Alan S. wrote:
ejvyas wrote:Thanks to all who helped me :) I am still learning. This is what I did in 2015. I havent thought about 2016 and will wait to decide depending on MAGI

my spouse account had earnings so I did recharacterize it to tIRA and I ll convert to rIRA tomorrow


However, my account has ~200 loss. Is it worth removing the contribution and contributing full amount 5500 to non-deductible tIRA?
Can I claim the ~200 loss on my taxes? I guess not as its a MISC deduction and I dont itemize
You do have a choice here to either recharacterize the contribution and then convert the ~5300 you received and let the remaining 200 basis carry over, or request a return of your Roth contribution, then recontribute it along with 200 to bring your non deductible contribution up to 5500. If you want to do the latter, the custodian may be able to handle your request without actually returning the contribution. They should be able to recontribute it to TIRA according to your instructions, and there is a tight time constraint on this because the new contribution must be made by 4/18 for a 2015 contribution. On the other hand, a recharacterization can be done as late as 10/15 provided you either filed your 2015 return on time or filed an extension on time. In other words, what you prefer to do may have time issues at this point and could limit your options.

Learning even more :) I will ask Vanguard if they can do "request a return of your Roth contribution without actually returning the contribution" I also have some spare money in the brokerage that may help me max it out to 5500 for the year. But all depends on whether they can do the return of funds and contribution in one step
doug4523
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Re: Roth IRA Recharacterization

Post by doug4523 »

Hijacking this thread because the original post is exactly what I'm dealing with for a friend. He contributed to a Roth IRA but made more money than he thought. I follow everything on this thread except for the part where OP plans on converting the tIRA back to a roth IRA. In reading other articles, it seems like that conversion event needs to wait the longer of 30 days or the first of the year following the recharacterization? Is that incorrect? Would someone who recharacterized a Roth IRA contribution to a tIRA NOT need to wait until that amount of time has passed and simply reconvert back to a Roth IRA as soon as the funds post in the tIRA?

Thanks for any clarification.
Alan S.
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Re: Roth IRA Recharacterization

Post by Alan S. »

doug4523 wrote:Hijacking this thread because the original post is exactly what I'm dealing with for a friend. He contributed to a Roth IRA but made more money than he thought. I follow everything on this thread except for the part where OP plans on converting the tIRA back to a roth IRA. In reading other articles, it seems like that conversion event needs to wait the longer of 30 days or the first of the year following the recharacterization? Is that incorrect? Would someone who recharacterized a Roth IRA contribution to a tIRA NOT need to wait until that amount of time has passed and simply reconvert back to a Roth IRA as soon as the funds post in the tIRA?

Thanks for any clarification.
No waiting is required. The waiting period applies to reconversions after recharacterizing a conversion. But a regular IRA Contribution has not been converted and therefore there is no waiting period to convert after a recharacterized regular contribution. If the friend converts back to Roth which is the basic back door Roth strategy, he needs to know that if he has any other pre tax non Roth IRA balances, his conversion will be mostly taxable. Form 8606 handles the math for determining the taxable amount.

If there are no other TIRAs, any gains on the contribution while in the Roth will be included in the recharacterization transfer, and converting the entire TIRA back to Roth will result in the gains being taxable.
doug4523
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Re: Roth IRA Recharacterization

Post by doug4523 »

Alan S. wrote:
doug4523 wrote:Hijacking this thread because the original post is exactly what I'm dealing with for a friend. He contributed to a Roth IRA but made more money than he thought. I follow everything on this thread except for the part where OP plans on converting the tIRA back to a roth IRA. In reading other articles, it seems like that conversion event needs to wait the longer of 30 days or the first of the year following the recharacterization? Is that incorrect? Would someone who recharacterized a Roth IRA contribution to a tIRA NOT need to wait until that amount of time has passed and simply reconvert back to a Roth IRA as soon as the funds post in the tIRA?

Thanks for any clarification.
No waiting is required. The waiting period applies to reconversions after recharacterizing a conversion. But a regular IRA Contribution has not been converted and therefore there is no waiting period to convert after a recharacterized regular contribution. If the friend converts back to Roth which is the basic back door Roth strategy, he needs to know that if he has any other pre tax non Roth IRA balances, his conversion will be mostly taxable. Form 8606 handles the math for determining the taxable amount.

If there are no other TIRAs, any gains on the contribution while in the Roth will be included in the recharacterization transfer, and converting the entire TIRA back to Roth will result in the gains being taxable.
Awesome, thanks for the explanation. I understand now. He falls into the second category luckily. He actually falls into the "in between" income range where his entire contribution is not allowed but about half is. Considering he had gains that will become taxable when he converts back to roth, would it make the most sense to only recharacterize what he has to (along with the prorated gains with the $3,000 or so) to reduce the amount of taxable gains? Or is it not worth the extra confusion and just recharacterize the full 2016 contribution? I've only ever done straightforward backdoor roth contributions myself so I've never had to research this too much.

I assume vanguard will be able to figure out the gains associated with the 2016 contribution right? If yes, would they also be able to figure out the gains if we only need to recharacterize half the contribution? Thanks again!
Alan S.
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Re: Roth IRA Recharacterization

Post by Alan S. »

Yes, VG must calculate the gain or loss on a partial recharacterization. Once the gain is known on the total contribution, if 50% of the contribution is recharacterized roughly 50% (subject to rounding) of the gains go with the transfer and 50% stays in the Roth.

From the above info, a dollar amount of gain is determined that can stay in the Roth. This is the dollar amount that a full recharacterization would result in transfer back to the TIRA unnecessarily. It would then be taxed on the conversion. If this figure is under $50, he would probably opt to recharacterize 100% of the contribution.

If more than that amount, then he needs to know what extra bookkeeping will be triggered.

Tax filing is about the same. He will be reporting a conversion either way, and will have to file an explanatory statement about the recharacterization either way. Only the amounts will differ.

For future Roth IRA tracking which everyone should be doing, and most fail to do, he would record a regular contribution of the allowed amount and a partially taxable conversion of the recharacterized total. This is no different than if he had done both a regular contribution and a conversion in the same year without a recharacterization. Conversely, if he recharacterized the entire contribution, then all he would record for future Roth purposes is a partially taxable conversion. I would say the partial recharacterization would add less than 10% of the work he already will have to do.
doug4523
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Re: Roth IRA Recharacterization

Post by doug4523 »

Alan S. wrote: I would say the partial recharacterization would add less than 10% of the work he already will have to do.
Thanks Alan S. for the wonderful explanation. I'll be showing him this post when helping him with all this. :sharebeer
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