Taxes for 2018 recharacterization of 2017 Roth conversion

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TinpotInvestor
Posts: 15
Joined: Sun Dec 01, 2013 12:45 am

Taxes for 2018 recharacterization of 2017 Roth conversion

Post by TinpotInvestor » Tue Feb 13, 2018 12:18 am

My mom converted about $40,000 of her traditional IRA into a Roth IRA at the end of 2017.
In the beginning of 2018, she figured that wasn't a good idea, so she undid the Roth conversion by doing a recharacterization.
She got a 1099-R for the conversion. Is there another tax form for the recharacterization so it cancels out the 1099-R?
Clearly, she does not want to report the 1099-R as income on her tax return. That was the whole point of the recharacterization: It should be as if the conversion never happened in the first place.
She is married filing jointly for tax year 2017, and should be filing single in tax year 2018.

Alan S.
Posts: 7520
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Taxes for 2018 recharacterization of 2017 Roth conversion

Post by Alan S. » Tue Feb 13, 2018 2:34 pm

TinpotInvestor wrote:
Tue Feb 13, 2018 12:18 am
My mom converted about $40,000 of her traditional IRA into a Roth IRA at the end of 2017.
In the beginning of 2018, she figured that wasn't a good idea, so she undid the Roth conversion by doing a recharacterization.
She got a 1099-R for the conversion. Is there another tax form for the recharacterization so it cancels out the 1099-R?
Clearly, she does not want to report the 1099-R as income on her tax return. That was the whole point of the recharacterization: It should be as if the conversion never happened in the first place.
She is married filing jointly for tax year 2017, and should be filing single in tax year 2018.
Yes, there will be a 1099R reporting the recharacterization, but it will not be issued until Jan, 2019. Therefore, while she will not report the conversion on her 2017 return, she WILL have to include an explanatory statement indicating the date and amount of the conversion, date and amount of the recharaterization and what the conversion was worth when transferred back to the TIRA in January. This will explain to the IRS why she is not reporting conversion income on her 2017 joint return.

Because the 1099R for the recharacterization will be coded R to reflect that a 2017 conversion was recharacterized, she will not have to report any of this on her 2018 single return. Of course, she should check that 1099R to be sure it is correct and the code is correct.

TinpotInvestor
Posts: 15
Joined: Sun Dec 01, 2013 12:45 am

Re: Taxes for 2018 recharacterization of 2017 Roth conversion

Post by TinpotInvestor » Thu Feb 15, 2018 4:07 pm

Alan, that was useful information, thanks.

1,200 shares of VTHRX (Vanguard Target Retirement 2030 Fund) was converted from Traditional to Roth IRA in 2017.
The conversion was reversed by a recharacterization in 2018.
1,227.8260 shares of VTHRX was recharacterized. At first glance, this looks about right, since there were annual fund distributions at the end of 2017.
Upon closer inspection, I am not sure how the extra 27.8260 shares came about.

From the Vanguard website for VTHRX:

Code: Select all

Distributions for this fund are scheduled Annually
Dividend and capital gains distributions

Distribution    Most Recent
Type            Distribution	Record Date     Reinvest Date	Payable Date	Reinvest Price	Distribution Yield	SEC Yield
Dividend	$0.66950	12/27/2017	12/28/2017	12/29/2017	$33.69	                         —	1.97%  B
ST Cap Gain	$0.01570	12/27/2017	12/28/2017	12/29/2017	$33.69	                         —	       —
LT Cap Gain	$0.00330	12/27/2017	12/28/2017	12/29/2017	$33.69	                         —	       —
I add up $0.68850 of distributions per share. Multiply that by 1,200 shares,and you get $826.20 of distributions. Divide that by the reinvest price of $33.69, and I get 24.5236 extra shares, not 27.8260.

Who's right, who's wrong?

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Epsilon Delta
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Re: Taxes for 2018 recharacterization of 2017 Roth conversion

Post by Epsilon Delta » Thu Feb 15, 2018 7:12 pm

Is Vanguard Target Retirement 2030 Fund the only thing in your Roth?

Have you made any other contributions to or withdrawals from the Roth between the conversion and the recharacterization?

Either of these would affect the earnings calculation.

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