IRA recharacterization to Roth IRA - resulting contribution basis?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
Rainmaker41
Posts: 657
Joined: Tue Apr 26, 2016 11:34 am

IRA recharacterization to Roth IRA - resulting contribution basis?

Post by Rainmaker41 »

If a taxpayer contributes $6,000 to a Roth IRA, then their contribution basis for that year is $6,000 for the purposes of penalty free withdrawals at any time. This ($6,000) is the figure on the Form 5498 recording the contribution.

If a taxpayer contributes $6,000 to a Traditional IRA, and then recharacterizes the contribution to a Roth IRA, then they still use up the $6,000 contribution limit. However, due to gains, let's say the value of $6,100 is the amount moved to the Roth IRA. This ($6,100) is the figure on the Form 5498 for box 4, "recharacterized contributions".

In the case of the recharacterized contribution, which is the Roth IRA contribution basis? The value originally contributed to the Traditional IRA, or the value moved to the Roth IRA which is recorded on the latter's Form 5498?
80% Global Stock, 20% US Fixed Income
User avatar
David Jay
Posts: 11113
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: IRA recharacterization to Roth IRA - resulting contribution basis?

Post by David Jay »

Can you recharacterize the $100? I doubt it, because it was never contributed. It would seem to me that you can only recharacterize the original $6000 contribution.

It would seem that one would need to perform a Roth Conversion to move the $100 to Roth.


See below, my bad.
Last edited by David Jay on Fri Jun 11, 2021 10:09 am, edited 1 time in total.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
User avatar
anon_investor
Posts: 7056
Joined: Mon Jun 03, 2019 1:43 pm

Re: IRA recharacterization to Roth IRA - resulting contribution basis?

Post by anon_investor »

Rainmaker41 wrote: Wed Jun 09, 2021 12:27 pm If a taxpayer contributes $6,000 to a Roth IRA, then their contribution basis for that year is $6,000 for the purposes of penalty free withdrawals at any time. This ($6,000) is the figure on the Form 5498 recording the contribution.

If a taxpayer contributes $6,000 to a Traditional IRA, and then recharacterizes the contribution to a Roth IRA, then they still use up the $6,000 contribution limit. However, due to gains, let's say the value of $6,100 is the amount moved to the Roth IRA. This ($6,100) is the figure on the Form 5498 for box 4, "recharacterized contributions".

In the case of the recharacterized contribution, which is the Roth IRA contribution basis? The value originally contributed to the Traditional IRA, or the value moved to the Roth IRA which is recorded on the latter's Form 5498?
I thought when a recharacterization is done, lets say from traditional to Roth, the custodian will treat any gains as if the original contribution was done as Roth all along, so the $100 would also become Roth. Someone correct me if my understanding is incorrect.
retiredjg
Posts: 44471
Joined: Thu Jan 10, 2008 12:56 pm

Re: IRA recharacterization to Roth IRA - resulting contribution basis?

Post by retiredjg »

Your contribution was $6k and that is the basis. The $100 would be associated earnings that must go with the contribution if the contribution is recharacterized.

That's how I understand it anyway.
lakpr
Posts: 7747
Joined: Fri Mar 18, 2011 9:59 am

Re: IRA recharacterization to Roth IRA - resulting contribution basis?

Post by lakpr »

anon_investor wrote: Wed Jun 09, 2021 12:37 pm I thought when a recharacterization is done, lets say from traditional to Roth, the custodian will treat any gains as if the original contribution was done as Roth all along, so the $100 would also become Roth. Someone correct me if my understanding is incorrect.
No. Recharacterization is as if you made the other type of IRA contribution on the date you contributed. Only the contribution. The $100 would become Roth in your example, but it would be a Roth "growth", and therefore not available for penalty-free / tax-free withdrawal earlier than age 59.5. The original $6000 would still be.
Topic Author
Rainmaker41
Posts: 657
Joined: Tue Apr 26, 2016 11:34 am

Re: IRA recharacterization to Roth IRA - resulting contribution basis?

Post by Rainmaker41 »

anon_investor wrote: Wed Jun 09, 2021 12:37 pm I thought when a recharacterization is done, lets say from traditional to Roth, the custodian will treat any gains as if the original contribution was done as Roth all along, so the $100 would also become Roth. Someone correct me if my understanding is incorrect.
Right, the total value becomes Roth.
David Jay wrote: Wed Jun 09, 2021 12:32 pm Can you recharacterize the $100? I doubt it, because it was never contributed. It would seem to me that you can only recharacterize the original $6000 contribution.

It would seem that one would need to perform a Roth Conversion to move the $100 to Roth.
No Roth Conversion takes place. As a result of the recharacterization, the contribution is treated as though it had been made to a Roth IRA in the first place.
80% Global Stock, 20% US Fixed Income
User avatar
anon_investor
Posts: 7056
Joined: Mon Jun 03, 2019 1:43 pm

Re: IRA recharacterization to Roth IRA - resulting contribution basis?

Post by anon_investor »

lakpr wrote: Wed Jun 09, 2021 12:47 pm
anon_investor wrote: Wed Jun 09, 2021 12:37 pm I thought when a recharacterization is done, lets say from traditional to Roth, the custodian will treat any gains as if the original contribution was done as Roth all along, so the $100 would also become Roth. Someone correct me if my understanding is incorrect.
No. Recharacterization is as if you made the other type of IRA contribution on the date you contributed. Only the contribution. The $100 would become Roth in your example, but it would be a Roth "growth", and therefore not available for penalty-free / tax-free withdrawal earlier than age 59.5. The original $6000 would still be.
Yes, Roth growth, but not traditional growth like it would be if the recharacterization was not made.
User avatar
David Jay
Posts: 11113
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: IRA recharacterization to Roth IRA - resulting contribution basis?

Post by David Jay »

Looks like you have your answer from multiple sources - The full $6100 is recharacterized but the $100 is not basis.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
Alan S.
Posts: 10683
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: IRA recharacterization to Roth IRA - resulting contribution basis?

Post by Alan S. »

The Roth basis is 6000.
Form 5498 shows 6100 as recharacterized contributions and therefore matches up with the recharacterization 1099R. But since these forms fail to clarify the amount of the original contribution that was recharacterized, the IRS requires an explanatory statement for the return year for which the original contribution occurred to clearly state the amount of the original contribution and the amount of that contribution that was recharacterized. The statement also indicates the amount actually transferred, which would be the 6100.

Needed tracking of your Roth contribution basis will have to rely on these statements because there will be no 5498 showing a regular Roth contribution, only one showing the recharacterized transfer. So you would also need to check this statement to track the actual addition to Roth IRA basis of 6000. You cannot use the Box 1 amount of the 5498 which will show 6100.
Post Reply