Roth Conversion
We converted a traditional IRA to a Roth IRA during 2007. It is now tax time and due to income rules, we would incur a penalty for this year and several years to come (according to turbotax). So we completed a recharacterization form with ML to convert the Roth back to a traditional IRA. When completing my taxes for 2007, do I just ignore both transactions since we are back we started?
Thank you.
Permalink Submitted by Alan Spross on Sun, 2008-03-02 00:01
When did you actually do the recharacterization, in 2008?
Did the tax program indicate whether you can deduct the TIRA contribution or not? That is based on both your income and retirement plan participation as well as which spouse participates.
When you provide that info, I can limit the response to your specific situation.
Permalink Submitted by Robert Bender on Sun, 2008-03-02 00:24
We completed the recharacterization form last month (Feb 2008) once we started working on our 2007 taxes. The form was completed as if the recharacterization is taking place the same day we originally made the Roth conversion in 2007. Our ML people completed the form we signed.
I apologize that I am not familiar with the rules or allowances for contributions. Entering the 1099R information, the traditional IRA distribution and classifying it as 100% contribution to Roth, only allowed a small portion of the total Roth conversion (maybe $2,000). The message indicated we would incur a penalty this year and for several years to come. I am guessing I could only rollover a certain amount each year. It appeared that we would be taxed on the entire distribution this year.
It is my spouse’s IRA. She does not work. We file jointly.
I hope I have given enough information.
Thank you.
Permalink Submitted by Alan Spross on Sun, 2008-03-02 05:45
Don’t apologize, but accept mine, because I misread your original post. Ignore my comments about deducting the TIRA contribution, as that does not apply when all you did was a conversion, and no regular contribution.
That said, if your joint modified AGI was over 100,000, you cannot convert even a partial amount, so if you are getting a comment from Turbotax that you were allowed a PARTIAL conversion, you must have entered it as a regular contribution and not a conversion. Since the income limit for regular contributions is higher than for conversions, it sounds like you could NOT qualify for a conversion at all, and therefore your total recharacterization is appropriate.
If these assumptions are correct, you should answer the TTax question about rechacterizing the conversion, and the amount you converted should end up on line 15a of Form 1040, but -0- on 15b. You then need to attach an explanatory statement to your return in the following format.
“On xx/xx/2007 (spouse’s name) converted $y to a Roth IRA, but since our modified AGI was too high, on xx/xx/2008 she recharacterized the entire conversion, which was then valued at $z back to her traditional IRA”
Since the 1099R for the recharacterization does not get issued until next January, this explains to the IRS why you are not reporting the taxable income for the conversion on your return. Otherwise, they would not know that you recharacterized (reversed) it. Hopefully, you Ttax will allow you to enter this explanation in the appropriate section, so you can still e file using the program.
Then, next January, when you get the 1099R for the recharacterization (and Form 5498) you can ignore them, because you will have fully reported this on your 2007 return.
To get the figure reprented by “$z”, check your statements from the IRA custodian showing the recharacterization. Since gains or losses must be reflected, a different amount than your conversion will actually migrate back to the traditional IRA.
Permalink Submitted by Robert Bender on Sun, 2008-03-02 13:22
Thank you. I appreciate the simplicity of your suggested directions and details of your advice. This has been a big help.
Best regards.
Permalink Submitted by [email protected] on Sun, 2008-03-02 19:36
To complicate things more, till now the TurboTax Deluxe online version–and perhaps other TT versions?–has an error in that it apparently includes the RMD, and perhaps also the converted amount, when it calculates the conversion modified AGI. As a result, false MAGI’s of > $100,000. may be generated in the program resulting in erroneous results re one’s Roth conversion.
One TT specialist posted a notice in 1/2008 on the TT Living Community that there would be an “upcoming update” to correct this problem. Maybe the correction will be included in a final program update scheduled for March 10.
Permalink Submitted by Alan Spross on Mon, 2008-03-03 03:51
That’s odd since 2007 is the 3rd year of this provision, and they must have made the change for a prior year, but it somehow was deleted in the current edition. In any event, it should be a simple update, but these editions probably don’t get nearly the priority for updates as LaCerte.