Roth IRA Recharacterization Questions

Submitted by fairira on Fri, 2008-10-03 04:42

I am about to recharacterize my 2007 Roth IRA conversion of a $10,000. portion of my TIRA, both IRA’s being at Vanguard, and would appreciate answers to the following questions. The conversion, done after I took my 2007 TIRA RMD, was an addition to a larger amount of pre-existing assets in that Roth IRA. I plan to check Vanguard’s calculation of the Net Income (which will be negative, a loss) with the TD 9056 formula. I have not done and do not plan to do any Roth conversion in 2008.
1. Since there were reinvested dividends and capital gains on the converted assets between the conversion date and the upcoming recharacterization date, am I correct that these added shares only affect the Net Income computation in that their value just before the recharacterization date will be a part of the Adjusted Closing Balance?
2. I will file an amended Form 1040x for 2007 and write “Filed pursuant to 301.9100-2” on it per Publ. 590. If the converted asset was $10,000. and if the recharacterized amount is $7,000., would it be correct to show on the 1040X a Net Change decrease of $3,000. (the Net Income) in the line 1 AGI (and thus in the line 5 taxable income) and of course the decrease in tax liability? Based on your answers, I will also file a California Form 540X.
3. Am I correct that my RMD for 2008 will be based on the TIRA 12/31/07 FMV increased by the recharacterized amount of $7,000.?
4. Because my and my wife’s reported 1040 AGI was $152,693., our stimulus payment was reduced by $134.65. After our recharacterization what if anything should we file or do to obtain this amount?
5. A Form 8606 was filed with my 2007 Form 1040 reporting the 2007 Roth conversion of $10,000. If I am correct that no Form 8606 needs to be filed re this recharacterization, is any paperwork or reporting needed other than my Form 1040X for 2007 and probably the 2008 Form 5498 for each of the 2 IRA’s?
Thank you very much for your help.

Flag as spam

Permalink Submitted by fairira on Fri, 2008-10-03 22:25

Oops! In question 3, I should have said “Am I correct that my RMD in 2008 for 2007…” and not said “Am I correct that my RMD for 2008 …”. Sorry.

Permalink Submitted by Alan Spross on Sat, 2008-10-04 01:30

1) Yes, that is correct. They are part of the closing balance, but the closing balance must reflect the total value of all assets in the particular Roth account on the date of the recharacterization.
2) No. Since you contemplate a full recharacterization of the 10,000 conversion, if you have no non deductible basis in your TIRA, the AGI is reduced by the full 10,000. The taxable income however may be affected by certain variables such as itemized deductions, reduced inclusion of SS income and others. It could reduce your taxable income by more than 10,000. Basically, you must totally recalculate your taxes based on the reduced AGI resulting from elimination of the conversion.
3) Yes. (Pub 590, p 35)
4) I do not know if your stimulus check will be supplemented automatically due to your amended return.
5) Right, no 8606 needed with the amended return. But include the explanatory statement on the 1040X that you did a conversion and full recharacterization including dates and amounts of each. (ref Inst for Form 8606, p 3 for example of this).
You do not have to provide the 5498 copies, since the IRS will receive them. They use your explanatory statement to match up to current or later 1099R and 5498 forms).