Roth Recharacterization
If someone makes a $5,000 Roth contribution for 2008, but later realizes that she was only permitted to make a $3,500 Roth contribution, is she permitted to recharacterize the $1,500 up until October 15, 2009 even if she did NOT file an extension? If so, can she still file her tax return on April 15th showing a $1,500 non-deductible IRA contribution (8606) even though the correction (recharacterization) has not yet happened because she has until October 15th to make the correction?
Thank you!
Permalink Submitted by Alan Spross on Tue, 2009-04-14 23:27
Yes, she could do that, but it would be preferable to file an extension in this situation because she will not be able to include a complete explanatory statement of the recharacterization if filing now. She will not know how much will be moved to a TIRA, even though that information will not affect the current return. Alternatively, she might attempt an abbreviated explanatory statement omitting the amount that will move to the TIRA if she wants to avoid an extension. That way the IRS will know that she has dealt with the Roth excess. She would file an 8606 reporting a 1,500 non deductible TIRA contribution on the return.
The extended due date is secured by either filing a timely return or a timely extension request by 4/15. If she does not meet this imminent deadline, she would incur a 6% excise tax on the 1,500 since it would be uncorrected by the actual due date of 4/15.
Permalink Submitted by Jonathan Sard on Wed, 2009-04-15 00:13
Thanks Alan. I got confused by your last statement. Are you saying that if she already filed her tax return for 2008 that she can’t do the recharacterization and that she will now incur the 6% penalty? Unfortunately, her return has already been filed and the CPA completed the 8606 using the $1,500 as her non-deductible contribution, even though we have not yet completed the recharacterization. The CPA, without talking with me or our client, figured we could press a couple of buttons and have everything fixed the same day! I think I am still confused…
Permalink Submitted by Alan Spross on Wed, 2009-04-15 03:42
If she has already filed she has secured the extended due date. Therefore, she has until 10/15 to actually partially recharacterize the contribution. No problem, other than the recharacterization was probably not fully explained in the return. But if the IRS inquires about it, she can supply the evidence they need until the 1099R comes out next January.
Permalink Submitted by Jonathan Sard on Wed, 2009-04-15 11:42
One new wrinkle. The CPA has filed the return with $1,500 being recharacterized, however, with market losses, we calculate the actual amount should be $1,310. Any suggestions on what needs to be done now since the return has been filed showing $1,500, but the actual amount needing to be recharacterized is $1,310 (due to market losses) and that is what will show up on the 1099R and will now be contradicting her tax return.
Permalink Submitted by Alan Spross on Wed, 2009-04-15 19:12
This will not cause a problem vrs the tax return. She still gets credit for a 1,500 non deductible TIRA contribution on Form 8606 as the return should have been filed. She is also considered to have contributed 3,500 to a Roth IRA. For recharacterized or returned contributions, there is always an earning calculation that results in the actual dollar amount transferred and showing on the 1099R being different than the original contribution. All this means is that only 1,310 is actually deposited into the TIRA. The net effect is that the loss that occurred to the 1,500 amount in the Roth is considered to have occurred in the TIRA as if the 1,500 went there originally.
The fact that the actual transfer was 1,310 is what is missing in the desired explanatory statement that ideally would have been with the return. But the tax return itself is correct as is, so nothing needs to be done except to retain the records as I indicated in my prior post just in case the IRS asks about this before the 1099R is issued next January.