Calculation of Basis after Recharacterization
Client has a Traditional IRA that was converted in its entirety to a Roth IRA several years back.
The value at time of conversion was $25K with a nondeductible basis of $3K.
While in the Roth, the investment paid $1K in dividends that were reinvested, and the underlying holdings appreciated $4K
In the beginning of the subsequent tax year, after discovering that unexpected income late in the year drove his MAGI above the limit for conversions, client recharacterized the entire Roth back a Traditional (at this time valued at $30K)
Given all of this back and forth and the gains that occurred, I am a bit confused as to how to correctly calculate the appropriate basis in the T-IRA today. Any help would be tremendously appreciated.
Permalink Submitted by Alan Spross on Wed, 2010-04-14 19:38
1) If client recharacterized the conversion before he filed his return, there would be no 8606 on his return reporting the conversion, and therefore the basis would be the same as it originally was before the conversion (3k). The conversion is treated as if it never occurred.
2) However, if the client filed a return including the conversion , then they had to amend that return which would also have eliminated the conversion 8606 entirely.
Either way, there should be no need to file a separate 8606 just to re state the amount of basis in the TIRA. Going forward client will assume they still have the same amount of basis that existed prior to the conversion (3k). Gains and losses while in the Roth do not affect the amount of basis at all, they just affect the total amount of dollars migrating back to the TIRA. Those extra dollars are all pre tax, so after the recharacterization the basis was still 3k, but the total TIRA value was now 30k.