Roth IRA contributions
A client made Roth IRA contributions in December 2009 but when looking at their return, there will be a tax owed if the Roth stays in place.
They now have a regular due date to the IRS of 5/11/09 . My thought was to tell them to recharacterize the contibutions from the Roth to a traditional IRA so that they can take a deduction on the 2009 return and then to later reconvert in 2010 to take advantage of spreading the tax over 2010 and 2011.
I have already filed an extension until 10/15/10 and it is my understanding that they will have until this date to do the recharacterization.
Am I correct?
Permalink Submitted by Alan Spross on Fri, 2010-04-30 20:22
Yes, as long as the extension was filed by 4/15 they have until the extended due date (10-15) to recharacterize or correct an excess contribution.
That said, be sure that this is to their advantage in the long term rather than just reducing the current tax bill. For example, a December 2009 contribution invested in the market may be up considerably in value. If they recharacterize it, those Roth earnings which would eventually be tax free are sent to a TIRA where they will be taxed in a future conversion or distribution. The added tax for 2010 (or 2011 and 2012) might well be more than the tax savings for 2009. In addition, a conversion has a 5 year holding period that is avoided for regular contributions.
There is no split option between 2010 and 2011. The two options are as stated above, and tax rates may also be higher in 2011 and 2012 than for 2009.
Also, they may not even be eligible to deduct a TIRA contribution if they are covered by a retirement plan at work.
Your plan works best if their marginal rate in 2009 is higher than what they expect in retirement and/or to the extent their contribution has lost money if they can deduct the original amount.
If they DO recharacterize, there is no waiting period to convert because this is NOT a recharacterization of a conversion, just a regular contribution. It would not be a “reconversion”.