Roth IRA
My client works for the State Department (probably covert) and was on an overseas assignment most of 2009. This increased his pay over the Roth IRA maximum but he still contributed the full $5000 to his Roth. We filed an extension and just completed his taxes today as he was out of the country until June 2010. Can he recharaterized this Roth to a Traditional Non Deductible IRA without penalty? If he can, should I wait to file his return until he does so? If he cannot, what is the penalty. He’s single, 2009 AGI $152K. THANKS!
Permalink Submitted by Alan Spross on Wed, 2010-06-30 17:51
As long as the extension was filed on time, he can recharacterize up to the extended due date of 10/15 without any penalty or added tax. Of course, he must also have earned income in excess of any income that may have been excluded by the foreign earned income exclusion to make any type of IRA contribution. As long as he can recharacterize, there is no reason to wait. That process can often be done in a week depending on the custodian. Completing it will allow for a more complete explanatory statement regarding the Roth contribution and subsequent recharacterization.
Remember to file an 8606 reporting the non deductible TIRA contribution. He might be a candidate for making continued non deductible TIRA contributions and then converting to a Roth IRA. That gets around the income limit for regular Roth contributions. The conversion will be subject to pro rate rules and therefore would be tax free only if he has no other TIRAs and converts before any earnings are generated on the non deductible contributions.