Backdoor Conversion Recharacterized and then again

Submitted by Jim Meixner on Fri, 2011-01-28 19:25

OK, see if you can follow me on this one:

In July of 2010 I decided to do a backdoor Roth conversion. I opened and fully funded a non-deductible IRA and then the following day converted it to my already open and funded Roth IRA.

In January of 2011, stupid me, didn’t realize non-deductible and deductible IRA’s were treated as one, from an IRS point of view. I recharacterized the 5k + earnings back to the non deductible IRA.

I initially thought my income was going to be too high to make the Roth contribution directly, but now that all the numbers are in, that is not the case. So I recharacterized the original non-deductible IRA contribution as a Roth contribution.

My trustee at the time screwed up (their words, not mine) and instead of doing a total recharacterization, they only did 5k worth (w/o the earnings), so the following day they reversed the transaction and then did a full recharacterization.

My questions are two fold:

1) Does everything I did seem alright? Bascially, it should look be a full Roth contribution for 2010.
2) With all this back and forth, what am I looking for on my tax return I will file for 2010. Specifically what will form 8606 look like and should I be looking out for anything else.

Thanks,

Jim



Submitted by Alan Spross on Sat, 2011-01-29 00:07

This sequence of a recharacterized contribution with a conversion and recharacterization sandwiched in between appears to narrowly avoid rules that prevent the undoing of a recharacterization. I think a conversion recharacterization escapes the limitation imposed on a second regular contribution recharacterization in the IRS Regs.

Your challenge will be to report this can of worms in a consistent manner with the 1099R forms you receive, and how the custodian reports their own screw up. Moreover, your 1099R forms for this will be issued over two years. You only get the portions done in 2010 this month, and those done this year in Jan, 2012.

For this tax season you will get a 1099R for the conversion, but since you recharacterized the entire conversion amount, do NOT report the conversion on Form 8606. Also, do NOT report making a non deductible TIRA contribution because you recharacterized it as a Roth contribution in 2011. But you DO need to attach an explanatory statement, but avoid too much detail that will just confuse the IRS. I suggest the following that does not commingle the events:
“On 7/xx/2010 I contributed 5k to my traditional IRA, and on 1/xx/2011 I recharacterized that contribution which was then worth $y as a 2010 Roth IRA contribution.”

“In addition, on 7/zz/2010 I converted 5k to a Roth IRA, but recharacterized 100% of that conversion, which was then worth $# back to my TIRA on 1/##/2011.”

The main test will be next January when you get the second set of 1099R forms for the two recharacterizations. At that time you will have to carefully compare them to your explanation above, and if all looks OK, you will not have to make any further reporting on your 2011 return.

Submitted by Jim Meixner on Mon, 2011-01-31 20:26

Alan, thanks for all your help.

You are correct, I did receive one 1099-R for this whole transaction. And let me make sure I get this correct. You are saying that I should not report any of this, and I should just attach an explanatory statement, correct? Or should I attach an explanatory statement as well as reporting a 2010 Roth contribution?

Submitted by Alan Spross on Mon, 2011-01-31 20:50

No, just the explanatory statement.

In the end, what remained was a regular Roth IRA contribution, and you do not report those. All the transactions that would have been reported were reversed by the recharacterizations, so the statement will be enough for the IRS to understand why your 2010 return does not match up with the 1099R and 5498 forms issued by the custodians.

Submitted by Mark Olson on Mon, 2014-09-22 21:13

I made an error and thought that I could make a non-deductible IRA contribution to a separate IRA account and then convert it as a tax free transaction. This was done in December 2013. I now know that it does not work that way. Fortunately, we are on extension. Can we reverse the Roth conversion and just have this account remain a non-deductible IRA? If so, what do we need to do?

Submitted by Jim Meixner on Mon, 2011-01-31 23:27

Much thanks Alan.

Submitted by Alan - IRA critic on Tue, 2014-09-23 00:23

  • Mark, you have until 10/15 to recharacterize the conversion back to TIRA. From there you have a choice to either file the 2013 8606 reporting the non deductible contribution you made, OR request a return of your contribution if you do not want the non deductible contribution. If returned, any earnings generated on the contribution including while in the Roth will be taxable and subject to penalty. 
  • Another option to check out is to determine if your current employer plan will accept a rollover from an IRA. The employer plan can only take the pre tax amount which is what you want to eliminate from your IRA anyway. If so, transfer your pre tax IRA balance into the employer plan. Then you would not need to change your conversion because it would be tax free as you originally thought. But be sure your investment options in the employer plan are good and have low expenses or you will not want to subject your IRA holdings to that situation.

Submitted by David Mertz on Tue, 2014-09-23 13:32

However, if Mark’s Roth conversion was done in December 2013, as appears to be the case, rolling the pre-tax amount to an employer plan in 2014 won’t affect the 2013 tax liability resulting from the 2013 conversion.  Rolling the pre-tax amount to an employer plan in 2014 would only reduce the tax liability resulting from a conversion performed in 2014 or later, so the 2013 conversion would need to be recharacterized, then reconverted more than 30 days later.

Submitted by Alan - IRA critic on Tue, 2014-09-23 19:21

Dmx – good catch. Only way to avoid taxation of the conversion at this point is to recharacterize it.

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