Recharacterization help needed
I recharacterized my 2011 Roth contributions ($5000) to a TIRA. The value when recharacterized was $4700.
The reason I did this is I expect to be able to fully deduct the TIRA contributions. I understood I get to deduct $5000 because that was the amount of my initial contributions. Is that correct?
Do I do anything with the $300 loss or is that taken into consideration as the value of the TIRA is $4700 going forward?
The custodian classifies this as a Retirement Account Withdrawal and will issue a 1099-R. How is this handled? I did not think I would have to report this as income. If I do haven’t I lost the value of the deductible TIRA?
And finally, I understood I would not need to do a Form 8606 because the TIRA contributions are deductible. Is this correct?
Sorry I am a bit confused and appreciate any help.
Permalink Submitted by Alan Spross on Fri, 2011-12-30 03:30
Yes, it is correct that you could the full 5,000 amount of your original contribution. The loss of $300 is considered to have occurred in the TIRA, and if this never changed it just means you would have $300 less to be taxed on when you distribute the TIRA in the future.
The 1099R will not require you to report any income as you did not take a distribution. All you would have to do is include an explanatory statement with your tax return explaining that you made a Roth contribution of 5,000 and recharacterized it as a TIRA contribution when the value of the contribution declined to 4,700. You would take the 5,000 deduction on Form 1040, and NO 8606 would be needed.
If it turned out your income was too high to deduct the contribution, you cannot undo the recharacterization back to a Roth contribution. But you could do a Roth conversion using the pro rate rules and of course if this happened you would need an 8606 to report both the non deductible contribution and the conversion. If you ended up in the income phaseout range for the deduction, you could get a partial deduction, and would also need an 8606 to report the non deductible part. Any conversion following would of course be subject to the pro rate rules over all your TIRAs.
Permalink Submitted by Bruce Glickman on Fri, 2011-12-30 03:49
Thanks very much. So it seems I had it pretty close to correct (suprisingly).
Here’s another question. I also recharacterized my wifes Roth contributions. She had only made $4807 in contributions with the remaining $193 still pending (that was my error I should have made it sooner). But when I look at how much they recharacterizied it’s exactly $4807. I know there had to be a slight loss or gain. Is there a reason the custodian (the same for both of us…Vanguard) wouldn’t have taken in to account the gain or loss? Did the pending $193 have an effect? I will ask them to be sure but I don’t want to lose out on any gain if there was one.
Permalink Submitted by Bruce Glickman on Fri, 2011-12-30 14:15
Well I jumped the gun a bit. The amount transferred over for my wife’s recharacterization does also show a loss. It was strange that the pending transaction for mine showed the correct amount while my wife’s didn’t. Oh well.
This leads to my (hopefully) last question. As you mentioned since both accounts have a loss, the amount of the TIRA deduction on my 1040 (5000 and 4807) will be different then the amounts actually recharacterized. You mention including a letter of explanation with my tax return. I typically efile (Fillable Forms on irs.gov). I don’t recall a way to add a note. Any thoughts on this? Should I just paper file and include the note? Thank you for your help.
Permalink Submitted by Alan Spross on Fri, 2011-12-30 20:04
Your wife could still make the balance of the TIRA contribution of $193 directly to the TIRA if you wanted her to bring the deduction up to 5,000. She has until 4/17.
I think there is a way to generate an explanatory statement using IRS free file. If not, I would still use the program if you wish to and let the IRS figure it out for themselves. Since all your activity was in 2011, they will get all the 1099R and 5498 forms at one time and can probably piece it together. There have been numerous reports of the IRS not reading these explanatory statements anyway, and if they send you a letter later on, you can explain it to them then. The explanatory statements are recommended, but I would not pass on the opportunity to e file for free just to provide them a statement when they should be able to piece together the 1099R reports they will receive.
Permalink Submitted by Bruce Glickman on Fri, 2011-12-30 20:37
[quote=”[email protected]“]Your wife could still make the balance of the TIRA contribution of $193 directly to the TIRA if you wanted her to bring the deduction up to 5,000. She has until 4/17.
I think there is a way to generate an explanatory statement using IRS free file. If not, I would still use the program if you wish to and let the IRS figure it out for themselves. Since all your activity was in 2011, they will get all the 1099R and 5498 forms at one time and can probably piece it together. There have been numerous reports of the IRS not reading these explanatory statements anyway, and if they send you a letter later on, you can explain it to them then. The explanatory statements are recommended, but I would not pass on the opportunity to e file for free just to provide them a statement when they should be able to piece together the 1099R reports they will receive.[/quote]
Well hopefully I did things right and the IRS understands…I guess that is their job. I’m still a bit nervous as I’ve never done things like this before. Really passed up some tax savings over the years by being too conservative and even this year I could take some LTCG and pay 0% but I don’t even want to come close to the MAGI number that allows the TIRA deductions.
Regarding the $193 I made a contribution to her Roth but it was too late to be included with the $4807. So yes I can still recharacterize $193 (or whatever it is worth) by April 17 to take her $5000 deduction. Thanks for reminding me. And thanks for all your help.