Recharacterization & Conversion waiting period & IRS forms

Submitted by Thiru Vadivelu on Sun, 2014-02-23 21:08

Opened a new Roth IRA account in Jan 2013.
Contributed $5500 towards 2013 Year and $5500 towards 2014, totaling $11,000.
Realized my net income prohibited me from making Roth IRA contributions. On Research, decided to do Backdoor Roth.
Opened a new Traditional IRA account in Feb 2013 with the same trusteee.
Recharacterized whole balance in Roth IRA( Contribution($11,000) + Earnings(About $40) to TIRA. Recharacterization completed as of 02/19/13. There is an additional earning in TIRA of about $50 , making the total balance in TIRA $11,090.

1. When I checked online, looks like the agent who did the recharacterization , placed all the $11040 into the 2014 contribution bucket of 2014. Is this OK?(ie did I not violate the $5500 annual contribution limit ? ). I had asked him to split the contribution between 2013 and 2014. I guess, I need to reconvert the money back to Roth IRA before April 2014, splitting between 2013 and 2014 buckets to avoid the excess tax & penalties.?

2. How long should I wait to convert all the money in my TIRA back into Roth IRA ? ( I am hearing 30 days , One year , but its confusing). Since the annual contribution limit is only $5500, will I be just converting $11,000 into RIRA from TIRA(excluding the earnings) , (ie convert $5500 for Yr.2013 and $5500 for Yr.2014 into Roth ), or will I need to convert all the monies($11,090) including earnings. How would I split the earnings between 2013/2014.

3. How & when do I report the original recharcaterization from Roth IRA into TIRA ?

4. How & when do I report the reconversion from TIRA into Roth IRA.

5. The earnings of $50, while the money was sitting in TIRA is taxable, for Year 2014, I guess and be reported in 2015? . How & when do I report this income.

I do not have any tax form from the trustee yet.

Thanks so much …Pls excuse newbie questions, am rather new to IRAs..
tgn



Submitted by Alan - IRA critic on Mon, 2014-02-24 02:14

  1.  Your calendar years are incorrect. You must mean that you opened the Roth in 2014 (not 2013) and contributed for 2013 and 2014. Assuming you recharacterized the 2013 and 2014 contributions into the same TIRA account, that is OK. as now they would be considered 2013 and 2014 TIRA contributions, same years as the original contributions were for.
  2. You do not have to wait to convert the TIRA to a Roth IRA as this is not a reconversion, it is your first conversion. However, if you have ANY OTHER non Roth IRA accounts, your conversion will be mostly taxable. If the TIRA only holds the 11,090, you can convert right away and only the 90 in gains will be taxable. There is no deadline to convert, but do it ASAP so that future earnings will be in the Roth. This will be a 2014 conversion and the 90 will be taxable on your 2014 return.
  3. You report the recharacterization of your 2013 Roth contribution using an explanatory statement only with your 2013 return. Assuming you cannot deduct the TIRA contribution, you must file Form 8606 to report the contribution.
  4. This is not a reconversion, it is your first conversion. You will report it on Form 8606 with your 2014 return and also report your 2014 non deductible TIRA contribution on that same form.
  5. Yes, the 90 of gains will be taxable on your 2014 return on Form 8606. You will not get the 1099R forms until next January, one coded for recharacterizing your 2013 contribution and another coded differently for recharacterizing your 2014 contribution. You will also get a 1099R for the conversion. Your 2014 return should also include an explanatory statement regarding the recharacterization of your 2014 contribution.
  6. If you have any other non Roth TIRA balance, better advise because it would increase the tax bill on your conversion.


Submitted by Thiru Vadivelu on Mon, 2014-02-24 03:12

1. You are correct. I opened the Roth IRA account in Jan 2014 and the TIRA in Feb 2014.  Yes, I recharacterized the 2013+2014 Roth contributions into the same TIRA(Non-deductible) account. What I see online now (after the recharacterization), as far as contribtions are concerned : 2013 : $5500(Roth), $0(TIRA) , 2014:$5500(Roth),$0(TIRA-Individual contribution), $11040(TIRA-Rollover contribution)  . Also see this note online “Excess contributions are included. However, removals of excess contributions are reflected in transaction details and will be reported on your Form 1099-R”  .   Also for Yr2014, for Roth IRA, its reporting $11040 as Total , as well as Net Distrubution.Little confused. I thought this is meant to be a recharacterization and not a Rollover/Distribution. Funds should be treated as having contributed to the TIRA as opposed to Roth IRA, due to recharacterization?2. I do not have any other non-Roth IRA accounts( I have a Roth 401K, hope thats not counted here).3. So for filing the 2013 return, I file Form 8606 showing only the 2013 TIRA non-deductible contribution?( will this be just $5500 or include the earnings).  The explanatory statement is an informal note to IRS ?  . Will I be receiving any tax form from my trustee to inlude in my 2013 return?4. If I got you right, my conversion from non-deductible TIRA back into Roth is my first conversion and not a reconversion and there is no waiting period. Great.  But I do not report this conversion(TIRA back into Roth) in my 2013 return, but only when filing 2014 return using Form 8606 ?5. So in 2014, I’d receive three 1099Rs , one for rechacterizing 2013 Roth into TIRA , one for recharterizing 2014 Roth into TIRA and finally one for converting TIRA back into Roth in 2014. Wow..5. Only IRAs I have are the Roth and TIRA , I opened in the past couple of months, no other IRA(me or my spouse).6. With all this, is it safe to invest in Spousal IRA (my wife is not working) for an additional $5500 into 2013 Roth ? Thanks again for your patience and kind replies. Much appreciated.  



Submitted by Thiru Vadivelu on Mon, 2014-02-24 03:36

The following IRS guideline is what confused me,  “Is there a minimum waiting period to reconvert the money to a Roth IRA following arecharacterization?Yes, if you recharacterize all or part of a rollover or conversion to a Roth IRA, you cannot reconvertthe amount recharacterized to the same or another Roth IRA until the later of:30 days after the recharacterization, orthe year following the year of the rollover or conversion.The waiting period to convert applies only to amounts you recharacterized. For example, you canconvert amounts from a different traditional IRA to a Roth IRA immediately” thanks again.



Submitted by Alan - IRA critic on Mon, 2014-02-24 03:48

  1. You are correct that a recharacterization should not be labeled as a rollover, as a recharacterization is somewhat different. But the custodian will still report both your Roth contribution AND the recharacterization separately. I don’t know why a distribution was shown because you have not done a distribution until you do the conversion (which is a two part transaction, first distribution then rollover to Roth).
  2. OK – Roth 401k is immaterial here.
  3. Yes, on the 8606 show just the contribution amount, no earnings. 5500 goes on lines 1,3, and 14. Explanatory statement goes with your return and should be as follows:  ” On xx/xx/2014 I contributed 5500 to my Roth IRA, and on yy/yy/2014 I recharacterized the full contribution to a traditional IRA”. There will be no tax form to include from the IRS. You will not get a form till Jan, 2015, but as long as it agrees with what you did, you do not have to report it again because it was covered by your statement. In any event, 1099R and 5498 forms do not actually go on your return, but they govern what you should be reporting.
  4. Yes, correct.
  5. You will also get a 5498 to correspond with each 1099R – the 1099R reports the distribution and the 5498 reports contributions. None of these go on your returns, but indicate what you should report either on Form 8606 or on an explanatory statement.
  6. Yes, your spouse can open TIRA accounts and make the same non deductible contributions for each year. She can then convert right away tax free to a Roth IRA. Her 8606 is separate from yours, you will see that an 8606 only holds one SS #. Both of your 2014 8606 forms will show your 2014 contribution on line 1, 5500 carried over from 2013 on line 2, and the total of 11,000 on line 3. The rest of the 2014 form will take some work, but you do not have to worry about that until next year. The 2013 8606 is just lines 1,3 and 14.


Submitted by Thiru Vadivelu on Fri, 2014-02-28 04:12

Appreciated. So I went ahead and converted all monies in my TIRA back into Roth. Now its Tax time , and not clear on how to report the specific amounts transferrred from my Roth into TIRA , as the Roth had contributions for both 2013 and 2014.So , my transactions, as reported in my account reports the follows:===                  Date      Fund      Transaction type      Shares transacted    Share price    Amount

  1. 02/24/2014    Target Retirement 2035     Transfer    651.769    $17.11    $11,151.77
  2. 02/19/2014    Target Retirement 2035     Transfer    – 324.525    $16.94    – $5,497.45
  3. 02/19/2014    Target Retirement 2035     Transfer    – 2.569    $16.94    – $43.52
  4. 02/19/2014    Target Retirement 2035     Transfer    – 324.675    $16.94    – $5,500.00

====

  • Line 4 is transfer from Roth to TIRA ( with description of CY RECHAR . Dont know what year contribution this is )
  • Line 3 is transfer of ATTRIBUTABLE EARNINGS from Roth to TIRA ( Dont know how to split this earnings between Yr.2013 and Yr.2014 contributions)
  • Line 2 is transfer from Roth to TIRA( with description of RECHAR. Dont know what year contribution this is)
  • Line 1 is Conversion from TIRA back to Roth.

Not sure how I report this , in Yr.2013 Tax return, splitting between yr.2013 and yr.2014 . For eg, I need to show the Total money transferred(Contribution + Earnings(when in Roth)) to TIRA. I know the contribution($5500), I know the total earnings on $11000( that is $43.52) , how do I estimate the earnings from 2013 contribution(it was made in two transactions( $1000, $4500 on two different dates) . Also the 2nd Rechar shows a loss(ie $5497.45 for contribution of $5500).Pls help, Thanks



Submitted by Alan - IRA critic on Fri, 2014-02-28 18:58

  • For your 2013 return, all you have to do is explained in 3. of my prior post. You need a 2013 8606 reporting the 2013 non deductible contribution only. And an explanatory statement addressing only the recharacterization of the 2013 contribution. Forget about the 2014 contribution, as those will be addressed on your 2014 return, as will the conversion.
  • Without a breakdown of the gross amount of your 2013 recharacterization from the 2014 one, best to stick with the more general statement in point 3 of prior post. One of those years had the $3 loss, but it is not clear which it was. The other year had the 43.52 gain. But the general statement will do. Therefore, your 2013 return should be fairly easy, just the 8606 and the explanatory statement.


Submitted by Thiru Vadivelu on Sat, 2014-03-01 02:50

Thank you Alan. Much appreciated your help.



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