Excessive Recharacterization of Roth Ira
Instead of recharacterizing the remainder of a Roth Ira conversion, I accidently rechacterized the original dollar amount. Since the value of the mutual fund had dropped, this resulted in recharacterizing more shares than the original Roth Ira conversion.
How do I retrieve the excess amount of the recharacterization from my Rollover Ira without being taxed a second time the excess shares that were recharacterized.
This was for tax year 2012, not last year 2013.
The mutual fund has refused to assist me in this matter since they did what I requested by recharacterizing the dollar amount rather the same number of shares.
Can it be done on form 8606? Can it be done at all? Perhaps a letter to the IRS (but what department)?
Any help will be most appreciated.
Permalink Submitted by Alan - IRA critic on Wed, 2014-07-23 03:07
Your conversion was done for a dollar amount, and a recharacterization request should be stated in terms of how much of the original conversion you want recharacterized, also in dollar amounts. Share values are immaterial, but if your Roth IRA had no assets other than shares of the converted fund and they dropped in value, the same number of shares you converted would be transferred back, more if the fund had a dividend or cap gain distribution that was reinvested in more shares. In any event, it is too late to change anything for 2012 unless you reported incorrectly on your tax return. What did your recharacterization 1099R value show in relation to the 1099R for the conversion? Also, note that if your Roth IRA held other investments besides what you converted, the earnings calculation must include the investment result of the entire Roth IRA. It is not clear whether you actually did a partial recharacterization or a total recharacterization, but the recharacterization request should be made in terms of dollars or a % of your original conversion, not in shares. The IRA custodian would then do the earnings calculation for you and make the transfer.
Permalink Submitted by LateFiler on Wed, 2014-07-23 22:27
Alan,First of all, thank you for your response.—– This is what has happened, so far: —–I specified on my 2012 tax return what the Ira distribution was, in dollar terms, under Income, Line 15A, Ira distributions on my form 1040.Under Income, Line 15B, I specified $0 as the taxable amount.Under Additional Information from your 2012 Federal Tax Return, Explanation Statement, Recharacterization Explanation, I specified the dollar amount that was originally converted from my traditional Ira to my Roth IRA.I also INCORRECTLY stated that 100% of the REMAINDER of the of the original conversion was recharacterized.In fact, I unintentially recharacterized more than the remainder (i.e. I recharacterized the exact same dollar amount as the original conversion). Thus, I recharacterized 18.55% MORE than the REMAINDER. This would not have been possible but for the fact that I already had funds in the Roth Ira from a prior recharacterization several years ago.—– This is what I would like to do: —–I want to remove the excess 18.55% funds that were returned to the traditional IRA without incurring any income tax on those funds. The justification would be that those funds were already taxed when they were transferred from my traditional Ira to my Roth Ira several years ago and were already taxed at that time.Whether those already taxed funds that are now in my traditional Ira are returned to my Roth Ira or just withdrawn is fine with me.—– How to Proceed: —–The question is what needs to be done NOW in order to accomplish this fund transfer without having to pay income tax a second time on said funds?—– Any advice would be most appreciated.
Permalink Submitted by Alan - IRA critic on Wed, 2014-07-23 23:52
Permalink Submitted by LateFiler on Thu, 2014-07-24 16:36
The custodian apparently did not figure the earnings or loss on the amount of my conversion that I wanted recharacterized. They simply processed the full dollar amount as requested in my letter. — I believe you are saying that ——1. I have no recourse with the IRS —and ——2. The custodian was in error and should NOT have processed the request (i.e. it was the custodian’s responsibility to validate the legitimacy of the request).—–Again, any help is most appreciated.
Permalink Submitted by Alan - IRA critic on Thu, 2014-07-24 19:49
Yes, you’ve got it. You did what you should have – asked the custodian to recharacterize the full amount of your contribution. The custodian should then have automatically done the earnings calculation OR told you that you must do it. Instead, they went ahead and transferred the exact amout of the conversion back to the TIRA, which is a custodian error unless there were No earnings or loss in the Roth during the time it held the conversion. Therefore, your 1099R for the recharacterization probably shows the same amount as the conversion. It would eliminate the tax on the conversion and you would not need to report the conversion, but the additional amount they transferred back will ultimately cost you because it will eventually be taxable when you distribute it again from the TIRA. The only way to offset this now is to pressure the custodian to correct their error by transferring the incorrect amount back to the Roth and either revising their forms or not reporting it. It will be difficult to get them to do this. Was there a form you had to complete to order the recharacterization? If so, better check it carefully to be sure you completed it correctly, or there is no chance the custodian will work with you.
Permalink Submitted by LateFiler on Fri, 2014-07-25 22:29
Good news! After escalating my displeasure regarding the custodian’s error with their 2nd level management, they agreed to undo the original recharacterization and re-do it correctly. The corrected transaction will be back dated to the original date of the recharacterization in 2013, and they will issue a “corrected” 1099R. —– Your responses to my post were most helpful to me in giving me the confidence to firmly and accurately (with precise terminology) present my case to the custodian. Additionally, you prevented me from wasting my time by trying to deal directly with the IRS. —– I really can’t thank you enough! —- Speaking of the IRS, I assume I will not have to submit a revised 2012 tax return, as there will be no change to my tax for that year. Actually, my original return will now be more accurate, as I had specified that my recharacterization was for 100% of the remainder of the Roth IRA conversion (or so I thought at that time). —– Should I ever need to find a financial tax professional, I will most definitely go through the Ed Slott and Company web site. —– Thanks again!
Permalink Submitted by Alan - IRA critic on Fri, 2014-07-25 23:12
Glad it worked out this way. Some custodians who mess up will still try to make excuses and blame the taxpayer for communications confusion etc. But at least this one owned up to the obvious error and is willing to fix things for you. You should take a look at how much will now be transferred back to the Roth IRA. It should be the original amount of the conversion LESS the % loss that occurred while the funds were in the Roth IRA. In fact, they should further adjust the transfer amount for gains or losses that occurred after the erroneous recharacterization as well, and those gains or losses occurred in the TIRA but were partially attached to the extra amount they transferred back there. That would put you in the same position as if the recharacterization was done correctly in the first place. An amended 1099R should not cause you to have to amend your 2012 return.