Roth Recharacterization
In Feb of 2014 we made non-deductible IRA contributions for tax year 2013 and 2014 for my client, then immediately converted them to Roth. I have recently found out that during the year the client rolled some of his 403b to an IRA outside that I was unaware of.
At this point I am freaking out.
If anyone could offer their thoughts and/or suggestions on how to address this problem it would be tremendously appreciated.
Is there anything we can do? Is it too late for recharacterization? I am really lost especially since we did ’13 and ’14 at same time and the Rollover IRA didn’t exist until ’14.
Thanks!
Permalink Submitted by Ben Meyer on Wed, 2015-02-18 16:56
The main issue here seems to be how to fill out form 8606 for year 2014. Assuming that the 403(b) rollover did not have any after-tax basis, and that the rollover was made in 2014, the amount rolled into a TIRA is reflected in the IRA fair market value on line 6 of form 8606. If you were expecting that the Roth conversion would be tax free due to having no prior IRA balance before 2014, this will probably change. If there were other previous TIRAs, the total balance of all of them needs to be included on the form 8606. Therefore, some 2014 tax may be due on the Roth conversion, as calculated on form 8606. If the tax is considered excessive, you can recharacterize the Roth conversion done in 2014 by October 15, 2015. The converted amount plus earnings would be transferred back to a TIRA in a direct transfer. If the return was timely filed by April 15, 2015 you can file an amended return by October 15, 2015. If you filed for an extension, no amendments would be needed. Follow the instructions in Pub 590-A and the instructions for form 8606.
Permalink Submitted by Alan - IRA critic on Wed, 2015-02-18 17:06
Nick, the conversion can still be recharacterized and that will eliminate the tax bill. And then the 2014 contribution could be returned along with any earnings if desired, but the earnings allocated to the 2014 contribution would be taxable in 2014. Too late to remove the 2013 contribution. If the earnings on the conversion are considerable, that makes recharacterization of the conversion worth less because the tax free earnings would then end up in the TIRA. Best decision would also factor in how large the 403b rollover was. If it was no larger than the two converted contributions, paying tax on half the conversion would probably be a good long range decision. Finally, if the remaining pre tax value of his IRAs can be rolled into a current employer plan, then any recharacterized conversion could be re done anytime after 30 days which would accomplish the original objective.