Taxes Owed Prior to Recharacterization

Submitted by Tangy Ward on Sat, 2015-03-14 15:24

I converted to a Roth IRA last year and am considering recharacterizing due to my tax liability. My income will be much less this year so my plan is to reconvert the funds this year. My questions are:

1. Will I have to pay the total taxes due ( includes the conversion funds) even if I will recharacterize?
2. Should I recharacterize before April 15th? Assuming this would avoid the additional taxes.
3. The Roth IRA balance has grown since I converted. Are there any issues I need to be concerned with due to the increase?
4. How long does a recharacterization take?

Thanks, Tangy



Submitted by Alan - IRA critic on Sat, 2015-03-14 16:38

  1. No, if you recharacterize the conversion is treated as if it never happened.
  2. You have until 10/15 if you either file your return or an extension by 4/15. The only reason to wait is if you are waiting to see how much gain or loss you have on the conversion and that would influence your decision.
  3. The gains on the conversion are transferred to the TIRA as well as the contribution. So instead of being tax free in the Roth they will be taxable when distributed from the TIRA. For example, if you are in the 25% bracket and have a gain of 20%, the effective tax for the conversion is reduced to 20.8%.
  4. Time depends on the custodian. A week to 10 days is probably the average. Some custodians will do it by phone which will cut the time down considerably. If you plan to reconvert, you must wait 30 days after the recharacterization of a 2014 conversion.

Submitted by Tangy Ward on Sun, 2015-03-15 15:54

Thank you Alan.To confirm my understanding:When I file my taxes on 4/15 I can omit the Roth conversion income since I have until 10/15 to complete the recharacterization..correct?  If so, what happens if I later decide, due to gains not to recharacterize, would I be subject to penalties for not paying the taxes due on 4/15?Regards,Tangy

Submitted by Alan - IRA critic on Sun, 2015-03-15 23:41

You could do that, but if you retained the conversion you would have to amend your return and the IRS could bill you for late interest on the late payment of the conversion taxes.

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