Partial Roth Re-characterization

Submitted by CARROLL WILLIAMS on Sun, 2016-09-18 20:20

I want to re-characterize a portion of my 2015 Roth Conversion IRA. It is in a separate account and fully invested. Do I need to liquidate some shares first?



Submitted by Alan - IRA critic on Sun, 2016-09-18 20:29

No. The custodian will just transfer partial shares if necessary to equal the earnings adjusted value to be transferred to the TIRA.

Submitted by CARROLL WILLIAMS on Mon, 2016-09-19 00:57

Thanks so much Alan for the quick response.

Submitted by CARROLL WILLIAMS on Tue, 2016-09-20 14:34

Is it true I will need to increase the RMD to cover the re-characterized value and the returning earnings?  Is there anytax to pay on these returned earnings?  Thank you again.  

Submitted by David Mertz on Tue, 2016-09-20 15:34

  • Yes, increase the December 31, 2015 account balance by the amount transferred (including earnings) to that traditional IRA in performing the partial recharacterization.  See IRS Pub 590-B page 7, Outstanding rollovers and recharacterizations:  https://www.irs.gov/pub/irs-pdf/p590b.pdf
  • Taxes on the earnings transferred are deferred until the money is distributed from the traditional IRA as a regular distribuiton.  They are effectively the same as earnings earned within the traditional IRA.

Submitted by CARROLL WILLIAMS on Tue, 2016-09-20 15:45

Thanks for clearing this up.  I had thought it would work this way but needed to know for sure.

Submitted by CARROLL WILLIAMS on Wed, 2016-09-21 22:48

I turned in my re-characterization request form and it went through In one day.  Problem is they did a full instead of a partial.  I called them and they redid their job and handled the contribution part correctly.  They don’t want to move the earnings even though their form says the earnings attributable to the contribution must also be re-characterized.  Page 2 on the Scotttrade form has the worksheet to figure the earnings. I left this worksheet blank because the needed values are not known until the time of recharacterization.  My local branch manager agreed.  I have already talked to a supervisor, but he doesn’t understand either.  This Roth holds only one ETF and it moves quickly and often 3% as it did today.  Should I have filled in the worksheet using yesterdays values and trusted them to adust to todays values or should they figure the earnings at time of recharacterization?  What must I do to get this corrected?

Submitted by Alan - IRA critic on Wed, 2016-09-21 23:16

A recharacterization whether partial of full requires an earnings calculation to be done to determine the amount to be transferred. The custodian cannot code the 1099R with the recharacterization code unless earnings are included in the transfer. There is no reason for you to have to figure the earnings on a publicly traded ETF for a brokerage IRA custodian because of the reason you indicated. These issues are very surprising for a large brokerage firm that offers IRA accounts. You need to get them to re calculate the transferred amount and for them to use the value of this ETF when they did the rest of the transfer. The market rose considerably today, so if they use today’s values there will be a higher amount transferred from your Roth IRA to your TIRA which will eventually be taxable. Since your br manager appears to understand, he needs to intercede with the recharacterization processing team to get this done correctly.

Submitted by CARROLL WILLIAMS on Wed, 2016-09-21 23:59

Sorry, but my branch manager doesn”t do this type of work.  He said the home office will call me if it isn”t correct.  Of course they didn”t call.  He approved leaving it as it was because he said he didn’t know. Is there a way to get past the front line supervisors?

Submitted by Alan - IRA critic on Thu, 2016-09-22 01:02

You might make one more request in writing and keep a copy. However, if they left all all the earnings in the Roth IRA, that is to your advantage. If you had a loss on the conversion this would be to your disadvantage. Your main concern is that the 1099R for the recharacterization is coded correctly as a recharacterization of a 2015 conversion. You have made multiple reasonable efforts to get this corrected, and if they refuse you will have your documentation in the unlikely chance the IRS will ever ask about this.

Submitted by CARROLL WILLIAMS on Thu, 2016-09-22 01:50

Thanks again for your help.

Submitted by CARROLL WILLIAMS on Sun, 2016-10-02 03:05

Alan, I did try one more time and learned from Scottrade home office that ROTH IRA owner must figure their own earnings based on the last closing price.  Scottrade will then recharacterize the total requested amount.  This was completed several days ago.  My new question has to do with form 8606 part II line 16 that wants the net amount I converted.  I don’t have any basis to deal with.  Do I arrive at the net amount by subtracting only the requested  $1200 recharacterization from the original Roth conversion, or do I subtract the total of the $1200 and earnings which would be the total recharacterized amount?  I was told earlier by DMx that my RMD for this TIRA will need to increase to cover for the total amount returned.  Thanks so much. 

Submitted by Alan - IRA critic on Sun, 2016-10-02 03:38

  • The 8606 is where you report the portion of your 2015 conversion that you retained (did not recharacterize). If you recharacterized 1200 of your conversion, then reduce the original conversion amount by 1200, not by the amount that actually transferred back to the TIRA, which due to the earnings calculation would have been more or less than 1200.
  • On the other hand your 12/31/2015 year end TIRA value for RMD purposes IS increased by the amount that actually transferred back to the TIRA.

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