Recharacterization of Roth Conversion Question

Submitted by Andy Reynolds on Wed, 2017-10-04 12:52

I am trying to determine how to calculate the “gain” of the recharacterized amount after a Roth Conversion.

History: Person A completed a Roth IRA conversion from a Trad. IRA on 1/26/2016 for $24,216.37. On 3/17/2017, Person A recharacterized $1,000 of the conversion back to his Trad. IRA for tax reasons.

Question: Do we need to determine the “gain” that was attributed to that $1,000 and return it to the Trad. IRA before 10/15 (he has not filed 2016 taxes yet)? Or should we simply say that the $1,000 that was returned to the Trad. IRA was a return of $9,XXX.XX PLUS the gain attributed to the $9,XXX.XX recharacterization? Below is some additional data.

Traditional IRA
1/25/16: $1,675,639
1/26/16: $1,671,352

3/16/17: $2,010,124
3/17/17: $2,012,040

Roth IRA
1/25/16: $19,274
1/26/16: $44,596

3/16/17: $55,027
3/17/17: $54,077

Thank you for the help.



Submitted by David Mertz on Wed, 2017-10-04 16:41

  • The gains must accompany the recharacterization at the time of the transfer.
  • It appears that the value of the Roth IRA immediately after the 1/26/16 deposit of the conversion was $44,596 and immediately before the distribution from the Roth IRA on 3/17/17 was $55,077.  That means that the gain was 23.5021% in the interim.  If a gross amount of $1,000 was transferred back to traditional IRA as a result of a recharacterization, the amount recharacterized was $809.70, accompanied by $809.70 * 23.5021% = $190.30 of gains.
  • If Person A instead wanted to recharacterize $1,000 of the original conversion, the $1,000 recharacterized would had to have been accompanied by $235.02 of gains at the time of the recharacterization for a total gross distribution from the Roth IRA and transfer to the traditional IRA of $1,235.02.  Normally the Roth IRA custodian would do this calculation upon a request to recharacterize $1,000 of the original conversion.
  • If the custodian did not do the earnings calculation, it’s questionable that the custodian will be reporting this as a recharacterization and will probably be reporting it as a regular Roth IRA distribution instead.  That creates some issues with convincing the IRS that this was actually a recharacterization.

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