Recharacterize and conversion allowed?
Is this allowed:
– Recharacterize $5000 of a 2024 Roth contribution to a regular IRA prior in Feb 2025 prior April 15, 2025
– Take the same $5000 plus earnings immediately after recharacterization and convert to Roth in 2025
– Will that remove $5000 from taxable earnings in 2024 and add $5000 plus earnings into 2025?
- If I do this, will I still be able to take out money from a Rollover IRA in 2025 under IRS hardship rules?
Thank you
Permalink Submitted by Alan - IRA critic on Wed, 2025-01-29 14:14
You can recharacterize and convert with the conversion taxed in 2025. If you have no other TIRA balance beside the recharacterized Roth contribution, you would report a non deductible TIRA contribution on your 2024 return on Form 8606 and the only conversion tax would be on the gains on the 5000, not the 5000 itself. But if you have any other IRA balance at the end of 2025 like a rollover IRA, most of the conversion would be taxable.
Hardship distributions do not apply to IRA accounts. If you have a rollover IRA and take a distribution from it in 2025, the taxable % of that distribution will be the same as the taxable % of the conversion.
Permalink Submitted by Whodiini on Wed, 2025-01-29 17:31
“If you have no other TIRA balance beside the recharacterized Roth contribution, you would report a non deductible TIRA contribution on your 2024 return on Form 8606 and the only conversion tax would be on the gains on the 5000, not the 5000 itself.”
At the date of the recharacterization of the $5000 from the Roth to a TIRA, there is also a rollover IRA with a balance. So does that mean for the 2024 return, I can deduct from income $5000 since it removed $5000 from income? Then in 2025, if before the end of the year, I withdraw the entire balance from the rollover IRA, so that there are no other IRA funds, and I convert the $5000 plus earnings from the TIRA to the Roth, then the $5000 is not taxable? I would think that the entire $5000 plus earnings would be taxable in 2025 because I deducted it in 2024.
Permalink Submitted by Alan - IRA critic on Wed, 2025-01-29 18:02
You might qualify to deduct the TIRA contribution but there are income limits if you (or a spouse) participated in a workplace retirement plan at any time in 2024. The income limit depends on your filing status.
If you qualified for the deducting the contribution and decided to deduct it, then any conversion done is 2025 would be fully taxable. You would in effect be moving taxable income from 2024 to 2025. But if your income is too high for the deduction making it non deductible, if you still have a rollover IRA at the end of 2025, any conversion will be mostly all taxable using the required pro rata rules (eg 5000 ND contribution and 95000 total pre tax IRA balance would result in 95% of any amount converted being taxable.
If you had a qualified workplace plan such as a 401k that would accept a rollover of the pre tax balance of your IRA, you would have to leave the 5000 not deducted in the IRA, roll the 95000 or whatever the rollover IRA was worth to the 401k before year end 2025, and the conversion of the 5000 would then be non taxable. This is all part of the so called back door Roth strategy.