Undo IRA contribution/recharacterization mistake?

Submitted by Betty White on Tue, 2020-04-14 01:25

Hi all,

For tax year 2019:
I recharacterized a sum of money from my Traditional IRA to my Roth IRA. I now need to get a portion of that money back out of my Roth IRA. Vanguard says they can’t reverse the recharacterization. What options do I have?

Can I re-recharacterize from my Roth back into my Traditional IRA again? (I’ve never heard of anyone doing this.)

Can I simply take the money out of the Roth, effectively “uncontributing” it? Are there penalties? Are the related earnings from the “Roth uncontribution” amount taxable in tax year 2019, and if so, where/how do I report that income on my taxes?

Thanks!
-Betty



Submitted by Alan - IRA critic on Tue, 2020-04-14 01:46

It is correct that a recharacterized contribution cannot be re recharacterized back. However, you can either request a return of your contribution that is now treated as a regular Roth contribution with allocated earnings with only the earnings be taxable and subject to penalty, or you can take a regular Roth IRA distribution that is not a return of your 2019 contribution or limited to that contribution, and that will be reportable as any other Roth IRA distribution under the ordering rules. The 1099R you will receive for this Roth distribution will be coded differently depending on how you request the distribution. 

Submitted by Betty White on Tue, 2020-04-14 03:40

I’m not sure what’s going on with the formatting.  It’s making it very hard to read, but I don’t know how to fix it. Thank you for your help.  This may be too confusing to follow, but, if you know how to help, it would be very much appreciated. Let’s say Person A is in a similar situation as me for tax year 2019. Example:Person A originally contributed 6,000 to her Traditional IRA, then recharacterized 3,000 to Roth.  She properly noted this in the recharacterization explanation section on her taxes. Later on, she realized she earned too much money and is over the AGI limit for a credit she really wanted to take, so she withdrew 1,000 of that Roth contribution, plus $15 in earnings.The $15 in earnings is now subject to tax (and penalties), which increases Person A’s AGI by $15.Person A, then (re-)contributes that $1,000 back into her Traditional IRA to (re-)reduce her AGI back under the required limit to take the credit.How would Person A properly show this on her taxes? There is a section for her to explain the original recharacterization, and a separate section to explain the withdrawal of the Roth contribution, but how would she explain putting the $1,000 back into the Traditional again?I searched for hours online and couldn’t find anyone else in this sort of situation.Thanks again,-Betty

Submitted by Alan - IRA critic on Tue, 2020-04-14 03:52

  • Yes, a very rare fact pattern.  After she withdrew 1000 of her Roth contribution, her total contributions for the year were back down to 5000, therefore there was room to make a new TIRA contribution for 1000 bringing the total TIRA contribution amount to 4000. It’s not clear whether she can deduct the TIRA contributions or not, but if deductible (MAGI not too high) she just reports the deduction on Form 1040. If non deductible those contributions go on line 1 of Form 8606. In any event, the last 1000 contribution does not need to be explained in any explanatory statement since it will not generate a 1099R. Therefore, this is simple to report.
  • Re format – yes, a long standing problem and that is why I have to use these bullet points as paragraph substitutes.

Submitted by Betty White on Tue, 2020-04-14 04:24

You are incredible.  Thank you so much!

  • “Person A” will keep her recharacterization statement as is.
  • She will withdraw, and explain that she withdrew, the funds from her Roth IRA, paying taxes/penalties on the (probably tiny bit of) earnings.
  • Her new TIRA contribution will definitely still be deductible, because the specific credit she wants to maximize is the Saver’s Credit, which requires a very low AGI.  So, she will simply contribute the amount withdrawn from her Roth, right back into her TIRA and include that amount in her total deductible TIRA contributions for the year.
  • She will also be forever grateful to you for helping her through this tricky situation!

Thanks again!

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