Recharacterization / Backdoor Roth Question
A lovely young lady contributed $6K to a Roth IRA early in 2020. Later that year, she married my son and their combined income became too great to permit the contribution.
Early in 2021, she recharacterized the account, which had grown to $7600, to a nondeductible IRA and soon completed a Backdoor Roth Conversion of the entire amount. The $7600 was the only money she had in any traditional IRA.
My question is, “Was she allowed to recharacterize the entire $7600?” Would that amount to an excess contribution of $1600?
Thanks for all you do.
Permalink Submitted by David Mertz on Tue, 2022-03-01 00:09
If the Roth IRA contained only this $6,000 contribution plus $1,600 of gains attributable to the $6,000, her recharacterization of the $6,000 contribution would have moved $7,600 to the traditional IRA, resulting in a $6,000 traditional IRA contribution and $1,600 of investment gains in the traditional IRA. She recharacterized only $6,000 even though $7,600 was required to be moved. The result is intended to be as if she had originally made a traditional IRA contribution and the traditional IRA had the same investment performance as did the Roth IRA.
Permalink Submitted by Undocumented Newcomer on Tue, 2022-03-01 12:40
Thanks for your response. I infer that the backdoor Roth conversion would consist of $6,000 in basis, which she had documented in a 2020 Form 8606, and $1600 in taxable gain. Since the conversion occurred in 2021, I surmise that the tax liability for the gain would apply to her 2021 tax return. Are these evaluations accurate?
Permalink Submitted by Alan - IRA critic on Tue, 2022-03-01 15:10
Yes, you are correct. Form 8606 with the 2021 return should generate that result. They may both want to consider doing annual back door Roths from here on as long as permitted.