Recharacterization of Roth IRA
Our client made a $6,000.00 2021 Roth IRA contribution but was ineligible to make that contribution. We are recharacterizing that contribution to a Traditional IRA and after calculating the Net Income Attributable, the recharacterization amount will be $5,795.07. What amount will the client put on their IRS form 8606; $6,000.00 or $5,795.07? If they put $5,795.07 on that form are they eligible to make an additional $204.93 Trad IRA contribution?
Permalink Submitted by David Mertz on Wed, 2022-03-02 20:44
The recharacterization amount is $6,000, not $5,795.07. $5,795.07 is the loss-adjusted amount that is transferred to effect the recharacterization of $6,000. If the client will not have reached age 50 or above in 2021, the recharacterization means that they will already have contributed the maximum permissible $6,000 to a traditional IRA for 2021.
Permalink Submitted by brcwm on Fri, 2022-03-11 18:16
Could the client do a removal of excess for the loss adjusted amount ($5,795), then contribute to the IRA the full contribution amount $6,000?
Permalink Submitted by Alan - IRA critic on Fri, 2022-03-11 19:37
Yes. Client now has a TIRA contribution following the recharacterization. Requesting the return of the TIRA contribution of 6000 will require another earnings calculation to recognize the gain or loss on the 5795 while in the TIRA. One the earnings adjusted contribution is returned, a new contribution of the full amount can be made up to 4/18/2022 for the 2021 year. Client will have to include an explanatory statement with the 2021 return for both the rechacterization and the return of contribution.