Recharacterization to Roth

Submitted by Melissa Osika on Thu, 2023-02-23 15:43

I have a client that had an existing ROTH IRA worth $ 40,600 at the beginning of 2022. He contributed $1200 to it in 2022, but he ended up making too much for Roth contributions. Do I need only recharacterize the $1200 or do I need to also figure out the growth of the $1200 to recharacterize that as well?

Also, our thought is that after we recharacterize we should then turn around and do a Roth Conversion of the amounts recharacterized above. He does not have any other traditional IRA accounts, only a 401k.

Can anyone offer insight as to the steps needed and if my thinking is correct?



Submitted by David Mertz on Thu, 2023-02-23 16:13

  • Recharacterizing the $1,200 requires any attributable gain or loss to accompany the $1,200 in the movement of the funds from the Roth IRA to the traditional IRA.  For example, if there was a gain of 10% attributable to the $1,200, the recharacterization of $1,200 would require a transfer of $1,320.
  • CFR 1.408-11 describes the calculation of the amount to transfer.
  • The subsequent Roth conversion can be done immediately.
  • With this done in 2023, he’ll need to make sure not to roll the 401(k) over to a traditional IRA before 2024, otherwise the Roth conversion will become mostly taxable and most of the basis in nondeductible traditional IRA contributions will remain with his traditional IRAs to be applied proportionately to future distributions or Roth conversions.

Submitted by Alan - IRA critic on Thu, 2023-02-23 16:14

Since the excess contribution was early in 2022, there is likely to be a loss generated. As such, rather than recharacterizing, it would be better to request a return of contribution for which the custodian will calculate the gain or loss. Client can then make a 2022 ND TIRA contribution of whatever amount he wishes up to the contribution limit of 6000, then convert it right away. The deadline for making the new 2022 TIRA contribution will be 4/18/2023. His 2022 tax return must include an 8606 to show the ND contribution for the amount contributed, and should also include an explanatory statement regarding the original Roth contribution and the return of the excess. First, he should request a return of the 2022 excess contribution ASAP, then make the new contribution, and then file the 2022 return to reflect the changes.

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