IRA recharacterization
I have a very rough idea of what my AGI will be for 2008.
I’ve tried to put enough $ into my Roth for 2008, that I will be able to pay the taxes on. I’m assuming that the Stock Mkt will improve in the next 9 months.
If I’ve rolled over $25k (as an example) into the Roth, and I have to recharacterize $5k, and assuming my Roth has improved substantially, is it just the $5k that I have to pull out of the Roth and put back into my IRA ?
Permalink Submitted by Alan Spross on Mon, 2009-01-12 20:56
No. If you want a partial recharacterization of that conversion such that you want to be taxed on 20,000 rather than 25,000, have the IRA custodian recharacterize 20% of the conversion.
The custodian will have to do an earnings calculation based on the investment experience of the entire Roth account while the 25,000 conversion was in the account. If the market recovers, and the overall gain in the account is 15%, then 1.15 times 5,000 or 5,750 is the amount that will have to be transferred back to the TIRA.
You would then complete Form 8606 and report a conversion of 20,000 instead of 25,000. You would also add an explanatory statement to your return showing what you have done. For example, “On xx/xx/2008 I converted 25,000 to my Roth IRA. On xx/xx/2009, I recharacterized 5,000 of that conversion, which was then worth 5,750, back to my traditional IRA.”
Conversely, if the market continues to sink, the amount that will go back to the TIRA will then be LESS than the 5,000 amount to be recharacterized. Generally, if you are just recharacterizing for tax reasons, you would be more inclined to go ahead if the market dropped than if it rose. If you generate gains, then the effective cost of the convesion is less because the gains will eventually be tax free.