Recharacterizing a ROTH
I converted a Traditional IRA to a ROTH IRA in December 2008 thinking it would be wise to do so since the IRA is in mutual funds which had declined in value.Since the conversion, the account has again substantially declined. I am thinking about recharacterizing the ROTH back to a Traditional IRA and then reconvert back to a ROTH. What are the rules in regard to this concerning timing? Since a recharacterization will undo the ROTH conversion making it a wash, will the conversion and recharacterization need be reported for the tax year 2008? As of yet I have not filed taxes for 2008.
Permalink Submitted by Alan Spross on Fri, 2009-03-06 22:27
A complete recharacterization will eliminate the 2008 conversion tax bill. The only reporting you will need is an explanatory statement with your 08 return, eg. “On 12/15/08 I converted $x to my Roth IRA. On mm/dd/2009 I recharacterized the entire conversion, which was then worth $y back to my traditional IRA”.
SInce you need to include the details per above with your 2008 return, your choices are to do the recharacterization now, so you will have these figures in hand for filing prior to 4/15. Or you could extend your return to October 15th, and wait to see if you need to recharacterize or not. If you are sure you do not want to pay the conversion taxes, might as well do it now.
Reconversion of the same assets cannot be done within 30 days of the recharacterization. However, if you have other funds in your TIRA that do not depend on the recharacterization dollars coming back, you can convert for 2009 right away, before doing the recharacterization. The 100,000 income limit still applies for 2009 conversions, the last year in which there are income limits.
Permalink Submitted by Anonymous (not verified) on Sat, 2009-03-07 15:39
Thank you for your reply. If I understand correctly, since the ROTH conversion and recharacterization are for the tax year 2008 then no IRS forms regarding this need be attached to the return. If so,why is there a need to attach a hand written statement ?
Permalink Submitted by Alan Spross on Sat, 2009-03-07 23:42
There will be a 1099R issued by the distributing custodian, and a 5498 by the receiving Roth custodian for 2008. The IRS will have these forms, and will figure that the taxpayer failed to report the conversion. The statement is the only way they will know that the conversion was recharacterized. The same situation exists for correction of excess contributions, return of contributions, and recharacterized contributions. Most of this activity occurs in the year following the transaction, yet the 1099 forms reporting the correction do not come out until the following January.
There are some cases where the entire cycle is completed in the original year, and therefore the 1099 forms reflect all the activity. But even then, the IRS suggests in the Inst for Form 8606 to attach an explanatory statement. Most tax software programs contain a field for entering the recommended statement. In some cases, there are so many transactions and 1099 forms, the IRS needs the statements to help them understand what actually happened.
Permalink Submitted by Anonymous (not verified) on Sun, 2009-03-08 05:41
Thank you again for your reply. What do I need to do in order to extend my filing date to 10/15/09 ? Also, is there a deadline for filing an amended return for 2008 ?
Permalink Submitted by Alan Spross on Sun, 2009-03-08 20:54
You can either e file or send in a paper Form 4868 by 4/15. However, the 6 month extension to file the return is not an extension to make payment of what you think will be due. If you do not include the conversion taxes, there will probably be an underpayment penalty when you file and pay in October. If you do pay and then recharacterize the conversion, you will get a refund.
An amended return can be filed up to 3 years after you filed your original return, or 2 years from when you paid the tax, whichever is later.