2008 Roth Recharacterization

Submitted by Mark Taylor on Tue, 2009-03-24 05:25

In early 2008 I contributed about $3K to a Roth IRA. Mid year I recharacterized the contributions into an IRA and they will be non deductible contributions. The value at the time of the recharacterization was approx $2K. I then contirbuted an additional $2K to the TIRA through the end of the year and I already had $4K in basis on the TIRA. I have a 1099R from the investment company showing the $2K as a distribution. Am I correct in filling out the Form 8606 LIne 1 as $5K, Line 2 as $4K, Line 3 and 14 as $9K or does the fact that value of the fund at the time of recharacterization was $2K come into play at all ?

Thanks for your help…..

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Permalink Submitted by Alan Spross on Tue, 2009-03-24 20:03

The amount actually recharacterized does not affect your original contribution amount. Therefore, $5,000 IS correct for Line 1 of Form 8606 and your other numbers are also correct. I assume the reason for the recharacterization was modified AGI too high for the Roth contribution as that would be the only good reason for recharacterizing it.

Permalink Submitted by Clyde Wolf on Tue, 2009-03-24 20:35

Mtaylor,

I view this not as a recharacterization, but a return of your ROTH Contribution minus a $1,000 loss during 2008. The returned contributions are treated as if they were never contributed. This contribution and distribution should not be reported on form 8606. The distribution should be reported on your 1040, and you would attach an explanation of what happened.

You then made an after tax contribution to a TIRA of $2,000, followed by another $2,000 contribution. Form 8606 line:
1) should be $4,000 – 2008 contributions
2) should be $4,000 – earlier basis
3) should be $8,000 – Answer the question NO and enter the $8,000 on line 14.

See Form 8606 Instructions, page 4, Return of Contributions.

Permalink Submitted by Alan Spross on Tue, 2009-03-24 21:25

cwolf,
The poster stated that the contribution was actually recharacterized and not withdrawn (although they could have been). The earnings calculation is the same either way, and when earnings are highly positive recharacterization compares favorably than in this case with incurred losses.

The basic treatment of a recharacterized contribution is that the contribution is treated as if it had been made to the second IRA on the date and in the amount it was originally made to the first IRA. In this case, that contribution was $3,000.

mtaylor: In the event that you did withdraw the Roth contributions and received the funds, then this was not a recharacterization. Look at Box 7 on the 1099R you received for the transaction – if Code is N, then you did a recharacterization; if it is 8, then you didn’t recharacterize.

Permalink Submitted by Mark Taylor on Tue, 2009-03-24 22:27

Thank you both for the information. The change was processed as a recharacterization directly though Vanguard. I did not get the funds returned. We did it when we figured that our AGM would be too high as Alan indicates. It looks like I got the 8606 correct and will submit as is. Would you suggest including a letter to outline the recharacterization ?

Also, just form my education, had I done the withdrawal withthe loss of approx $1K, would I be able to include that $1K loss along with some other tax loss harvesting I did to offset some gains ?

Thanks again.

Permalink Submitted by Alan Spross on Tue, 2009-03-24 23:48

No, you could not deduct any of the 1,000 earnings loss unless you closed all of your Roth accounts totally. And then it would be a potential misc itemized deduction subject to the 2% of AGI limit. The IRS does request an explanatory statement when you do a recharacterization briefly explaining all the related transactions, but in your situation where all the activity took place in 2008 and is thereby reflected on 1099R and 5498 forms that are already issued, it is not as essential as in most cases.

Permalink Submitted by Mark Taylor on Tue, 2009-03-24 23:55

Thank You Alan.

Permalink Submitted by Clyde Wolf on Wed, 2009-03-25 00:56

Alan-oniras,

Thanks for your insight.

I always find you do give sound advice.