Recharacterizing Roth contributions to IRA
Client made monthly contributions to a roth IRA in 2009. Client’s income grew dramatically so that he was ineligible to contribute to a roth ira in 2009. Client wishes to recharacterize 2009 contributions to his regular non deductible ira. Are the tax ramifications (and calculation process) of recharacterizing roth contributions the same as recharacterizing a roth conversion?
Permalink Submitted by Alan Spross on Tue, 2010-03-09 22:43
They are very similar and the earnings calculation formula is identical. One difference is that you must be sure that the taxpayer is qualified to make the IRA contribution to the type of IRA the contribution is being sent to.
A conversion recharacterization just reverses the conversion back to where it was, so there is usually no doubt that the original account was OK. But a recharacterized regular contribution is going to a type of IRA that is totally new to the particular contribution. An example is that the taxpayer must have earned income to make a regular contribution and recharacterizing it does not help. Taxpayer also cannot have already made a TIRA contribution, or there is no room for the recharacterization.
Usually, in your client’s situation, the only question is whether he can deduct the TIRA contribution or not. Since he does not expect to, he will need to file Form 8606 to report the added basis to his TIRA.
All recharacterizations must be done by direct transfer, not by rollover, and cannot be reversed once done.