Recharacterize Roth to Traditional – affect on RMD
Client, put $6k into Roth in Nov ’10
She wants to recharacterize it to a traditional IRA so she can deduct it on her 2010 taxes.
She turns 70 in April. Does she need to adjust the year-end value (12/31/10) of her traditional IRA when she figures her RMD to somehow include the Roth $ too?
Thanks
Permalink Submitted by Alan Spross on Thu, 2011-02-17 19:54
Yes. The adjustment is referred to as “outstanding rollovers and recharacterizations”.
The 12/31/2010 TIRA balance would have to be increased by the dollar amount moved back to the TIRA. If the contribution gained $400 while in the Roth IRA, then the year end balance would be increased by 6,400, not 6,000. The reverse is true if the investment lost money in the Roth. If there was a gain, the recharacterization would make the potentially tax free gain in the Roth taxable when it eventually is distributed from the TIRA.
Accordingly, these are two factors that should be considered. And of course, she also needs to be totally sure that she is eligible for the TIRA deduction before she acts.
Permalink Submitted by margy lesher on Fri, 2011-02-18 14:01
Okay, do I add on the Roth’s value as of 12/31/10, or it’s value when it actually is transferred (recharacterized)?
Yes, she did have a gain in her Roth, but her tax person is telling her that she’ll save nearly $2000 on her taxes because the $6000 deduction affects the saver’s credit and taxes on her SS.
Permalink Submitted by Alan Spross on Fri, 2011-02-18 22:32
The value when the recharacterization is done, ie the amount that is transferred to the TIRA. That is also the amount that will show on the 1099R issued next January.
I think that the Savers Credit loss is due to the AGI being too high for the 50% top savers tier. Losing that often means the credit will be reduced from $500 to $100. But the SS inclusion is the main problem here. If the preparer can enter various TIRA deduction amounts from 6k down to 1k to determine the lowest tax, she could do a partial recharacterization instead of a full recharacterization. It might take the full amount to be recharacterized or only a portion of it to get the max tax savings while keeping in mind the tax that will be due later on this amount if it becomes a TIRA contribution.
If she is paying 33% (2000 extra tax on the 6,000 Roth contribution) as is, that should be reduced, but if that figure can be brought down to 15% or less, it may be worth it to preserve part of the contribution as a Roth.