Recharacterization rules
Made $5000 contribution to a Roth IRA for 2010. Turns out MAJI was above the limit to contribute so was going to do excess contribution withdrawal of $5000 plus earnings of $1000 (pay tax and penalty on the earnings). Fund company said we could recharacterize the contribution plus earnings back to the still open traditional IRA then convert for this year. We submitted papers to rechar the entire $6000 but fund company only rechar $5800. I’m still waiting on explanation of why only $5800. One thought was you can only rechar the contribution and earnings for the calendar year 2010. Does anybody know this rule? Thanks, TA
Permalink Submitted by Alan Spross on Tue, 2011-05-24 20:50
If the Roth IRA held only this 2010 contribution and the contribution was recharacterized as a TIRA contribution, the entire balance would go back to the TIRA. There would be no balance remaining in the Roth IRA. However, if the contribution was made to an existing Roth IRA, the earnings calculation must be based on the entire Roth holdings, not just on the specific 2010 contribution results. Perhaps the latter is what happened.
I can tell you that the earnings calculation includes the entire period from the contribution date(s) to the recharacterization date. It does not stop on 12/31/2010.
Note: More than likely, the TIRA contribution cannot be deducted for 2010 for the same MAGI income reasons. If so, then Form 8606 should be filed with the 2010 return OR by itself after the return was filed to document the added basis in the TIRA. The non deductible contribution amount would be 5,000, NOT the amount transferred out of the Roth due to earnings.