Steps to recharacterize 2010 conversion
I converted my TIRA to a Roth in 2010. Now realize I want to recharacterize due to large tax due (want the $$ for a house downpmt.). What steps are involved AFTER moving the money back to my traditional IRA (already done this)? What do I need to file with the IRS?
Permalink Submitted by Alan Spross on Fri, 2011-07-29 22:43
If you filed your 2010 return, you need to amend it. If the only reason you filed an 8606 was to report the conversion, then the 8606 would be eliminated from your amended return and of course the 1040X would show AGI and taxable income reductions and a tax refund due. On the 1040 X you should also include an explanatory statement regarding the conversion (dates and amounts) and the recharacterization (dates and amounts).
If you are on extension, then just file the return as if you never converted, but still include an explanatory statement so the IRS will know why you did not report the conversion. The recharacterization 1099R will not be issued until next January.
If you were taking RMDs, the year end 2010 IRA balance will have to be increased to reflect the recharacterization and that will obviously increase your 2011 RMD.
The recharacterization will NOT affect your 2011 tax return and you will not need to refer to it on your 2011 return because the explanatory statements mentioned above will suffice.
Permalink Submitted by Mike Hunt on Sat, 2011-07-30 02:17
I always file an 8606 since I make after-tax contributions to our IRA’s every year (don’t qualify for a roth). I went into T Tax, deleted the 1099-R entries related to the conversions and generated a 1040X that treats it like it never happened. 8606 forms look just like they have in previous years with my 2010 non-deductible contribution and basis update noted.
Is that it?
Permalink Submitted by Alan Spross on Sat, 2011-07-30 03:30
In that case you will still need the amended 8606, but there will be no conversion to report in that separate section of the form.
Permalink Submitted by Mike Hunt on Sat, 2011-07-30 03:45
Right…looked at both mine and spouses 8606 and no conversion is showing after deleting the 1099R’s generated from the conversions.
PS – is it necessary to amend my state as well (CA)?
Permalink Submitted by Alan Spross on Sat, 2011-07-30 04:44
Yes.
Note that for a 2010 conversion you could have deferred the income to 2011 and 2012, or opted out and reported all the taxable income in 2010. Either way, you still have to amend both the federal and CA return to show that the conversion was recharacterized. Whatever years the taxable income was due to be reported will have that taxable income reduced by the amount of the recharacterized conversion.
Your basis from non deductible contributions will also revert to what it would have been without the conversions. Your basis will go up if you made non deductible contributions for 2010 as well.
Permalink Submitted by Mike Hunt on Sat, 2011-07-30 16:16
Right – 2010 contributions will be included as part of my basis as in all previous (pre conversion) years. I was aware of the tax pmt. options of paying all in 2010 or split across 2011/12, but we want the money in the next 6 mos. to buy a home rather than pay the taxes on the conversion (A robbing Peter to pay Paul sort of thing). Besides, we’re moving out of CA (high tax state) to one of three lower tax states. Our plan is to still convert, but in smaller amounts every year which make the tax burden more manageable and done in lower tax (or no tax – TX) states. Does this seem like a good strategy?
Upon finishing the changes to my 2010 1040, it generates a 1040X. The form was basically blank except for me entering in a line indicating I recharacterized my 2010 conversions. No numbers – just that one line. I am assuming because all I did was delete the 1099’s associated with the conversion, there are no meaningful changes to my return and thus no numbers were recalculated and carried over to the form. Does this sound correct and will just the one descriptive line suffice?
Permalink Submitted by Alan Spross on Sat, 2011-07-30 18:31
I assume there are no numbers because your original return deferred the conversion income to 2011 and 2012. If so, the explanation should be enough as the Inst for Form 8606 do not request an amended 8606 to report a fully recharacterized conversion.
As for your overall plan, if you do incremental conversions in the future with the added advantage of living in a low tax state, you will be able to cut the cost of your conversions and that makes it more likely that the conversions will pay off in the long run.
Permalink Submitted by Mike Hunt on Sat, 2011-07-30 18:51
Your assumption is correct – we [i]were [/i]planning to defer the taxes to 2012 and 2013. Also happy to hear your input on our new strategy for future conversions. Seemed to make a bit more sense and cents given our housing and moving plans.
One other question. Do I need to send in a revised two page 1040 (and all the schedules, etc.) along with the two page 1040X, or just the 1040X itself? What about all the worksheets the software generates? I assume these are for my records but are not part of the return itself (I always file electronically so I don’t know what it does /does not include in what it sends).
Permalink Submitted by Alan Spross on Sat, 2011-07-30 20:39
Just the 1040x with a detailed explanatory statement. The IRS only wants to see the items that actually changed, and your 2010 taxes did not change. The explanation tells the IRS to ignore the conversion on Parts II and III of your original 8606, and therefore to not expect any conversion income from 2010 to be on your 2011 and 2012 returns.
Permalink Submitted by Mike Hunt on Sat, 2011-07-30 20:53
No new 8606’s?
Permalink Submitted by Alan Spross on Sat, 2011-07-30 21:28
Technically, not required. But if you want to include an updated 8606 with the 1040X it cannot do any harm as long as it is correct. It would only show the non deductible contribution you made on lines 1 and 3 and nothing else at all.
Permalink Submitted by Mike Hunt on Sat, 2011-07-30 22:14
T Tax puts entries on lines 1-3 and 14.
Line 1 – contribution for that year (2010)
Line 2 – previous basis
Line 3 – sum of 1 and 2 (new basis)
Line 14 – same as Line 3
I assume this will be OK?
Permalink Submitted by Alan Spross on Sat, 2011-07-30 22:31
Yes, that is fine.