Recharacterizing a 2012 IRA Contribution to a 2013 Contribution

Submitted by Kelly Cordes on Mon, 2013-07-01 03:40

I have a client and his wife who each contributed the full amount to a regular IRA on February 28, 2013. They wanted the deduction for their 2012 taxes. They also sold some property in 2012 that made their income go up over $179,000. The year 2012 was an unusual year for them in having their adjusted gross income be that high.
They filed their taxes right before April 15th. Several weeks ago the IRS sent them a letter indicating that their income was too high for them to take an IRA deduction for 2012 since both of them participate in a state government pension plan.
The question is can they recharacterize their IRA contribution, originally intended for 2012, and use it for 2013 since they made the contribution in February of 2013? If not, then what are their options if any to avoid or minimize penalties?



Submitted by Alan - IRA critic on Mon, 2013-07-01 16:39

Very surprising they heard from the IRS that close to filing their 2012 return! They have several options:

  1. 1)After determining the exact amount of their AGI, they may qualify for a partial Roth contribution. They could recharacterize that amount of their TIRA contribution to a Roth and have the rest returned with earnings. The higher the gain on their contribution, the better this alternative will be.
  2. 2)They could request a return of their entire contribution, but would be taxed and penalized on the earnings allocated. The tax and penalty would be for 2013 because the contributions were made in 2013.
  3. 3)They could file Form 8606 indicating non deductible contributions. There would be no tax or penalty, just the loss of deductions. Earnings would stay in the IRAs.
  4. 4)They cannot pay the 6% excise tax and assign the contributions to 2013 (or recharacterize the year per your question) because these are not excess contributions. They can make the 2012 contribution, just cannot deduct it.
  5. 5)There best option likely depends on the amount of earnings or loss on these contributions. If there is a loss, then they can request a return of contributions under which the amount is recontributed as a 2013 contribution by the custodian, but if there are gains, the gains will be taxed and subject to penalty for 2013 in this process.
  6. 6)The deadline for a return of contribution or recharacterization is 10/15.

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