Partial Roth Recharacterization

Submitted by Paul Schneider on Wed, 2014-09-24 17:00

Assume in 2013, one transfers $50,000 from a Tradional IRA into a new Roth IRA. Further assume that the new Roth IRA reaches a value of $80,000 in 2014, when the owner decides to keep $20,000 in the New Roth IRA and transfer/recharacterize $60,000 back to his Traditional IRA. How would this be handled from a tax standpoint? How much is taxable in 2013?



Submitted by Alan - IRA critic on Wed, 2014-09-24 19:47

  1. Typically, the taxpayer decides how much he wants to be taxed on in relation to the gain or loss on the conversion. Many conversions are recharacterized just because the lost money, but if you have gained 60% your effective tax rate on the conversion has been reduced by 5/8 so you would generally keep that conversion.
  2. But let’s assume for this conversion, only the actual tax bill is the problem. In that case, if you determine that you want to recharacterize half the conversion then half the investment gains must also transfer back to the TIRA. Half the gains would be 15k, so the Roth custodian would transfer 25k plus 15k for a total of 40k back to the TIRA. The taxable remaining conversion would be 25k.
  3. A recharacterization would rarely be based on how much is to remain in the Roth IRA, but if that amount was to be 20k, 3/4 of the Roth balance needs to be transferred back to TIRA. 3/4 of the conversion is being recharacterized and 3/4 of 50k is 37,500. You would ask the Roth custodian to recharacterize 37,500 of the 50k conversion and that would leave 12,500 taxable for 2013 and 20k remaining in the Roth IRA.

Add new comment

Log in or register to post comments