Recharacterization and taxable interest

Submitted by Patrick McGinty on Tue, 2015-03-17 19:51

We completed a Roth conversion of $100,000 in August 2014, then for a number of unfortunate reasons we had to $40,415 of it (plus earnings) back into the client’s traditional IRA. The amount that came back into the IRA was $42,343. We then had to distribute this amount ($42,343) from the IRA into a taxable account (basically we had to undo a disallowed 60-day rollover).

The amount Fidelity reported on their 1099-R for the IRA is: $98,072. My understanding is that the earnings shouldn’t offset the taxable Roth conversion amount. What are your thoughts?



Submitted by Alan - IRA critic on Tue, 2015-03-17 20:21

Did all these events occur in 2014? Need more info on the disallowed rollover, dates and amounts. Also, the code in Box 7 of the 1099R? Any other 1099R forms?  



Submitted by Patrick McGinty on Wed, 2015-03-18 13:43

Hmm – I was attempting to simplify the concept, but let’s start over; ignore all the numbers in the original question. Here is the full timeline of actual events and $amounts. The exact number on the 1099-R is: $158,998.68. Box 7 is code 7. No other 1099-R forms. There appears to be $1,099 of interest that Fidelity is offseting the conversion. My understanding is that when you recharacterize it is as if nothing ever happened, in which case the taxable income number I’m getting is $119,683 (and cents). Thoughts? 12/17/13 $40,000 60-day rollover deposited back into IRA 8/12/14 $50,000 IRA distribution (100% w/h for taxes) 8/19/14 -$40,415 60-day rollover back into IRA account (ineligible) 8/25/14 $108,169.99 Roth Conversion of entire account balance 9/2/14 $0.18 Residual Roth Conversion (total conversion comes to $108,170.17) 12/11/14 Recharacterized $42,342.80 ($40,415 + earnings based off 8/25-12/11) 12/18/14 Distributed $41,514.29 as Return of Excess ($40,415 + earnings based off 8/19-12/18)  12/30/14 Distributed net $828.51 withheld 100% for taxes 



Submitted by Alan - IRA critic on Wed, 2015-03-18 19:23

  • I agree with the 1099R amount code 7 for 158,999, but you should also have another 1099R for 41,514 coded 8 for the return of an excess contribution and earnings. In addition there should be a 1099R on the Roth account for the 42,343 recharacterized conversion.
  • Total line 15a of Form 1040 should be 242,856 from the 1099R you have plus the 2 other 1099Rs you did not mention. Total net conversion reported on Form 8606 is 67,755 which also goes on line 15b. Also on 15b is 50,000 distribution plus 1,099 of earnings on the return of excess, plus 829 – total 15b is 119,683. You cannot show any amount as a rollover because the rollover was ineligible and treated as an excess regular contribution. To check the math 15a 242,856 less 15b 119,683 = 123,173 as non taxable. This 123,173 is the total of 40,415 excess contribution distributed plus 42,343 recharacterization transfer plus 40,415 converted which was later recharacterized with earnings. Remember that the 1099R on the TIRA should also show 50,829 in tax withholdings which is a deposit against your total tax liability.
  • This will also require an extensive explanatory statement with your return describing the disallowed rollover, the partial recharacterized conversion, and the return of the excess contribution created by the disallowed rollover.
  • If you have any IRA basis per Form 8606, the line 15b amount will be less since the conversion and even the withholding distributions will be partially non taxable.
  • Good try – but you cannot simplify something as convoluted as this. You will have to determine where these other 1099R forms are. Form 5498 showing contribution amounts will come out in May. 

 



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