We have a client who converted the sum of $21,000 from a traditional IRA to a Roth IRA in 2014. The conversion was made to a new Roth IRA account with a zero starting balance.

By September of 2015 the account value had dropped to $18,000. The client completed a recharacterization moving the funds back to the original IRA account. My understanding is this is done by way of a trustee-to-trustee transfer.

Therefore the balance of $18,000 was returned – the existing balance on the account – there are no prior year contributions or other funds.

The difference between the $21,000 converted and the $18,000 recharacterized left the original IRA short $3,000.

So, the amended return will show income of $18,000 instead of $21,000 and the $3,000 difference is a taxable distribution reported on form 8606 Part 2 correct? The client paid a $600 tax for this round trip in addition to the loss in market value.

The Roth recharacterization is often referred to as a do-over, but it is hardly that given the fact one has created a tax liability by doing so in this case and one of the primary reasons recharacterizations are touted…loss market value from the time of the original conversion. Is there any way the client could have returned the entire balance to eliminate the $3,000 shortage? Are we missing anything?