How to calculate net income on a rechar

Submitted by abura98 on Wed, 2016-03-02 17:00

Hi there,

I recharacterized $4,490 in contributions from my Roth to my Traditional this year, but due to losses, I actually ended up recharacterizing $4,487.81.

Now I want to recharacterize a portion of the original contribution, $4,180, in contributions BACK to my Roth – is this allowed? Note that this is a recharacterization of contributions (not undoing conversions).

Also, how would you calculate the gain/losses on a portion of the recharacterized contribution using Worksheet 1-3 on page 30:
http://www.irs.gov/pub/irs-pdf/p590a.pdf

Am I to first calculate the gain/loss on the first recharacterization for the $4,180 and then calculate the gain/loss AGAIN given market changes AFTER the first recharacterization?

Thanks



Submitted by Alan - IRA critic on Wed, 2016-03-02 17:53

You cannot reverse a recharacterization (recharacterize the recharacterized contribution) of a regular IRA contribution, however you could convert  back to the Roth IRA. The conversion would simply be an amount you wish to convert and there is no earnings calculations because the conversion is not tied to a specific contribution, rather it is just an amount you wish to convert. It could be more or less than the original contribution. Taxes on the conversion depends on your TIRA basis per Form 8606. Your contribution might have been deductible or perhaps your income is too high to deduct it.

Submitted by abura98 on Wed, 2016-03-02 18:34

Are you allowed to recharacterize a recharacterized contribution in any direction?

Submitted by Alan - IRA critic on Wed, 2016-03-02 19:41

  • Not a regular contribution. A given regular contribution can only be recharacterized once. However, there is another option. You could make a Roth contribution, recharacterize it to a TIRA, then remove it and start over by making a new regular Roth contribution, as long as the tax deadline for the year of the contribution has not passed. When you request that your TIRA contribution be returned to you, the custodian must calculate the earnings on that contribution including the time it spent in both the Roth and the TIRA accounts. If there are positive earnings, the earnings will be taxed and subject to penalty. If the TIRA is your only non Roth IRA, it is easier to just convert it, but if you have additional TIRA accounts or more in your TIRA than just this contribution, a conversion would be taxable, and in that case it would be better to remove it and make a new Roth contribution since the only tax you would pay for that procedure would be on the small amount of earnings, if any. If you have a loss, then there is no tax or penalty at all.
  • If you want to check the amount of earnings or loss on either a recharacterization or a removal of contribution before you request it, the formula is the same. Just start with the amount of your contribution (full amount or partial amount) that you want returned or recharacterized, and use worksheet 1-3 for a recharacterization or 1-4 for removal of a contribution.

Submitted by abura98 on Wed, 2016-03-02 20:13

Thank you!

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