recharacterizing, then converting
I had a client who had to recharacterize her Roth IRA contributions to a Traditional IRA back in 2014 when she realized she was over the income limit for the Roth.
This is her only Traditional IRA, so we don’t have to worry about the pro-rata issue. If she were to now convert this account to a Roth, would the amount that was recharacterized in 2014 be considered like the “basis” of a non-deductible IRA and be tax-free? She didn’t receive a deduction when she recharacterized, so it only seems fair that it would convert tax-free, but I’ve never run across anything that addresses this specific scenario.
Thank you for any help!
Permalink Submitted by Alan - IRA critic on Fri, 2017-01-06 20:06
Since the recharacterization changed her Roth contribution to a TIRA contribution, and she did not deduct it, she needs to file an 8606 for 2014 reporting a non deductible contribution assuming the original Roth contribution was FOR 2014. That will establish her amount of basis in her TIRA and would result in her conversion being non taxable except for any earnings that would result in the value exceeding her original contribution. If she converts in 2017, the 2017 8606 will calculate the taxable portion, if any.
Permalink Submitted by Jason Frank on Fri, 2017-01-06 20:08
Awesome, thank you for the information, especially about the form 8606. I’m guessing her accountant didn’t file that back in 2014 even though she took no deduction. Your help is GREATLY appreciated!
Permalink Submitted by Alan - IRA critic on Fri, 2017-01-06 20:30
Another option if 2014 was a high income year would be to amend the 1040 to claim the deduction if eligible for the deduction. That would make the conversion fully taxable this year, but reducing the 2014 tax bill in favor of the conversion tax in 2017 would pay off if 2017 will be a lower tax rate year than 2014. Probably not worth the effort unless there is a large difference in those rates.