Roth IRA Recharacterization

Submitted by Jonathan Sard on Thu, 2018-03-29 12:31

A 37 year old married client has been contributing $450 per month to his Roth IRA. It turns out his MAGI will be $195,000 for 2017 so we now have to do a partial recharacterization. His $450 monthly contributions were being made to Fidelity for part of 2017 and then the account was transferred to TD Ameritrade where the $450 monthly contributions have continued. Is there an easy way to calculate the earnings that need to come out of the Roth since not only was he making monthly contributions, but he made contributions at two different institutions, one of which has since been transferred?? Also, does the recharacterized money have to go into a TIRA, or can they just withdraw the money?? Thank you!



Submitted by Alan - IRA critic on Thu, 2018-03-29 15:53

  • Client has a choice between recharacterization or having the excess amount returned with earnings. Assuming all these contributions were made in 2017, the rule for return of contributions calls for the last contributions to be returned first. Since the excess amount is roughly just one contribution, it is clear that the returned contribution was made at TD, so the Fidelity activity is not a factor. For example, if the excess amount is 550, then TD should be asked to process a return of contributions for the last 550 of contributions made. Since the contributions were made in 2017, any earnings returned will be taxable on the 2017 return. If the 2017 return has been filed, it will have to be amended unless there are no earnings returned, which just might be the case for contributions made late in 2017.
  • Recharacterization is much different. Client must select the contribution being recharacterized so he would probably choose the last contributions made here as well so TD can handle the calculation. Instead of money returned, it would have to be transferred to a TIRA including any earnings. The TIRA contribution cannot be deducted if client is participating in a workplace retirement plan and would have to file Form 8606 with the 2017 return (of can send it in by itself if 2017 already filed) to report the non deductible contribution. If client does not already have basis in a TIRA, it would probably be simpler to have the excess returned rather than having to maintain a Form 8606. 

Submitted by Jonathan Sard on Thu, 2018-03-29 17:18

What if some of the recharacterization or excess returned was a result of dollars contributed at Fidelity?

Submitted by Alan - IRA critic on Thu, 2018-03-29 18:16

  • It does not appear that Fidelity contributions would be involved here, but if they were it is up to TD what information they require to determine the “adjusted opening balance” at Fidelity when that contributions was made. Some custodians will simply ignore the prior custodian’s activity and use the balance on the day they received the account for the opening balance. Therefore the earnings calculation is much simpler and not subject to distortions if the prior custodian activity can be ignored. Again, a return of an excess contribution MUST come from the latest contributions made, whereas for a recharacterized contribution the client can select which contribution(s) are to be recharacterized. If client wanted the early contributions recharacterized that were made at Fidelity, without the client providing statement copies to TD, TD would have a hard time processing the recharacterization. And they must do it as Fidelity is now out of the picture.

 

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