How to recharacterize Roth excess contribution while it’s in stocks
On 3/10/21, I created a Roth IRA account thru my bank. I made a $3000 contribution for 2020 on 3/11/21 and bought stocks and a little cash remained. On 3/15/21, I made a $2000 contribution for 2021 and bought stocks totaling $2072. I am now realizing that when I do a Roth conversion later this year from my traditional IRA (also at the same bank) that I will be over the income limit to make this 2021 contribution. So I wanted to re characterize it to my Traditional IRA so as not to incur the penalty.
Since the stocks I bought totaled $2072 on the day I purchased them, I’m not sure how to re characterize them to the T-IRA. How to assess the value, sell first and convert cash? the value maybe even lower now, but some of the $2072 purchase was from the 2020 contribution I made, since the 2021 contribution was only $2000.
Also would it be best (simpler) to re characterize this before I do my Roth conversion?
or should I just open another Roth IRA and do the Roth conversion to this 2nd Roth account to keep the recharacterization “clean” for doing later with the help of a tax specialist?
Thanks very much for your help.
Permalink Submitted by Alan - IRA critic on Fri, 2021-03-19 19:13
Are you sure you will be over the MAGI limit for a regular Roth contribution? Note that conversions DO NOT count in calculating the MAGI.
Assuming you are over the limit even without the conversions, if you request a recharacterization the Roth custodian has a software program (or should have) to determine the % gain or loss in the entire Roth account from the date of your contribution to the date the recharacterization is processed. This calculation produces the dollar value that must be transferred to your TIRA account. To meet that dollar figure, the bank may let you choose which assets you want transferred first, or they might simply pro rate the holdings and transfer pro rated amounts of all investments to the TIRA.
If you do NOT have any non Roth IRA accounts, you may have heard of back door Roth conversions. In that case you could just make a non deductible TIRA contribution in the first place and convert it and then you do not have to worry about exceeding the MAGI limit. If you made the Roth contribution first, you would have to recharacterize it to TIRA, and then convert the entire TIRA balance to Roth. You would only be taxed on gains that occured on your contribution, but you only made the investment a couple weeks ago, so I would not worry about any gain or loss.
First thing to do is determine the chance of your MAGI exceeding the limit this year without any conversions. If you think you will be under, there is no need to recharacterize.
Permalink Submitted by Jane Gies on Fri, 2021-03-19 21:11
Thank you so much for all of your advice and feedback. I should be well below the income limit without counting my Roth conversion so thanks for pointing that out. I appreciate the other information that you taught me. I feel much better informed on what to do. Thanks again.