@fanfare wrote:
Because the amount of attributable earnings is ignored on your tax return, whatever the amount the custodian comes up with does not matter when filing. That money is still yours, but it is no longer in a Roth IRA. You have to live with that. In the scheme of things, this is not a big deal. the universe will continue on.
I'm just trying to establish what the correct way to recharacterize it is and avoid any issues down the road, no need to make it dramatic. There's definitely money to lose if I'm paying penalties for handling it in an indefensible way.
I would accept "tax law doesn't rely on legitimate mathematics" as the answer and the rule is apply the formula whether it's logical or not (and seemingly despite the definition of income attributable to), but that's only a reliable answer if the situation I am describing is well-understood which hasn't been demonstrated to be the case so far in this thread.
So consider this loose facsimile of the situation:
- IRA contains securities valued at $5000 immediately prior to contribution.
- $1000 contribution is made bringing the balance to $6000.
- Nothing is purchased with the $1000, it's simply cash with no net income up to the moment it is recharacterized.
- IRA is valued at $8000 immediately before recharacterizing the $1000 contribution ($2000 gain due to the initially $5000 assets).
Then the questions are:
- Do I instruct the broker to recharacterize $1000 because there is obviously no income attributable to the contribution, or do I instruct the broker to recharacterize $1333.33 because the rule somehow still applies in this situation?
- If the latter, what's the justification for applying the rule in this situation?
- If the latter, does the $333.33 "income" that lands in the traditional IRA require any special treatment when filing for 2025 or later? Count against contribution limits, taxed as income, etc.?
