How to handle a Roth recharacterization that transferred too much back to the Traditional IRA?

[JG0Z]

I converted $10,000 from my Traditional IRA to my Roth IRA in 2017.

In December 2017, I sent an election to the Trustee to recharacterize $11,000 (the $10,000 plus $1000 gain attributable to the conversion) back to the Traditional IRA.

The Trustee actually transferred the $11,000 in February 2018, at which time there was a $1000 loss attributable to the conversion, so I believe only $9000 should have been recharacterized.

How should this be reported in TurboTax?

[dmertz · Accepted solution]

That's a real mess.  Assuming that you had no regular contributions to this Roth IRA account for 2017 that can be considered to have been included in that recharacterization, the $2,000 transferred that should not have been would have to be considered to have been a regular distribution from the Roth IRA and a regular contribution to the traditional IRA.  If you were age 70½ or older in 2018 or will have insufficient earnings in 2018 to be able to make a $2,000 contribution to a traditional IRA, you have an excess contribution to the traditional IRA for 2018.

If you cannot get the trustee to issue a code R 2018 Form 1099-R showing only $9,000 transferred, plus a new code J, T or Q 2018 Form 1099-R to show the remaining $2,000 as a regular distribution, you'll need to prepare substitute Forms 1099-R (Forms 4852) to do so and provide explanation.  You'll also need to enter the $2,000 as a regular traditional IRA contribution.  I don't know of any precedent for the trustee to be able to simply "undo" the transfer of the $2,000 as if it never happened.

There is some chance that you could obtain a return of contribution of the $2,000 from the traditional IRA and roll it back into the Roth IRA under self certification that the circumstances qualify for a waiver of the 60-day rollover deadline.  You would need to convince the trustee that the $2,000 was deposited into an account that you mistakenly thought was a retirement plan that was eligible to receive this transfer.  Of course the amount distributed as a return of contribution from the traditional IRA would have to be adjusted for gain or loss since the time of the deposit of the $2,000 into the traditional IRA, and your rollover back to a Roth IRA would have to be $2,000 regardless of the amount distributed as a return of the $2,000 contribution.  Self-certifying that this is eligible for a waiver of the 60-day deadline might be stretching things a bit, though.  Alternatively, you might be able to convince the trustee that the result was a separate $2,000 traditional IRA contribution (as it actually seems to be under the circumstances) and that it is eligible for recharacterization to a Roth IRA, provided that you are eligible to make a $2,000 Roth IRA contribution for 2018.  Otherwise, if you are eligible to have made a $2,000 traditional IRA contribution, you could just leave it in as a regular traditional IRA contribution for 2018.

[JG0Z]

dmertz, thanks for your comments. It does seem like a real mess. However, I actually did have a regular $6500 contribution to the Roth IRA in 2017. So I could recharacterize a portion of that contribution as a contribution to the Traditional IRA, correct?

[dmertz]

I think the argument can be successfully made that the code R 2018 Form 1099-R showing a gross distribution of $11,000 transferred to the traditional IRA represented the sum of the recharacterized $10,000 conversion made in 2017 and the a recharacterization of some amount of the regular $6,500 Roth IRA contribution made for 2017 in 2017.  $9,000 of the $11,000 transferred would represent the $10,000 recharacterized.  You would then need to figure out how much of the regular Roth IRA contribution would have to have been recharacterized to result in a transfer of $2,000 to the traditional IRA.  If the regular Roth IRA contribution occurred on the same day that the conversion contribution was deposited into the Roth IRA, the Roth contribution would have seen the same 10% loss in value by the time of the recharacterization.  (The gain or loss for a recharacterization is calculated over the entire balance in the Roth IRA.)  For $2,000 to represent 90% of the contribution, the contribution amount would be $2,000 / 0.9 = $2,222.22.  Working the calculation in the other direction to check the result, recharacterizing a total conversion and regular contribution of $12,222.22 that saw a 10% drop in value would result in 0.9 * $12,222.22 = $11,000 to be transferred to the traditional IRA. (Of course these are just round numbers.  You'll have to calculate the gain or loss on the regular contribution a bit more precisely and substitute the appropriate value for the 0.9 used above.)

Trustees generally will combine distributions from the same account and having the same box 7 code onto a single Form 1099-R, so the 2018 Form 1099-R that you receive should look exactly the same as if your intent had actually been to do these two separate but simultaneous recharacterizations.  Treating this as two simultaneous recharacterizations is way easier than anything else since it involves no cooperation by the trustee and no assertion that the code R 2018 Form 1099-R is wrong.

To make sure that you are calculating the loss percentages correctly, review CFR 1.408-11:
<a rel="nofollow" target="_blank" href="https://www.law.cornell.edu/cfr/text/26/1.408-11">https://www.law.cornell.edu/cfr/text/26/1.408-11</...>

[JG0Z]

Thanks again for the very helpful suggestions.