Not enough funds in Roth IRA to Recharacterize

[tnanaihsoj]

Hello,

While preparing 2023 returns we discovered that we overcontributed to both our Roth IRAs in 2023.

To make matter worse, we have also contributed for 2024 and expect none of it will be allowed due to higher MAGI this year.

2023 Contribution was $7,500 and 2024 contribution was $8,000

Only $1000 contribution for 2023 is permissible in Roth for both accounts. 

We opened traditional IRA accounts and requested recharacterization as follows:

• 2023 tax year - $2,000 (there were losses. In fact account value had dropped below $1,000. Did not realize this before filing for recharacterization)
• 2024 tax year - $8,000

This is already done for wife's account at Schwab.

For my own account the brokerage has delayed and also made some of their own calculation. They transferred only $1,500 to traditional IRA. The Roth account still has $9,500.

The $2,000 recharacterization for 2023 is bothering me now. Because that much money was not left in the account at end of 2023 due to losses. In fact it had fallen below $1,000.

After contribution of 2024 was made, there were some gains and hence total value of the accounts rose to approximately $11,000.

Is this a problem?

We have filed for extension.

Thanks

[DanaB27]

No, this isn't a problem if you requested the recharacterization of the excess amount but less got transferred because of a loss. Earning and losses are deemed to have happen in the traditional IRA account when you recharacterize a Roth IRA contribution.

You will enter the recharacterization when you enter the contribution to the Roth IRA:

1. Login to your TurboTax Account 
2. Click on "Search" on the top right and type “IRA contributions” 
3. Click on “Jump to IRA contributions"
4. Select “Roth IRA”
5. Answer ‘Yes” on the “Roth IRA Contribution” screen
6. Answer “No” to “Is This a Repayment of a Retirement Distribution
7. Enter the Roth contribution amount 
8. Answer “Yes” to the recharacterized question on the “Switch from a Roth To a Traditional IRA?” screen and enter the contribution amount recharacterized (no earnings or losses) on the next screen.
9. TurboTax will ask for an explanation statement where it should be stated that the original $xxx.xx plus $xxx.xx earnings (or loss) were recharacterized.
10. On the screen "Choose Not to Deduct IRA Contributions" answer "Yes" if you are thinking about doing a backdoor Roth. Otherwise select "No". (If you have a retirement plan at work and are over the income limit it will be nondeductible automatically and you only get a warning and then a screen saying $0 is deductible)

You will get a 2024 Form 1099-R  for the recharacterization with code R-Recharacterized IRA contribution made for 2023 and this belongs on the 2023 return. But a Form 1099-R with code R will do nothing to your return. You can only report it as mentioned above. Therefore, you can ignore the Form 1099-R with code R when you get it in 2025. 

[fanfare]

recharacterization: the original amount to the first IRA you report as contribution to the second IRA, earnings move but are ignored. It does not matter if the earnings are negative.
You must use a trustee-to-trustee transfer before the due date April 15,2024.
You will instruct trustee to calculate the allocable earnings.  (You did that.)

report this on your tax return for the year during which the contribution was made.
Treat the contribution as having been made to the second IRA on the date that it was actually made to the first IRA.

@tnanaihsoj 

[tnanaihsoj]

Thank you DanaB27 for quick and detail reply.

"No, this isn't a problem if you requested the recharacterization of the excess amount but less got transferred because of a loss. "

- Assuming there were no gains (even interest) and losses in the Roth account since beginning of 2023, our recharacterization would have been $6500 for 2023 and $8000 for 2024. But there were not enough funds in the account at end of 2023. Not even $1000 allowed out of $7500. Isn't that an issue?

There's a form 5498 in which account value is mentioned. For some reason, I have this form for only 2016 for both accounts and 2022 for wife's account.

I double checked at both brokers and it is not available for 2023 at either.

[DanaB27]

No, it isn't an issue. You will request the recharacterization of the $6,500 contribution for 2023 and $8,000 contribution for 2024 with your financial institution and they will calculate the loss and move the correct amount.

And you will enter on your 2023 return that you recharacterized the Roth IRA contribution of $6,500 (step 8 in above instructions).