Recharacterization of Roth IRA to Traditional- Contributed current and previous year

[talktoandyli]

Hello,

So I contributed 6000 to my Roth IRA in 2022 and 1500 to 2023 so far, but now realize I have made over the $144,000 income limit in 2022. I will likely be over the limit for 2023 as well. I'm having trouble figuring out which date balance I need to go off of, and calculating how much I need to recharacterize for 2022 and 2023 to a Traditional IRA though. Closing balance is the removal of balance now correct? Could someone spot check my math please? 

Roth IRA amount/Date

21,298.64 April 2023

18,189.47 Jan 2023

15,542.86 Jan 2022

Contributed 6000 in 2022 and 1500 in 2023

NIA(Net income Attribute) = Excess contribution amount * ((Adjusted closing balance – Adjusted opening balance)/Adjusted Opening Balance))

So if I'm calculating 2022 it's: 6000 *((21298.64-15542.86)/21298.64)=6000*(5755.58/21298.64)=6000*0.27=1620

Since I earned for 2022 I need to recharacterize 6000+1620=7620.

For 2023:

1500*((21298.64-18189.47)/21298.64)=1500*(3109.17/21298.64)=1500*0.15=225

So 2023 I need recharacterize 1500+225=1725.

Please let me know if I did the math wrong.

[fanfare]

IRS Pub 590A:
"You contributed more than you were entitled
to in 2022. You can’t recharacterize the excess contributions
you made in 2022 after April 18, 2023, because contributions
after that date are no longer timely for 2022"

---

For 2022-

return of excess contribution:

after tax due date including extensions: you distribute the excess amount being carried forward on 5329,

(or offset it with currently allowed contribution) .

Earnings stay in the Roth account.

[Edit: you are still before the extension date, see For 2023.]

For 2023-

return of excess contribution:

before tax due date including extensions: positive earnings allocable to the excess are taxable on the Line 4b for the year of the contribution. negative earnings are ignored; therefore, do report the entire requested amount as returned .

positive earnings removed are penalized 10% if you are under age 59 1/2.

@talktoandyli 

[fanfare]

For 2022-

On another page it says you can have excess returned by the due date (including extensions) if you filed by April 18.
If you do this before Oct 15, file an amended return with “Filed pursuant
to section 301.9100-2” written at the top.

@talktoandyli 

In most cases, the net income you must withdraw is determined by the IRA trustee or custodian.

[dmertz · Accepted solution]

@fanfare :

The calculations are for recharacterizations, not returns of contributions, but the NIA calculation is the same.  Yes, the deadline to recharacterize the contribution for 2022 is October 16, 2023 if by April 18, 2023 the 2022 tax return was filed or a request for an extension for filing the 2022 tax return was made, otherwise the deadline was April 18, 2023.

@talktoandyli :

The amount to recharacterize for 2022 is $6,000.  The amount to transfer is the adjusted amount.  Similarly, the amount to recharacterize for 2023 is $1,500.  The custodian should calculate the adjusted amount to transfer when you provide them with the requests to recharacterize, $6,000 and $1,500.

Your calculations are incorrect.  You calculations appear to be using incorrect Adjusted Opening Balances.  Also, both calculations are incorrect because you are dividing by the ACB instead of the AOB.

Given the general market performance over the period, for the recharacterization of the $6,000 contribution made for 2022 I'll assume that the balance in the IRA was $15,542.86 immediately prior to the first contribution for 2022.  I'll assume that on the date of the recharacterization the balance will be $21,298.64:

AOB = 15,542.86 + 6,000 + 1,500 = 23,042.86

ACB = 21,298.64

NIA =  6,000 * ((21,298.64 - 23,042.86) / (23,042.86) = 6,000 * (-0.075695) = -454.17

In other words, a loss of $454.17  The amount to transfer to the traditional IRA would be $5,545.83.  Note that the $1,500 contributed for 2023 is an addition during the computation period that must be included in the AOB.

For the recharacterization of the $1,500 contribution made for 2023, I'll assume that the balance in the account was $18,189.47 immediately prior to the first of the contributions for 2023.  I'll assume that on the date of the recharacterization the balance will be $21,298.64:

AOB = 18,189.47 + 1,500 = 19,689.47

ACB = 21,298.64

NIA =  1,500 * ((21,298.64 - 19,689.47) / (19,689.47) = 1,500 * 0.081727 = 122.59

In other words, a gain of $122.59.  The amount to transfer to the traditional IRA would be $1,622.59.

I suspect that the account balances that you indicated are not the exact amounts to be used in the calculations because they do not represent the actual balances on the dates defining the computation periods, so you'll need to make the calculations using the correct balances.

[talktoandyli]

Thanks so much for the help! I'm in California, San Francisco which has an automatic extension for Tax filing due to storms recently to Oct. 16, 2023. So that means I'm fine to re-characterize for 2022 right? Thanks for clearing up the math, can't believe I goofed on the denominator to.

Yes, the January balances were Jan 1st start of each year before I started transferring money over. The April balance is the current closing balance I have in the account. I'll adjust the closing balance to when I make the recharacterization in case there were gains/losses.

[fanfare]

The Example on Pub 590A page 29 contradicts the paragraph "Timing" on the same page.

[dmertz]

@fanfare , in 2022 Pub 590-A, the example on page 29 is referring to the paragraph at the end of page 28 which describes applying prior year excess contributions as current-year contributions.

@talktoandyli , it's doubtful that the January 1 values would be appropriate non-adjusted opening balances because the contributions probably could not have been made on January 1.  If the (first, if more than one) contribution for 2022 was made, say, January 15, 2022, the non-adjusted opening balance would be the balance on January 15 not including the contribution made on that date, not the January 1 balance (unless invested in a way that would not have resulted in a balance change between January 1 and January 15, which seems implausible given the subsequent balances).