Roth IRA Recharacterizing Question

Forum|Forum|5 years ago
June 1, 2021
6 replies
33 views

Hello, I put in the $6K maximum into my Roth IRA through TDA earlier in 2021 (income <$125K, <50 yrs old). I now believe my income might be over the $140K limit for 2021, and would like to make the appropriate corrections now by moving this over to a traditional IRA.

TDA offers a "Removal of Excess" form, or an "IRA Recharacterization " form to fill out:

https://www.tdameritrade.com/content/dam/tda/retail/marketing/en/pdf/TDA1401.pdf

https://www.tdameritrade.com/content/dam/tda/retail/marketing/en/pdf/TDA269.pdf

I am not sure which is the best method for the movement even after speaking with a rep. The rep told me the recharacterization form is for a nontaxable, but reportable movement. They also mentioned the Removal of Excess form will yield a 1099-R and calculated earnings are considered taxable. It has a section on tax withholdings to fill out, and has an option to distribute the amount as a deposit into a different IRA. It wasn't clear to me if a 1099-R would also be generated if I filled out the recharacterization form instead.

Additionally, based on whichever is the best method, when doing the movement, will the earnings from the $6K originally in the Roth IRA count towards the $6K limit for all IRAs? So if the $6K has grown to be $6100 while in the Roth IRA, would I need to withdraw $100 and pay a penalty on that, and only be allowed to put in exactly $6K when moving to the traditional IRA?

Thanks in advance for the help.

macuser_22

Alumni - Champ

@fleuver11 wrote:

Hello, I put in the $6K maximum into my Roth IRA through TDA earlier in 2021 (income <$125K, <50 yrs old). I now believe my income might be over the $140K limit for 2021, and would like to make the appropriate corrections now by moving this over to a traditional IRA.

TDA offers a "Removal of Excess" form, or an "IRA Recharacterization " form to fill out:

https://www.tdameritrade.com/content/dam/tda/retail/marketing/en/pdf/TDA1401.pdf

https://www.tdameritrade.com/content/dam/tda/retail/marketing/en/pdf/TDA269.pdf

I am not sure which is the best method for the movement even after speaking with a rep. The rep told me the recharacterization form is for a nontaxable, but reportable movement. They also mentioned the Removal of Excess form will yield a 1099-R and calculated earnings are considered taxable. It has a section on tax withholdings to fill out, and has an option to distribute the amount as a deposit into a different IRA. It wasn't clear to me if a 1099-R would also be generated if I filled out the recharacterization form instead.

Additionally, based on whichever is the best method, when doing the movement, will the earnings from the $6K originally in the Roth IRA count towards the $6K limit for all IRAs? So if the $6K has grown to be $6100 while in the Roth IRA, would I need to withdraw $100 and pay a penalty on that, and only be allowed to put in exactly $6K when moving to the traditional IRA?

Thanks in advance for the help.

They are correct. Any earnings on a return of contribution is taxable income.

A recharacterization has no tax since the contribution is simply deemed to have been made to a Traditional IRA in the first place. The IRA custodian must issue a 1099-R with a box 7 code R for the recharacterization. The earnings are simply moved to the Traditional IRA along with the contribution.

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**

fleuver11Author

Level 2

Hi @macuser_22 , in the case where I believe my income might be too high and I shouldn't have been allowed to contribute to the Roth IRA this year originally, am I allowed to treat this as a recharacterization? I am to fill out only 1 of the 2 different forms (recharacterization vs. removal of excess).

Based off your response, if it's a recharacterization and they move the earnings along with the original contribution to the traditional IRA, does that mean the earnings will not count towards the $6K limit?

Thanks in advance!

macuser_22

Alumni - Champ

Hi @macuser_22 , thanks for the helpful reply and clarification on the earnings. Yes, this is a 2021 contribution made for 2021.

Sounds like I will proceed with the recharacterization to move from the Roth IRA to a traditional IRA. I believe this will be treated as nondeductible based off my income/employer retirement plan. Will TurboTax then prompt me to enter the basis on line 1/14 of the 8606 form, after doing the recharacterization/earnings steps you detailed?

If I continue to use TurboTax, will it prompt me every year on entering this basis amount? What happens if say, in 2022, I don't make any 2022 contributions to the traditional IRA? Do I still need to enter the basis value every year when doing my taxes?

Thanks much!

Will TurboTax then prompt me to enter the basis on line 1/14 of the 8606 form, after doing the recharacterization/earnings steps you detailed?

If I continue to use TurboTax, will it prompt me every year on entering this basis amount? What happens if say, in 2022, I don't make any 2022 contributions to the traditional IRA? Do I still need to enter the basis value every year when doing my taxes?

TurboTax will either automatically make the contribution non-deductible and create the 8606 if yiu are not eligible for a deduction or if it can be deducted, it will ask if you want the deduction or to make it non-deductible.

If you use TurboTax every year and transfer the prior years data then TurboTax will track your basis on the IRA Information worksheet. A new 8606 is only created it you make a new non-deductible contribution or take a distribution, otherwise the last filed 8606 remains in effect.

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**