Roth IRA Recharacterizing Question

[fleuver11]

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]

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@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.

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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.

[fleuver11]

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]

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@fleuver11 wrote:

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!

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I am assuming that this was a 2021 contribution and not a 2020 contribution made in 2021.   You will have until the due date of the 2021 tax return (Apr 15, 2022) to remove or recharactorize a 2021 contribution.

Correct.    The earnings are treated as if they were were earned in the Traditional IRA.

When you do your 2021 tax return next year it would be entered like this.

The proper way to report the recharacterization and earnings which is to enter the 2020 IRA contribution in the IRA contribution interview section and then say yes to "Did you switch from a Roth to a Traditional IRA - recharacterize".

The amount The amount of the original Roth contribution must be entered - not any earnings or losses.

Then TurboTax will ask for an explanation statement where it should be stated that the original $xxx.xx plus $xxx.xx earnings (or loss) were recharactorized.

There is no tax or penalty on the before-tax earnings since the earning were simply switched into the recharactorized account.

That is the only way to prepare and attach the proper explanation statement for a code R 1099-R.

Enter IRA contributions here:
Federal Taxes,
Deductions & Credits,
I’ll choose what I work on (if that screen comes up),
Retirement & Investments,
Traditional & Roth IRA contribution.

OR Use the "Tools" menu (if online version under My Account) and then "Search Topics" for "ira contributions" which will take you to the same place.

Since the after-tax Roth contribution is now a Traditional IRA contribution it can be either a before-tax deduction if your MAGI allows a deduction which might result in an additional 2020 refund, or it will be an after-tax contribution reported on a 8606 form (line 1 & 14) as a "basis" in the Traditional IRA that will reduce the tax of future distributions.

[fleuver11]

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!

[macuser_22]

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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?

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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.

[fleuver11]

Thank you for the reply!

On a separate note, I would also like to rollover my Roth-401K (through my current employer) to the very same Roth IRA account. Do I need to complete the recharacterization step of the $6K Roth to traditional IRA, prior to doing any rollover activity (is there a timeline/order restriction with rollovers if there is currently an ineligible contribution in the Roth IRA account)?