Roth IRA Recharacterizing Question

Forum|Forum|5 years ago
June 1, 2021
1 reply
7 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

@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!

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.

**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.**