topic Earning and Loss Calculation for Recharacterization in Retirement tax questions

Earning and Loss Calculation for Recharacterization

Jiawei32 — Tue, 22 Apr 2025 21:17:08 GMT

Dear TurboTax, I over-contributed $7000 to ROTH IRA in 2024 because my income went up. I want to recharacterize that $7000 and I filed extension to get this done now. Brokerage A does not provide earn/loss calculation so I would really appreciate if you can point out my mistakes:

Here's my situation:

Timeline

January 2024: I contributed $7,000 to my Brokerage B's Roth IRA
June 2024: I opened brokerage A Roth IRA and transferred $22,048 from Brokerage B's ROTH IRA (which included my $7,000 contribution)
July 2024: The closing balance was $21,928 in brokerage A Roth IRA
December 2024: The closing balance was $22,724.47 in brokerage A Roth IRA
January 2025: I contributed an additional $7,000 for tax year 2025 (not 2024), bringing the balance to $30,673 inbrokerage A Roth IRA
March 2025: The closing balance was $28,059 in brokerage A Roth IRA
April 22, 2025 (today): The current balance is $26,604 in brokerage A Roth IRA

All funds in my brokerage A Roth IRA have been invested in stocks and ETFs throughout this period.

I do not wish to recharacterize that ROTH IRA contribution of $7000 that I made in Jan 2025.

Questions: If I were to recharacterize the original $7,000 contribution from my Brokerage A's Roth IRA, is the following the right way to calculate my earnings or loss and Net Income Attributable (NIA)?

Step 1: Calculate the proportion of the 2024 contribution relative to the total transfer

Proportion of 2024 contribution = 2024 Contribution / Total Transferred = $7,000 / $22,048 = 0.3175 or 31.75%

This means that 31.75% of the total transferred amount was your 2024 contribution.

Step 2: Calculate the value of the 2024 contribution as of December 2024

Since all funds are commingled in investments, we use the proportional method to determine how much of the December 2024 balance represents the original $7,000 contribution.

Value of 2024 contribution as of Dec 2024 = Closing Dec 2024 × Proportion = $22,724.47 × 0.3175 = $7,214.77

Step 3: Calculate the earnings/loss on the 2024 contribution as of December 2024

Earnings/Loss as of Dec 2024 = Dec 2024 Value - Original Contribution = $7,214.77 - $7,000 = $214.77

This represents a gain of $214.77 by December 2024.

Step 4: Calculate performance ratio after January 2025 contribution

We need to determine how the account performed after the January 2025 contribution to apply this performance to the 2024 contribution's December value.

Performance Ratio = Current Value / (Dec 2024 Value + Jan 2025 Contribution) = $26,098 / ($22,724.47 + $7,000) = $26,098 / $29,724.47 = 0.8780

This means the account value declined to about 87.80% of what it would have been if there had been no change in value after the new contribution.

Step 5: Apply this performance ratio to the December 2024 value of the 2024 contribution

Current Value of 2024 Contribution = Dec 2024 Value of Contribution × Performance Ratio = $7,214.77 × 0.8780 = $6,334.55

Step 6: Calculate the final earnings/loss for the 2024 contribution

Total Earnings/Loss = Current Value of 2024 Contribution - Original Contribution = $6,334.55 - $7,000 = -$665.45

Step 7: Calculate percentage return

Percentage Return = (Total Earnings/Loss / Original Contribution) × 100% = (-$665.45 / $7,000) × 100% = -9.51%

If these are correct, then my 2024 contribution of $7,000 has experienced a loss of $665.45, which represents a -9.51% return. When recharacterizing the 2024 contribution, I should report this number indicating that the current value of that contribution is $6,334.55? Thank you so very much for your help!

I do intent to backdoor this amount back to Roth IRA too.

Re: Earning and Loss Calculation for Recharacterization

dmertz — Tue, 22 Apr 2025 22:00:29 GMT

The calculation is described in CFR 1.408-11: https://www.law.cornell.edu/cfr/text/26/1.408-11

I'll assume that the entire balance of the Roth IRA at Brokerage B was transferred to a previously empty Roth IRA at brokerage A and perform the calculation as if everything had stayed at Brokerage B since the transfer really didn't change anything with regard to the calculation. I'll also assume that the $7,000 contribution in January 2024 was for 2024 since it's too late to recharacterize a contribution made for 2023. I'll also assume that by April 15, 2025 you either filed your 2024 tax return or requested a filing extension for your 2024 tax return, otherwise the deadline to recharacterize a contribution made for 2024 has passed.

In your case the AOB is the value in the Roth IRA at Brokerage B in January 2024 immediately prior to contributing the first $7,000, plus the two $7,000 contributions. For the calculations that follow, I'll assume that the balance immediately prior to the January 2024 contribution was $12,000, but you'll need to redo the calculations using the true value.

The AOB is $12,000 + $7,000 + $7,000 = $26,000

If the recharacterization was done today, the ACB would be $26,604.

The Net Income attributable to the January 2024 $7,000 contribution would then be:

$7,000 * ($26,604 - $26,000) / $26,000 = $162.62 or 2.323% of $7,000

If your true balance prior to the first contribution was more than $12,604, you actually have a net loss.

Re: Earning and Loss Calculation for Recharacterization

Jiawei32 — Thu, 24 Apr 2025 00:03:21 GMT

Thank you so much for your valuable advice!

Yes- the ENTIRE balance of the Roth IRA at Brokerage B was transferred to a previously empty Roth IRA at brokerage A. That $7,000 contribution in January 2024 was for 2024 and meant for recharacterization now. I did file extension for 2024 tax return.

I contributed $7000 in Jan 2024 for that needs to be recharacterized now, and I also contributed $7000 in Jan 2025 that is meant for 2025 and do not wish to recharacterize this.

Question:

I wonder if the AOB is $12,000 + $7,000 + $7,000 = $26,000 is fair because the contribution $7000 in Jan 2025 were not part of the balance when the 2024 contribution started growing. Should we exclude the 2025 contribution's impact?

My account now has 2 contributions (2024, 2025) and I just want to recharacterize the 2024 contribution, is the following correct?

NIA=C×[(A−B)/B]

Where:

C = Amount of the contribution I want to recharacterize ($7,000 for 2024)
A = Current value of the entire Roth IRA at recharacterization time
B = Value of the Roth IRA when the 2024 contribution was made, including that contribution

Since I don't want to recharacterize the 2025 contribution, should I adjust both A and B to exclude:

The 2025 contribution amount ($7,000)
Any earnings or losses associated with that 2025 contribution

So my adjusted values would be:

Adjusted A = $26,604 - $7,000 - (any earnings on 2025 contribution)
Adjusted B = $12,000 + $7,000 = $19,000

Re: Earning and Loss Calculation for Recharacterization

dmertz — Thu, 24 Apr 2025 02:56:07 GMT

"I wonder if the AOB is $12,000 + $7,000 + $7,000 = $26,000 is fair"

Fair or not, it's what CFR 1.408-11 requires.