Undoing a 2009 Conversion to a Roth for the 2009 Tax Year
I received the following email from a CPA alliance of mine:
“I have a client, her employer closed their 401K and she rolled the money over to a ROTH IRA. She is a single mom, very low income and is now missing out on a big refund because the money is taxable. Can she at this point move it back to a traditional IRA by April 15? My client did a trustee to trustee transfer on July 6, 2009. She rolled it into a Roth, $12,111.00. It is costing her $2,893 in taxes because she lost her earned income credit. She makes about $30,000 a year and really doesn’t have a need for this to be in a Roth. Is there anyway for this to be reclassified to traditional IRA if done by April 15?”
I welcome the opportunity to be able to help them out with the answer.
Thanks for the response,
Todd
Permalink Submitted by Alan Spross on Tue, 2010-03-30 00:41
Yes, the entire conversion or any portion of it can be recharacterized to a traditional IRA account. The funds cannot go back to the 401k plan, therefore if she does not have a TIRA account, she must open one. This will be easier to handle if she uses the same custodian that holds the Roth IRA. SInce the rollover was done by direct transfer there should have been no tax withholding to deal with so she can recharacterize the entire gross distribution. An earnings adjustment must be done meaning that somewhat more or less than the 12,111 will move to the TIRA.
The deadline to complete the recharacterization is:
1) 4/15/2010 if she does not file on time or does not file an extension by that date
2) 10/15/2010 if she files the return or an extension by 4/15.
There is still time to complete the recharacterization and file by 4/15 if she gets right on it. Once recharacterized it would be reported as a non taxable rollover on the appropriate line of the return form she uses, and the return should include an explanatory statement of the conversion and recharacterization including dates and amounts.
Generally, she does not appear to be a Roth IRA candidate unless her future income prospects improve considerably or she receives a large inheritance or other increase in assets. Lacking that, I cannot see anyone eligible for the EITC contributing or converting to a Roth IRA. Loss of EITC can be looked at the same as an income tax cost when it comes to determining if a conversion is viable.
Permalink Submitted by [email protected] on Tue, 2010-03-30 00:57
Alan,
Thank you so much for your response and always willing to share a piece of your knowledge with me. I am grateful that you are always available, and quickly, to my posts. I think I saw where you where up in Prescott, AZ. I am in Tempe, AZ and go up to Prescott 4 times a year on business. You must give your contact information so the next time I am in your neighborhood I can have the opportunity of meeting you and repaying appropriately by treating you to lunch.
Thanks again my friend,
Todd
Permalink Submitted by Sofia Medvedev on Fri, 2010-04-02 13:41
I need your help with Form 8606.
I contributed $2,400 to my TIRA as non-deductible in 2009. In 2010 I opened Roth IRA and contributed $3,600 for 2009 and $500 for 2010. Later I find out that I am not eligible to contribute to Roth IRA. I sent forms for re characterization of Roth IRA to TIRA for all amount of $4,100. I didn’t include Form 8006 in my taxes.
I made same mistake for my husband. I contributed $6000 to my husband ROTH IRA for 2009 in March 2010 for which he is not eligible. I file forms for re characterization for him also.
I read that we have to file form 8606 for each of us. Do I need to include $2,400 only in my form or all $6000? And what should be included in form for my husband?
Thank you. Sofia
Permalink Submitted by Alan Spross on Fri, 2010-04-02 18:50
See response to your other post. This is a duplicate.