1040 IRA Contribution Characterized Incorrectly
My wife and I both made 2011 Roth contributions ($12,000 total) but mischaracterized them, in an already filed return, as traditional resulting in an excess refund of $3000. Do I only need to file a 1040X accompanied with the excess refund or are there additional forms required? Thanks for any advise you can offer. John
Permalink Submitted by Peter Lingane on Wed, 2012-03-07 19:51
I assume that the Roth contributions were for the 2011 tax year, were reported as contributions to traditional IRAs on your 2011 returns and that you have filed your 2011 returns.
Your choices are to amend your 2011 return and send in a check for the amount that was refunded to you. If you do this before April 15th, there should be no interest or penalties.
Alternatively, you could recharacterize the Roth contributions as having been made to traditional IRAs; recharacterization makes your tax returns correct as filed. You could then convert the traditional IRAs to Roth IRAs thirty-one days after the recharacterization and report the conversion income on your 2012 returns. If you choose this route, please review how the recharacterization must be done in Pub. 590.
Permalink Submitted by Alan Spross on Wed, 2012-03-07 20:55
Before you consider recharacterizing the contributions as TIRA contributions, check to see that your joint modified AGIs are not too high to deduct those contributions. Determine whether one or both of you is covered by a retirement plan at work to determine if you can deduct them.
1) If you can deduct both contributions, then you can recharacterize them as TIRA contributions and not owe more tax. If you do not send an explanatory statement to the IRS, you may well get an inquiry because the IRS will not know you recharacterized until next year.
2) If you cannot deduct both recharacterized contributions, then you need to amend that return and include a Form 8606 for each of you that cannot deduct their contribution and you will owe the additional tax. You can then convert to a Roth IRA if you wish, but the pro rate rules for taxation apply if you have additional TIRA balances which are likely to be pre tax. Any conversion tax will be due on the 2012 return.
3) If you qualify for the Roth contributions (modified AGI not too high), you can keep them and just amend the return and pay the additional tax.
4) If you cannot deduct the TIRA contribution if you recharacterized, you could also request a return of contributions with any earnings. If you cannot deduct them maybe you do not want to contribute at all. With a return of contribution, any earnings are taxable IN the year you contributed (not FOR the year) and subject to 10% penalty if you are not yet 59.5. Positive earnings on a 2011 contribution made in 2011 will also require a 1040X.
So there are several choices here, and whether you have either positive or negative earnings on that 12,000 may affect what you choose to do.
Permalink Submitted by John Biltz on Thu, 2012-03-08 04:02
Thanks to both of you for your insight and advise. We are both eligible for TIRAs so recharacterizing the contributions is possible. A potential complication is that the Roth contributions were added into CDs containing previous year contributions. Would the earnings specific to the 2011 contributions (since Jan 2011) have to follow the contributions into the TIRA or can they remain in the Roth IRA? Thanks.
Permalink Submitted by Alan Spross on Thu, 2012-03-08 16:56
I think you meant to say that your income was not too high to DEDUCT the TIRA contributions if you recharacterize. Anyone with earned income and under 70.5 is eligible for a TIRA, it is just a question of whether you can deduct it or not.
You are right that CD IRAs typically present various issues when it comes to recharacterizing. They will probably recharacterize, but you might get hit with bank penalties, fees, or lower interest rates.
Since you would be recharacterizing within the time limit, any earnings on the contribution would also have to transfer to the TIRA. The end result should be the same as if you had originally made a TIRA contribution and the earnings were generated on that contribution.