Borrowing from a ROTH IRA

Submitted by Seth Poppel on Fri, 2014-09-05 17:05

Are the rules for “borrowing” from a ROTH IRA the same as for borrowing from a TIRA??

i.e. That you may withdraw and repay once (from one account) each year if it is returned within 59 days??

I have a personal loan on which I must do a “cleanup” (pay back fully) on the anniversary of the loan.

Presently I have been doing this from my conventional IRA, but am considering a ROTH Conversion and wanted
to know if the same rule held for such a withdrawal/payback from a ROTH as I would not like to lose the
sheltering of the earnings from this.

Thank you!!



Submitted by Jose Morales on Fri, 2014-09-05 17:57

People casually refer to taking a distribution that they intend to pay back within the 60 day period as “borrowing” from their IRA.  This is not borrowing, this is simply taking a reportable distribution and then completing a rollover within the 60 day rollover period.  You must also be sure to only do this once every 12 months, and note that beginning January 1st of 2015 you can only complete 1 rollover in a 12 month period no matter how many IRAs of any type that you have.



Submitted by Seth Poppel on Fri, 2014-09-05 19:01

Yes, I was aware of that with regards to the TIRA, but was not sure if the same rules applied to a ROTH so that the distribution could be returned within 60 days.  Just wanted to verify that??  Thank you.



Submitted by Alan - IRA critic on Fri, 2014-09-05 21:02

Yes, same for Roth. And starting in 2015, only one rollover combined for ALL IRA types. This is bound to be very costly for those who have been doing 60 day rollovers for years. 1099R and 5498 matching will become the prime tool in enforcing the new rules, replacing in large part the enforcement IRA custodians have been doing in the past. 



Submitted by Seth Poppel on Sat, 2014-09-06 07:42

Much appreciated and say hello to Ed if you are in touch with him.  



Submitted by Seth Poppel on Mon, 2014-09-08 12:51

Carrying the thread above a bit more…I had converted a ROTH in January of 2013.  I may recharacterizeby October 8 (which is when Schwab says they need the paperwork to assure all funds are correctly placed in the right account.)  Complicating life is the fact that I turned 70.5 in 2014.  IF I recharacterize I will owe the RMD on the year-end 2013 valuation of the recharacterized funds.  If I then convert again, e.g. on January 2, 2015, would I then owe an RMD for 2015 IF I do not recharacterize that conversion EVER again??



Submitted by Alan - IRA critic on Mon, 2014-09-08 16:43

  • You are correct that a recharacterized 2013 contribution to a TIRA will result in a retroactive 12/31/2013 TIRA balance increase and a higher RMD for 2014, although as your first RMD year you can defer all or part of that RMD to 4/1/2015. The 12/31 TIRA balance increase will be the amount that actually transferred to the TIRA which would be more than your conversion if you had gains or less if you had losses on the converted dollars.
  • Since you are recharacterizing a 2013 conversion, you can reconvert 31 days after the recharacterization, you do not have to wait until 2015 to reconvert. Or if you can document that you are converting different funds (eg by converting before you recharacterize) you do not have to wait at all because you are obviously not converting the same dollars you recharacterized. Another way to document that is to recharacterize to a new TIRA account, not back to the one that you will draw the next conversions from. Of course, if you convert again this year the conversion will be taxable this year and it will not be if you wait until 2015. Most importantly, you must take out the additional 2014 RMD before you convert a second time since the RMD must always be satisfied in an RMD year before you convert in that year.
  • Now for your question. It sounds like this was your only TIRA that was originally converted (if so, then you MUST wait 31 days before reconverting). If you do so in 2014, there would be a 2014 RMD required first, but no 2015 RMD. But if you wait until 2015, you will then have a 2015 RMD to satisfy as well as your 2014 RMD if you elected to defer it to 2015 before you can do the 2015 conversion.
  • As you can see, when you have a recharacterized conversion in your first RMD year and you wish to reconvert, several interdependent factors need to be cobbled together in the correct order.


Submitted by Seth Poppel on Tue, 2014-09-09 01:23

Thank you, Seth



Submitted by Seth Poppel on Sat, 2014-09-27 07:39

To recap…I took e.g. $2,000,000 from a TIRA in January of 2013 and converted it to a Roth (clean, as the Roth, while seasoned had no balance when this was done.)  I am now recharacterizing the Roth back to a TIRA as of October 1, 2014 and will file my 2013 tax return with an explantory note about this, since IRS will only have the “distribution” note on the $2,000,000 from the TIRA.If, in May of 2013, I withdrew $50,000 from the “Roth” account (the one that I put the $2,000,000 into) and have now recharacterized, I would assume that the $50,000 will now somehow become a taxable distribution.Exactly how will that work?  Do I just report a $50,000 distribution from ?? account (the original IRA, where the money is now back into, or from the ROTH account # with another explanatory note?)  Or is there some other way this should be treated??



Submitted by Alan - IRA critic on Sat, 2014-09-27 17:46

  • Somewhat of an odd situation, but not so unusual that the IRS would not have issued instructions to deal with it. But they haven’t. Your assumption is correct, and we have to improvize to get there. You would request that 1,950,000 of your conversion be recharacterized because the 50k is not available to be recharacterized. That will leave the 50k as a taxable conversion for 2013 on Form 8606. Since the Roth was a new account when you converted, the entire value as of the recharacterization date would be transferred back to the TIRA, and would increase your 2014 RMD as previously discussed.
  • Since the 50k will now be considered a taxable conversion, the Roth distribution can be reported on the same 8606 (last section of Form). You should have a 1099R for that Roth distribution. This distribution will be tax free. If you had made prior Roth contributions before 2009, your Roth is qualified and you do not need to report the distribution on the 8606, just on line 15a of Form 1040.
  • Your explanatory note for the recharacterization on your 2013 return should not mention the distribution, just indicate that you converted 2,000,000 in Jan, 2013 and recharacterized 1,950,000 in Oct, 2014 which was worth (amount remaining in the Roth) at the time of the recharacterization.
  • I assume you filed an extension request for your 2013 return by 4/15/2014
  • If you have any other Roth IRA accounts, please advise.


Submitted by David Mertz on Sun, 2014-09-28 02:15

  • The amount to request for recharacterization would be exactly $1,950,000 only if there was a balance of exactly $1,950,000 in the Roth IRA at the the time of the recharacterization.  If there were gains or losses that made the Roth IRA balance (referred to as Balance below) at recharacterization something other than $1,950,000, it’s necessary to calculate the amount to be recharacterized by treating the Roth IRA balance as Net Income plus Contribution as these terms are used in CFR 1.408-11.
  • Applying a bit of algebra to the equation in CFR 1.408-11, you get for your example
  • Amount to be Recharacterized =  $2,000,000 * Balance / (Balance + $50,000)
  • Note that if Balance = $1,950,000 (no gain or loss), the amount to be recharacterized is $1,950,000, exactly as Alan described.  If instead Balance was $2,100,000 because the Roth IRA value had increased, the amount to request for recharacterization would be $1,953,488.37, which would be transferred to the traditional IRA along with $146,511.63 of net income for a total of $2,100,000 transferred.  (Of course the IRA custodian should do this calculation.)

 



Submitted by Alan - IRA critic on Sun, 2014-09-28 03:38

  • There are no examples in the IRS Regs that deal with this scenario. You could not allow conversions to occur, tax free Roth distributions taken from the Roth IRA, and then have the entire Roth conversion recharacterized, which would eliminate the conversion taxes. If taxpayer could do this, everyone would be lining up to get their TIRAs distributed tax free. Perhaps you know of a better way to approach this issue.
  • The net income calculation is a separate issue and 1.408-11 does address that calculation, but the amount to be recharacterized must first be determined. Then the NIA formula can be applied to determine the amount transferred back to the TIRA that goes on the 1099R. You cannot have more go back than what is in the Roth account for obvious reasons. Without doing the math, I figured that if there was a large investment loss generating negative earnings, then less than the amount being recharacterized would go back but that would also be reflected in a reduced Roth balance. So I think that the remaining balance in the Roth IRA after the 50k distribution would be transferred to the TIRA.
  • This ends up as it should be. Taxpayer withdrew 50k from his TIRA and he should be taxed on it. The entire Roth goes back to the TIRA and the net result is the same as if taxpayer had just taken the 50k  out of the TIRA in the first place.
  • In retrospect, I am surprised that there is no IRS Reg dealing with this specific situation, since it is so ripe for abuse.

 



Submitted by David Mertz on Sun, 2014-09-28 14:21

  • I’m not seeing anything unusual here.  There was a conversion followed by a distribution and then a partial recharacterization.  Note that the calculation of the net income attributable to the amount recharacterized, as described in CFR 1.408-11, is based on the adjusted closing balance which adds back intervening distributions (the $50,000 in this case).
  • The result is that the amount of tax due on the part of the conversion that was not recharacterized but instead was distributed depends on the earnings in the Roth IRA prior to the partial recharacterization and whether or not the distribution was a qualified distribution.  Between the time of the conversion and the time of the partial recharacterization, my example showed 7.5% earnings attributable to the original $2,000,000 converted.  Of the $2,150,000 that resulted, $50,000 was distributed from the Roth IRA.  The remaining $2,100,000 transferred back to a traditional IRA in a partial recharacterization included $146,511,63 of earnings. The amount of the original conversion that was not recharacterized and remains a taxable conversion is $46,511.63.  If the distribution was not a qualified distribution, the $3,488.37 of earnings distributed from the Roth IRA would be taxable as well, resulting in a total of $50,000 being taxed.  If the distribution was a qualifed distribution, only the $46,511.63 that was not recharacterized would be taxed.
  • Consider the scenario where a traditional IRA starts with $2,000,000 and $46,511.63 of that is converted to a Roth IRA.  The Roth IRA then grows by 7.5%, at which point, the entire resulting $50,000 Roth IRA balance is distributed.  Separately, the remaining $1,953,488.37 still in the traditional IRA grows by 7.5% to $2,100,000.  The result is the same, which is the intent of the calculation described in CFR 1.408-11.
  • Don’t forget that there is a code T Form 1099-R for the $50,000 distribution from the Roth IRA.  (I assume that the custodian won’t know if the distribution was qualified or not.)  If this was actually a qualifed distribution, it’s necessary for the taxpayer to determine the amount of the $50,000 that is earnings ($3,488.37 in my example) and therefore not taxable.


Submitted by Alan - IRA critic on Sun, 2014-09-28 20:27

Will address your recent post in order of bullet points.

  1. What’s unusual is there is nothing in the IRS Pubs or Regs that indicates when a distribution if taken from conversion funds prior to a recharacterization, you must reduce your recharacterization amount requested by the amount of the distribution.
  2. I disagree with this point. Using your example, the amount not recharacterized will be 50k. That leaves a 50k conversion reported on Form 8606. Tax on that does not depend on any investment earnings in either IRA. Looking at your example of 150k of earnings in the Roth the formula would result in 7.5% gain. 1.95m X 1.075 = 2,096,250 transferred back to TIRA. Since the actual Roth balance is 2.1m before recharacterization, a balance of 3,750 would remain in the Roth as Roth earnings. This result is directly from the 1.408 formula. Your result is close but off by the 3,750. It appears to arise from using 2.1m as the amount to be transferred back. The Roth distribution (50k 1099R code T) will be tax free whether qualified or not. If the Roth is not qualified because this conversion was the first Roth contribution of any kind, the ordering rules will apply. Since 50k of the conversion was retained, the first 50 k out of the Roth is from the conversion and tax free. If the remaining 3,750 was withdrawn later, it would be Roth earnings and taxable. The rest of the earnings in the Roth were transferred back to the TIRA as part of the recharacterization.
  3. Pretty much the same as above. Somehow, it appears that you are using the NIA formula to change the amount converted and recharacterized, rather than just allowing it to determine how much transfers back to the TIRA. The NIA formula only affects the dollar amount remaining in the Roth and TIRA, but does not affect the taxable amount of the original conversion retained (50k) or the amount recharacterized (1.95k) in the original example where we do not know the NIA.
  4. Agree regarding codes. I think you meant to say if this was a NON qualified distribution, it would have to be reported on Form 8606 and you would have to indicate your conversion basis (50). The first 50k would be tax free because basis comes out first in the ordering rules. If more than 50k had been distributed in the first place, then the entire NIA calc would be different. But if the small amount of earnings that remained in the Roth after the recharacterization was distributed after recharacterization, it would be taxable.


Submitted by Seth Poppel on Mon, 2014-09-29 07:35

The account had appreciated about 30% from January of 2013 through September 27, 2014.  I asked Schwab to “recharacterize” the entire account, and wanted to use your answer to determine how I should “explain” the $50,000 (which was the actual amount that I took out in June of 2013) to the IRS on my upcoming October 15-due filing for 2013 (for which I most certainly did file an extenstion), since the Schwab paperwork relating to 2013 transactions would have to be matched to the paperwork for the 2014 transactions (which will not be filed by Schwab until 2015). 



Submitted by David Mertz on Mon, 2014-09-29 15:55

Regarding the points:

  1. The entire remaining balance in the Roth IRA is being transfered back to a traditional IRA.  To be a legitimate recharacterization, the amount transferred must be the sum of the amount requested to be recharacterized plus the amount of net income attributable to the amount of contribution that is requested to be recharacterized, determined by the use of the formula given in 1.408-11.  In this case, we know the total amount being transferred (net income + the contribution being recharacterzed), the opening balance (no adjustment needed) and the closing balance adjusted by the amount of the intervening distribution.  The unknown in these equations is the amount being recharacterized, so we simply algebraically solve the equations for the unknown to determine what portion is original contribution and what portion is net income.
  2. Once we know the amount being recharacterized as calculated in point 1, whatever amount of the original contribution that was not recharacterized remains as the net conversion.  It just so happens that this was distributed, along with the net income attributable to the net conversion for a total of $50,000.  In my example showing 7.5% of earnings, about 93% of the distribution is conversion basis and about 7% is earnings.
  3. The amount of the $50,000 that represents net conversion basis and the amount that represents earnings indeed is affected by the recharacterization.  The result is (and should be) identical to what you would get if the distribution took place after the recharacterization (assuming that the distribution still took place in 2013).
  4. Yes, I probably should have turned my mention of Form 1099-R around and said that if the distribution was NOT a qualified distribution, the taxpayer needs to calculate the earnings portion of the distribution using Form 8606 Part III since the remaining conversion basis ($46,511.63, my example) will be reported on Form 8606 Part II, line 16.  Part III will have $50,000 on line 19 and $46,511.63 on line 24, resulting in $3,488.37 on line 25.  The sum of the amounts on Form 8606 lines 18 and 25, $50,000, will be reported as taxable.
  • Again, to be a legitimate recharacterization, the amount transferred must be the sum of the portion of the original contribution being recharacterized and the net income applicable to the portion of the original contribution being recharacterized, as determined by applying 1.408-11.  Because we are starting with the total amount that is being transferred, we simply have to algebraically solve the equations for the amount contained in that transfer that represents the amount of the original contribution being recharacterized.
  • Consider the result if the taxpayer in my example had asked for $1,953,488.37 to be recharacterized.  Since 7.5% of net earnings would also need to be transferred to make a legitimate recharacterization, the total transfer would be $2,100,000, exactly the entire balance in the Roth IRA at the time of the recharacterization.  One cannot ask for more than that to be recharacterized and still have a legitimate recharacterization.  I would expect Schwab to know that a request to recharacterize the entire amount remaining in the Roth IRA really means to transfer the entire balance of the Roth IRA in a legitimate recharacterization (but I wouldn’t blindly trust them to do this properly).


Submitted by Alan - IRA critic on Mon, 2014-09-29 20:50

Seth, your 50k distribution from the Roth is producing a distortion, which is triggering this debate. Two questions:

  1. Did you have any Roth IRA balance prior to doing the 2mm conversion? If so, were those Roths also formed by conversions or by regular contributions, and what is the balance of the other Roths?
  2. Has Schwab commented on your request to do a full recharacterization?  Do you understand that recharacterizing the conversion will result in transferring about 600,000 in gains back to your TIRA where they will eventually be taxable and produce even larger RMDs? Conversely, if you retained the conversion, those gains will be totally tax free in a couple more years. 


Submitted by Seth Poppel on Mon, 2014-09-29 22:12

1.) The Roth had NO balance prior to the conversion (although it had balances going back over 10+ years, but I cleaned it out well before I then had the TIRA funds transferred for the conversion.)2.) There were no other Roth accounts.3.) Yes, I understand the trade-offs.  I had hope to “earn” the amount of taxation on the conversion during the 20 months of my “free ride” from January of 2013 through early October of 2014, but missed my goal and thus the marginal tax rate of 43.6% on a large percentage of the conversion if I were to have kept it converted would eat more into the principal than I had hoped and thus I am recharacterizing and will try again from January of 2015 through October of 2016 to see if I can earn that.  In the meantime, the approx. $120,000 RMD (as the amount is a bit more than I have used the round numbers to illustrate) added to my regular income still leaves me well under the highest marginal bracket for the next 2 years.  Also, if I had NOT recharacterized, I would assume the gains would be totally tax free immediately, rather than in a few years??4.) If you provide a direct e-mail I can send you screen grabs of how Schwab has treated the actual recharacterization as they have now implemented it as of today.  If you don’t want to put that out in a post, you can send it to me directly at my e-mail which is (just put all of the pieces together) seth poppel at aol dot com. 



Submitted by David Mertz on Mon, 2014-09-29 23:53

Altering my earlier example for a net income of 30% instead of 7.5%, I would expect a Roth IRA balance of $2,550,000 transferred back to a traditional IRA to be the sum of $1,961,538.46 recharacterized plus net income of $588,461.54.  This should roughly approximate Schwab’s treatment of the recharacterization.  The taxable net conversion would be $38,461.54.  Since you had had a Roth IRA more than 5 years earlier and you were over age 59 1/2, the $50,000 distribution was a qualified distribution and is therefore tax free.



Submitted by Alan - IRA critic on Tue, 2014-09-30 00:06

  1. If you had a 30% gain on your conversion, that is excellent, probably something you would expect only once in a 6 year period. When you refigured your 2014 RMD, you must add the dollar amount that moves back to the TIRA to your 2013 year end balance, not just the 2mm. Not sure whether you used the higher amount or not.
  2. Yes, based on having had prior Roths, even though you drained them, you have met the 5 year period from your first Roth contribution so your conversions are fully qualified and tax free immediately.
  3. I don’t think I need to see Schwab’s calculations UNLESS they are NOT transferring the entire remaining Roth balance back to the TIRA.
  4. A light finally went on regarding the so called distortion. Since you are doing a full recharacterization, your Roth conversion basis is eliminated, so the 50,000 distribution is all Roth earnings. That 50k would have been taxable had your Roth not been qualified, but since your Roth IS qualified, you do not even have to report the distribution on Form 8606. It will be tax free. You will not have any taxes due except for the higher RMD you will end up with.
  5. Note that the recharacterization earnings calculation can produce distortions when there are intervening transfers, contributions and distributions before recharacterization. That comes from the simplified calculation formula in Reg 1.408-11. These distortions can work in favor of or against taxpayers.
  6. In the future, if you do smaller conversions the earnings on those conversions will be proportional by %, but much smaller conversions may keep you out of the top bracket. For example, in the 35% bracket a 30% gain will reduce the effective conversion tax rate to 26.9%. But in the 25% bracket, a 30% gain will reduce it to 19.2%. You will be more likely to retain the conversion and reduce your RMD modestly. Remember, you can also do partial recharacterizations with the amount selected to keep you out of a given higher bracket. The conversion will cost you less in lower brackets and the gains you retain are proportional to the amount of the conversion retained.
  7. Let me know if Schwab does NOT transfer your entire Roth balance back to the TIRA.
  8. Re your explanatory statement for the recharacterization – “In January 2013 I converted 2mm to my Roth IRA and on 9/27/2014 I recharacterized the entire conversion, which was then worth (show amt transferred back) back to my TIRA.” That is all you have to do. You do not have to explain the Roth distribution except to report it on line 15a of Form 1040.


Submitted by Seth Poppel on Tue, 2014-09-30 02:28

I just don’t see how I am allowed to have taken a distribution and not pay taxes if I recharacterized.  That would be a loophole an elephant could get through??  If, e.g. I had taken $400,000 I can’t believe that it would be tax free and then have to recharacterize with absolutely no tax liability.  Everyone would convert, withdraw and then recharacterize??



Submitted by David Mertz on Tue, 2014-09-30 15:43

  • Regarding Alan’s points #4 and #8, this is definitely not a full recharacterization.  A full recharacterization would have required that the $50,000 that was no longer in the Roth IRA account be transferred back to the traditional IRA along with the rest, which of course is impossible because, as I understand it, this $50,000 was not rolled back to a Roth IRA and remains forever distributed.  Because of the partial recharacterization, the  $50,000 distributed is a mix of conversion basis and earnings in the same ratio as the ratio in the amount transferred in the recharacterization.
  • The tax code is unambiguous about how this must be handled.  408A(d)(6)(B)(ii) makes it clear that the amount transfered back to the traditional IRA in a recharacterization must be the sum of the portion of the conversion being recharacterized plus the net income attributable to the portion of the conversion being recharacterized.  The net income attributable to the amount being recharacterized must be as calculated using the method described in CFR 1.408-11 (also repeated in CFR 1.408A-5).  I have described the resulting calculation that is necessary to determine how much of the amount transferred back is from the original conversion and how much is net income so as to simultaneously meet these requirements of the tax code.
  • Seth, your $400,000 example highlights the fallacy in Alan’s reasoning.  Calculated the way that I have described so as to meet the requirements of the tax code, there is no loophole.


Submitted by Alan - IRA critic on Tue, 2014-09-30 19:57

I agree it is logical to cut back the recharacterization amount in order to reduce the NIA calculation to the amount available in the Roth, but I would be surprised if this is included in IRA custodian software used to calculate the NIA. Seth has now requested a full recharacterization, so we can only wait to see what Schwab does from here. I suspect they will just process it and transfer the full balance in the Roth to the TIRA.



Submitted by Seth Poppel on Tue, 2014-09-30 20:11

They have taken the full contents of the Roth (intact…stock positions and cash balance) and transferred it to the TIRA.  For “distributions” it is showing (in the Roth summary) a $50,000 distribution for 2013 and the full account balance that was transferred at a 2014 distribution.



Submitted by David Mertz on Tue, 2014-09-30 20:40

The recharacterization is definitely a reportable distribution from the Roth IRA, but it will be important to see how much Schwab reports as earnings in box 2a of the 2014 Form 1099-R.  I agree with Alan, I don’t necessarily trust any custodian to get this right.  However, being a large custodian, I wouldn’t expect this to be the first time Schwab has encountered this situation.



Submitted by Alan - IRA critic on Tue, 2014-09-30 21:27

  • While I doubt it, it is possible that Schwab did reduce the recharacterization amount because the amount that transferred to the TIRA would be the total account balance and you cannot tell even from the 1099R what portion of the conversion Schwab recharacterized, only the dollars that were moved. Seth might be able to tell from the Schwab history page (on line account) whether Schwab processed a 2mm recharacterization or whether they reduced it as Dmx indicates should happen. If Seth wanted to pay taxes on the portion of the conversion that should have been retained, he could report that on an 8606 and describe the recharacterization as partial in the explanatory statement. It always surprised me that custodians were not required to report the amount recharacterized on the 1099R as well as the total dollars transferred. Anyway, if taxes are to be paid, they will have to come from the conversion, not from the Roth, since the Roth is qualified. 
  • Let me paraphrase Dmx’ position and he can correct me if this is incorrect. The tax code says that in a recharacterization, the earnings (calculated per 1.408-11) must be transferred. But if the account balance is less than what should be transferred, then the recharacterization must be reduced until the earnings calculation is reduced to the amount the Roth now contains. This is logical and equitable and would prevent manipulation.
  • However, the Regs also say that the calculation is only done on the specific account that held the conversion likely due to avoid complexity, and the Regs notably fail to suggest anywhere what is to happen should the Roth balance be insufficient to fund the full calculated amount. Therefore, the intent of the IRS is less clear than it should be. Perhaps the IRS understood that the recharacterization amount should be reduced, but failed to require it to avoid that extra layer of complexity. They need to clarify this beyond a doubt.


Submitted by David Mertz on Wed, 2014-10-01 02:19

  • Ah yes, thanks Alan, I had return-of-contribution on the brain when thinking about the details of the Form 1099-R.  You are correct, the 2014 Form 1099-R box 2a should have a zero in it, not the net income.  I believe that box 1 of the Form 1099-R will show the entire amount transfered, so there is no need for Schwab to do any calculating.  It’s only necessary for Seth to get it reported properly on the tax return, including the explanation statement.
  • Yes Alan, you have paraphrased correctly; that is my position.  I believe any other interpretation of the code would be capricious.
  • I too am unaware of any guidance regarding this situation.  (If there was guidance, I would probably be relying on Alan to point me to it.  That’s how I learned much of what I know about IRAs 🙂 )  I agree that specific guidance would be useful.


Submitted by Alan - IRA critic on Wed, 2014-10-01 02:37

Dmx, thanks for bringing your analysis to an issue that I had not run into previously. It adds complexity, but is the only solution that is equitable and will prevent a huge loophole. If Schwab does not detect this pitfall as one of the largest professional custodians around, it does not bode well for proper processing.



Submitted by Seth Poppel on Wed, 2014-10-01 07:09

Right now, online they are showing:For 2013 a $50,000 distribution from the RothFor 2014 a distribution of the full value of the account at the time they journaled over the contents to my TIRAThey did, in fact, journal over everything that was in the Roth to my original TIRA from whence the $2mm (actually a higher number) came.I feel that the prudent thing to do is to report a $50,000 distribution from the Roth for 2013 as a taxable distribution on this return and explain it in simple prose as I have to you…Namely that I took the distribution at the time the account had been converted to the Roth, from the Roth account, but that since I recharacterized it, I am ASSUMING that I should thus report the $50,000 as a taxable distribution since I will not have any actual tax papers from my broker until after I am required to complete my extended filing. (this would be in addition to the note explaining the recharacterization and thus “matching” to the $2mm that was shown as being a “distribution” from my TIRA in 2013 also.If I understand the gist of what you are both saying, it is probably that the actual “value” of the distribution may turn out to be a few thousand $$ less, but I would rather err on the side of overstating the distribution and paying the minor tax on the difference than understating it or not stating it at all.



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