Recharacterization
60yr old client made a $6,500 IRA contribution in July of 2018. They are filing their taxes and about $5,000 of it will be nondeductible due to income.
If we recharacterize the $5,000 to the Roth, it doesn’t make gain on that $5,000 taxable correct?
Thank you!
Permalink Submitted by Alan - IRA critic on Wed, 2019-04-10 23:49
Correct. The gains on that 5000 are treated as Roth gains since the 5000 is treated as if it was a Roth contribution from Day 1.
Permalink Submitted by David Mertz on Wed, 2019-04-10 23:49
The recharacterization is not taxable. The gain transferred to the Roth IRA along with the $5,000 simply becomes gain in the Roth IRA as if the $5,000 was originally contributed to the Roth IRA and the gain occurred in the Roth IRA. Of course you’ll want to make sure that the client’s 2018 MAGI for the purpose of a Roth IRA contribution permits the client to make a $5,000 Roth IRA contribution for 2018.
Permalink Submitted by Treavor Dodsworth on Thu, 2019-04-11 13:49
Great! Thank you so much! The client already has about $200K of pretax money in the IRA. When doing the recharacterization we can pull out just the $5,000 that would be deemed non deductible on the 2018 return right. It would not come out pro rata?
Permalink Submitted by Alan - IRA critic on Thu, 2019-04-11 15:40
Basically, yes. The TIRA custodian will use the IRS formula to determine the amount of gain or loss for the total account and such gain must be added to the 5000 (or loss subtracted from the 5000) when the funds are transferred to the Roth IRA as part of a recharacterization request. Any basis in the TIRA will not change because a non deductible contribution should not be reported on Form 8606 since the 5000 will be treated as a Roth contribution. The other 1500 is being deducted on Form 1040.