Recharacterization | Ed Slott and Company, LLC

Recharacterization

I converted $20,000 from Traditional IRA to Roth IRA. Now I see lots of tax I have to pay. Can I re-characterized (or undue) the whole amount? or any other way to get the tax benefits? Or lower the tax?

Thank you
Sumit Ghosh

You do not have to convert, it is optional.  Once you do convert, the amount converted will be 100% taxable unless you have basis in your TIRA account from non deductible contributions. You cannot recharacterize any part of the conversion. The purpose of a conversion is paying the tax now at your current rate, so that you do not have to pay taxes in the future on the amount plus any gains you have in the Roth IRA.  Therefore, the conversion is more beneficial if your tax rate now is lower than you expect it to be in the future.

I converted money in an IRA to Roth IRA in 2019 and had taxes withheld for the conversion from the IRA. I realize now I should have paid for the taxes with other funds.  Is there some way I can restore the funds used for taxes in the IRA?  Understand recharacterization is not an option.  Fed and state taxes totaled $10k.Since RMDs in 2020 can be returned by Aug 31, 2020 and since I took a $19k distribution from my 401(k) in 2020, can I return $10k to the IRA by Aug 31?

There is nothing that can be done now to roll over the tax withholding back into an IRA or any other retirement account.  The deadline for doing that was the 60th day following the date the funds left the traditional IRA.  As you suggested, the only ways to compensate are to either reduce the amount of subsequent distributions you might otherwise take or to increase the amount of future retirement contributions you might make if still working.  Pursuant to Notice 2020-51, you have until August 31, 2020 to roll over to an IRA any amount of the distribution from the 401(k) that would have been an RMD were it not for the CARES Act waiving RMDs for 2020.

 

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