Roth IRA recharacterization
A client contribute to their Roth IRA and does not qualify due to earnings to high. A recharacterization was processed with the brokerage firm to apply the contribution to his IRA. Client plans to do a back door roth conversion and pay the taxes when he converts the contribution to his Roth IRA. Are there any penalties on the recharacterization or will it just be a wash?
Permalink Submitted by Alan - IRA critic on Wed, 2021-07-28 17:02
There is no tax or penalty for a recharacterization. However, any gains on the Roth contribution were also transferred to the TIRA account. Client must file Form 8606 to report the TIRA contribution as non deductible if it cannot be deducted. Then when the TIRA balance is converted to Roth, tax (but no penalty) will be due only for the amount of the conversion that exceeds the non deductible contribution, in other words just on the gains that were generated between the time of the original Roth contribution and the conversion. This also assumes that client does not have any other non Roth IRA balance in addition to the recharacterized contribution.