Originally Posted by edbro
#1;Maybe I don't understand all the terms but I didn't recharacterize a conversion. I recharacterized an annual contribution made directly to my ROTH.
#2;I'm confused. I already paid the tax on the contribution amount when I put it into the ROTH. Because of my income, I still can't deduct it now that it is in a traditional. So, why would I have to pay the tax again on the contribution?
#1; i gues you cAN TALK TO YOUR ADMINistrator fo rmore accurate info
#2;i SAID "When you convert from a Traditional IRA to a R-IRA you NEED TO pay income tax on the contributions". YOU DO NOT PAY tax on your traditional IRA contribution as it is pretax contribution as you can see well;however,R-IRA contributions are not taxed at the time you contribute the funds to your R-IRA. However, your contributions come from post-tax income. You pay taxes on your income today.
assume that you ask your IRA custodian to convert $1k from your traditional IRA to your R- IRA and withhold 15%. What you are really asking to be done is the equivalent of Converting $850 plus Taking an additional $150 distribution and mailing it to the IRS. Using the hypothetical numbers above, you may have meant to convert $1k to your R-IRA, but you really only converted the after-tax amount ,$850. And you took out an additional $150 from your IRA which is subject to the same tax and penalty as any other early withdrawal from your IRA. The fact that you had the $150 sent to the IRS does not matter. Unfortunately, since you really only converted the after-tax amount, that's all you can recharacterize. So, using the above example numbers, $1k came out of your traditional IRA account, $850 went into your R-IRA account, and $150 was sent to the IRS. Since only $850 went into your R-IRA, you can only recharacterize that $850 plus the earnings on the $850(if there is) while it was in your R-iRA. The net result of all the transactions is that the value of your combined Roth and traditional IRA accounts will go down by the amount of the withholding. If it has been less than 60 days since the funds were withdrawn from your traditional IRA account to do the conversion, you can write a check to your R-IRA account for the amount of the withholding and replace the lost funds that way. You need to be sure to tell the R-IRA custodian that this is part of the conversion so that they report it correctly to the IRS. If it has been more than 60 days, you are stuck with the result.
What happens to the $150? It has been credited to your account at the IRS as a tax payment for the year in which you performed the conversion. You will get a 1099-R for the year of the conversion that shows the amount withheld. Claim credit for the withholding on line 64 of your Form 1040 along with any withholding shown on your W-2. It will reduce the amount of tax you owe for the year or increase the amount of refund for the year.