Welcome Guest. Register Now!  



Reply
 
LinkBack Thread Tools Search this Thread Display Modes
  #1 (permalink)  
Old 05-17-2017, 03:27 PM
Junior Member
 
Join Date: May 2017
Posts: 2
Roth Recharacterization Limbo !!!

several years ago I did a conversion from my traditional IRA to a ROTH? as we know , this creates a distribution and thus a taxable event.

However I also did a recharacterization, which is part of the tax code and allows me to ?reverse? some/all of the conversion AFTER THE FACT. in my case I recharacterized $10k which means documented this on my 1040 and sent a check for the net distribution (ie the original conversion minus this $10k)
. I also instructed Fidelity to move that $10k back to to traditional IRA

IRS however insisted I pay additonal tax on that $10k claiming it was a taxable distribution. I paid the tax but that $10k is not in the ROTH ? it is back in the Traditional

IRS claiming im past the deadline to amend my return.
What can i do ? the bottom line is I have paid tax on $10k of money that is sitting in my traditional IRA and not in my Roth! I dont think I should have to pay the same tax twice on the same dollar regardless of deadlines??



Digg this Post!Add Post to del.icio.usBookmark Post in TechnoratiFurl this Post!Reddit! stumble!bookmark in google!Share on Facebook!
Reply With Quote
  #2 (permalink)  
Old 05-18-2017, 07:16 PM
Moderator
 
Join Date: Oct 2010
Posts: 4,836
several years ago I did a conversion from my traditional IRA to a ROTH? as we know , this creates a distribution and thus a taxable event.==> Beginning in the year 2010, all restrictions on converting to a R- IRA have been removed. Prior to 2010, individuals were not allowed to convert to a R- IRA if their income exceeded 100K. tax deduction for the savings contribution; both earnings and initial investment are taxed when withdrawn but
partial or no deduction for the savings contribution; earnings tax-deferred until withdrawn; the portion representing your nondeductible basis is returned tax-free.


However I also did a recharacterization, which is part of the tax code and allows me to ?reverse? some/all of the conversion AFTER THE FACT. in my case I recharacterized $10k which means documented this on my 1040 and sent a check for the net distribution (ie the original conversion minus this $10k)
. I also instructed Fidelity to move that $10k back to to traditional IRAIRS however insisted I pay additonal tax on that $10k claiming it was a taxable distribution. I paid the tax but that $10k is not in the ROTH ? it is back in the Traditional======>there may be reasons to recharacterize a R- IRA conversion. For instance:The value of investments in the converted R-IRA has declined.Higher than expected taxable income and/or the additional income from the R- IRA conversion resulted in a bump to a higher federal income tax bracket.Taxable income in retirement will likely be lower than expected, reducing the potential benefits of a R- IRA?s tax-free distributions.Not enough cash on hand to pay the taxes
as said, because of the different tax treatments, you have to pay taxes on tax-deferred traditional IRA money moved to a R-ira. That tax bill is based on the IRA's value at the time of the conversion.If your R-ira account's value is now substantially less than the amount you converted months ago, you will owe taxes on money you no longer have. Such losses are a key reason most people recharacterize a R-ira;



IRS claiming im past the deadline to amend my return.
What can i do ? =====>You generally can recharacterize your rollover or conversion by Oct 15 of the following year, regardless of whether you requested an extension to file your tax return. For example, for your conversion to a R- IRA in 2016, you have until Oct 15, 2017, to recharacterize. This deadline applies even if:you did not request an extension to file your 2016 tax return, and you file your return on or before April 15, 2017.
If you have already filed your return, you can file an amended return and subtract the amount recharacterized from the taxable amount of the rollover or conversion reported on your original return. Form 1040X can be used to amend your return. Generally, for a credit or refund, you must file Form 1040X by the later of: 3 years (including extensions) after the date you filed your original return, or within 2 years after the date you paid the tax. I guess yu need to contact the IRS for help

the bottom line is I have paid tax on $10k of money that is sitting in my traditional IRA and not in my Roth! I dont think I should have to pay the same tax twice on the same dollar regardless of deadlines??========> All recharacterizations are reported to the IRS.
A recharacterization of a R-ira conversion means that the converted funds are transferred back to your Traditional IRA, eliminating the taxes that would have otherwise been owed on that amount. A recharacterization undoes the R- IRA conversion and wipes out the income tax due on the conversion. The recharacterized funds can go back to the original IRA or any other IRA you may have, including a brand new IRAThe amount converted and later recharacterized is treated as though it never left the IRA. The income or loss on the converted amount goes back to the IRA along with the converted amount and is also treated as though it occurred in the IRA. say you have a traditional IRA worth $50k to which you made $5k in nondeductible contributions. The taxable distribution amount is $45k. If you didn?t make any nondeductible contributions, the taxable distribution would be the entire account balance of $50k.If the investments in your new R- IRA lose value after the conversion, you?ll have an adverse tax outcome, because the taxable distribution from the conversion will still be based on the value of the account on the conversion date. In other words, you?ll wind up owing taxes on money you no longer have. So, let?s say the value of the R- IRA drops from the initial $50k to $35k. You?ll still have a $45k taxable distribution from the conversion, even though the R-ira account is now worth only $35k.Fortunately, you can avoid this unfavorable outcome by reversing the R-ira account back to traditional IRA status. Thru the process of recharacterization. Once the recharacterization is complete, you?re right back where you started, tax-wise?though your IRA is now worth $35k instead of $50k. To summarize: the conversion is reversed, the $45k taxable distribution disappears,(along with the related tax liability), and the account is again a traditional IRA worth $35k. To reverse a conversion by recharacterizing an account back to traditional IRA status you must submit the required form to your Roth IRA trustee or custodian by Oct 15 of the year after the conversion takes place.



Digg this Post!Add Post to del.icio.usBookmark Post in TechnoratiFurl this Post!Reddit! stumble!bookmark in google!Share on Facebook!
Reply With Quote
  #3 (permalink)  
Old 05-19-2017, 01:15 AM
Junior Member
 
Join Date: May 2017
Posts: 2
non deductible contributions to traditional IRA

thanks for the detailed response. without repeating my situation, my take-away from your comments is that I now have a traditional IRA that has about 10k of non deductible amount in it. this non deductible 10k occured because several years ago I did a Roth conversion of 40k (from my traiditional IRA) and then (before I filed tax return) I did a rechar of 10k (including having my financial institution move that 10k back to the traditional).
the IRS ignored the rechar and went ahead and forced me to pay tax on that 10k (this 10k wasnt really distributed ofcourse, it was returned to the original IRA)
20 years from now , when I retire, how the heck am i going to prove to the IRS that I already paid tax on whatever the future value of that 10k is going to be. it seems they will just say, that is a taxable distribution. what paperwork, forms, etc do i have to prove that the 10k was a non deductible contribution. AGAIN.. the main fact here is that is was not really that .. it was a botched recharacteriztion.



Digg this Post!Add Post to del.icio.usBookmark Post in TechnoratiFurl this Post!Reddit! stumble!bookmark in google!Share on Facebook!
Reply With Quote
  #4 (permalink)  
Old 05-19-2017, 12:30 PM
Moderator
 
Join Date: Oct 2010
Posts: 4,836
Quote:
Originally Posted by hugo555 View Post
thanks for the detailed response. without repeating my situation, my take-away from your comments is that I now have a traditional IRA that has about 10k of non deductible amount in it. this non deductible 10k occured because several years ago I did a Roth conversion of 40k (from my traiditional IRA) and then (before I filed tax return) I did a rechar of 10k (including having my financial institution move that 10k back to the traditional).
the IRS ignored the rechar and went ahead and forced me to pay tax on that 10k (this 10k wasnt really distributed ofcourse, it was returned to the original IRA)
20 years from now , when I retire, how the heck am i going to prove to the IRS that I already paid tax on whatever the future value of that 10k is going to be. it seems they will just say, that is a taxable distribution. what paperwork, forms, etc do i have to prove that the 10k was a non deductible contribution. AGAIN.. the main fact here is that is was not really that .. it was a botched recharacteriztion.
Basically, Say, you made nondeductible IRA contributions and you received a lump sum into your IRA but , you have no way to prove that the initial cost basis consisted of already-taxed dollars. you cannot get through to the IRS about this, and you have no documents. you do not have the tax returns for all those years to prove it. Then,you would hate to pay taxes on the entire amount of the distribution since you know for sure your IRA was funded with after-tax dollars and not deducted from income for many years. you should note that there is a requirement that Form 8606 be filed with your tax returns for every year when nondeductible contributions are made. In fact, in order to verify the nontaxable part of contribution/distribution from your IRA, you are required to keep, among other information regarding the IRA account, copies of Page 1 of your Form 1040s for the years nondeductible contributions were made and Form 8606 for all applicable years.If you used a professional tax preparer, you can start there and request copies of the returns.If that is not an option, contact the trustee of his IRA and see if you are able to obtain historical information regarding the nondeductible deposits made.
The next step would be to complete Form 4506 for each year that you believe a nondeductible contribution was made. But there is one hitch here: The IRS will go back only 6 years for you.If you get overwhelmed, consider seeking the assistance of a qualified tax preparer to help you. Such guidance is invaluable at times like these and will let you move forward in your new life ahead.



Digg this Post!Add Post to del.icio.usBookmark Post in TechnoratiFurl this Post!Reddit! stumble!bookmark in google!Share on Facebook!
Reply With Quote
Ads
Reply


Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

vB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Neglected to Include a Recharacterization Explanation? tjt002 IRA/Sep 2 04-11-2016 11:30 PM
Roth to IRA, back to Roth ghostserver Retirement Planning 3 08-25-2015 01:25 AM
Sep/roth eacollie IRA/Sep 4 03-20-2013 09:52 PM
Recharacterization of Roth to Traditional IRA tristan IRA/Sep 1 02-23-2008 11:08 AM
Roth Ira kapriati IRA/Sep 1 01-21-2007 08:14 PM

Follow us on Facebook Follow us on Twitter Google Buzz Rss Feeds

» Categories
 
Individual
 » Income
 » IRA/Sep
 » Medical
 
Corporations
 » Payroll
 
Forum for CPAs
 
Financial Planning