Quick question on IRA recharacterization

[Curmudgeon]

I contributed to a Roth for 2017, now I'm thinking I want that to be tIRA (need the deduction). Suppose I contributed $6500 (the max) to the Roth, but now, thanks to a great year, that Roth is now worth $8000. When I recharacterize, does that entire $8000 go into my tIRA? And then I get a $6500 deduction? Or can I only recharacterize $6500?

[RunningBum]

That's my understanding. It's like going back in time and changing the decision, so your $6500 contribution to the Roth becomes a $6500 tIRA contribution, and the $1500 earned is moved over as well, as if it had been making that money in the tIRA instead of the Roth.


Make sure that's what you really want to do. That's a 20+% tax free return in the Roth that you will eventually be taxed in when you take it out of the tIRA.

[kaneohe]

Quote:

Originally Posted by RunningBum ........................................... Make sure that's what you really want to do. That's a 20+% tax free return in the Roth that you will eventually be taxed in when you take it out of the tIRA.

+1

assume 20% tax rate for simplicity: have 1.3K in taxable account
1) Leave in Roth; use 1.3K in taxable to pay taxes on Roth so only have 8K in Roth; after N yrs, Roth doubles to 16K
2) Recharacterize to TIRA, so have 8K in TIRA and 1.3K in taxable. After N yrs TIRA doubles to 16K; taxable to 2.6K. After 20% taxes, TIRA is worth
12.8K and taxable is worth 2.4K- for total of 15.2K- (less than the Roth)

Of course, if you withdraw TIRA at lower tax rates, option 2) could come out better so, as usual, depends on assumptions.

[Curmudgeon]

The biggest things this analysis is missing are my high state taxes, and lost ACA premium tax credit - so I think I'm better doing the tIRA this year. I was just asking about the mechanics.

[SecondCor521]

You can recharacterize any amount from $0 to $6500. Your IRA custodian will calculate the associated gains (or losses, but in your case it sounds like it's all gains) and move those over as well.

You will then take the deduction on your tax return for the recharacterized amount, not the actual amount that gets moved over.

So if you recharacterize the whole $6500 then your IRA custodian would move $8000 over and you would get a deduction of $6500. If you recharacterize $3250 then your IRA custodian would move $4000 over and you would get a deduction of $3250.

I don't recall if you get a tax statement from the custodian after the recharacterization, so I would recommend writing yourself some notes for your tax files so you can remember what happened in case the IRS asks questions later.