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Recharacterize IRA tax question please
Old 03-02-2016, 10:41 AM   #1
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Recharacterize IRA tax question please

Folks, I'm a little bit unsure of what to do. I recharacterized my 2015 Roth into a 2015 TIRA. Did my taxes and discovered that I made too much for a TIRA so I went back recently and recharacterized the 2015 TIRA back to a 2015 Roth. All with vanguard and for the full 11000 that my family is allowed.

I realize that some part of these recharacterizations is "reportable" to the IRS. In the end, the net effect of them was zero but I don't want to trigger an audit.

I was provided with 1099 forms for the first recharacterization and maybe for the second recharacterization will come soon.

I use turbotax and nothing is mentioned about this. What do I do?
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Old 03-02-2016, 02:06 PM   #2
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Two years ago upon doing my taxes (also with Turbotax) I found that my income put me over the limit for a total Roth contribution, which i had already made. I recharacterized the amount that was over the limit into a TIRA, but did not deduct that amount from my income.
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Old 03-02-2016, 02:42 PM   #3
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TurboTax does understand what to report with recharacterizations. But the IRS is even better. I suggest that you read the IRS instructions to Form 8606 first (they're easy to find on the web).

Also, there seems to be some confusion about contributions, conversions, withdrawals and recharacterizations which are all different things one can do with IRAs. If your custodian got confused, then your 1099-Rs will be probably not be correct.

So in TurboTax, be sure to report the contribution(s) which will not have any 1099-R's associated with it. Then report the 1099-Rs that you get. Unfortunately, one can get a 1099-R a year later (example: Recharacterize a 2015 contribution or 2015 conversion in 2016. The 1099-R will come in Feb 2017 for 2016, but may need to be reported on 2015 tax return). This is all explained in the Form 8606 instructions in detail.

TT will do this as well, but we see lots of questions because folks the interview questions in TT are very precise, but folks answer the questions incorrectly.

You might also see this write-up by TheFinanceBuff, but it may not apply to your situation: How To Report Backdoor Roth In TurboTax
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Old 03-02-2016, 04:00 PM   #4
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Just to clarify my understanding of this:

- We are talking about (2) 2015 IRA contributions here (married filing jointly) not Roth conversions
- You decided to recharacterize a 2nd time (from Trad IRA to Roth) because you couldn't take the IRA deduction in 2015 due to income and/or retirement plan coverage at work

Personally I would not have done the second re-characterization if I were you, but I like to keep things clean. I would have left it in a traditional IRA with non-deuctible contribution tracked on Part 1 form 8606. You could then Roth Converted this amount in a later year which I think would have been equivalent.

If you are not concealing any income, I don't think you would need to fear an IRS audit, but you may need to be able to explain what you did. This will be especially true if Vanguard became confused and reported something not as you are expecting.

I would examine the 5498's that you may receive from Vanguard to verify that Vanguard reported this as described above. Basically you want the 5498s to be consistent with the 1099-Rs. You will need to read the full instructions for 1099-R and 5498 to understand this. Be sure to read the full instructions that are designed for the financial institution (ie the person filling out the 1099-R/5498).

Pub 590-a talks more about recharacterizations.

You may wish to research/discuss this over at fairmark.com in that they tend to be experts in this type of thing.

I would do this by hand and not defer to Turbo Tax or other computer software exclusively. I would use the tax software to confirm my understanding of it however.

Godspeed to you

-gauss
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Old 03-02-2016, 04:30 PM   #5
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Also note that one can recharacterize a contribution and one can recharacterize a conversion. They are different. It seems you might have done both kinds. TT will ask you what you did, so please read its questions very, very carefully.

However, if you did not use the correct forms provided by your brokerage, then maybe something bad happened.
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Old 03-02-2016, 04:48 PM   #6
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If you wanted to seek some professional advice on this you may wish to enlist an Enrolled Agent (EA). They are highly trained and credentialed by the IRS (but they are not employees). You may have to look hard for them in that in some states it is unlawful for them to advertise.

Here is a directory where you can find them as well as other credentialed professionals.

http://irs.treasury.gov/rpo/rpo.jsf

-gauss
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Old 03-02-2016, 07:30 PM   #7
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I suggest posting your exact question on the BH forum. Most likely you will get a response from Alan S., the roth conversion resident guru there. He is extremely generous with his time and detailed explanations (never not seen him not reply to these types of questions). I owe a great deal of my understanding regarding conversions/recharacterizations to him.
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Old 03-03-2016, 04:24 PM   #8
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Let me restate what happened so that I can be sure I am getting the right advice.

I funded my 2015 Roth IRA through the year, decided to recharacterize all 2015 contributions to a TIRA. That went well. Vanguard recharacterized for me. Sent me a 1099R because apparently a distribution from an IRA to another IRA triggers that.

So then, months later, I discover that my AGI exceeds 118000 so I am unable to deduct the TIRA. Dang. Now I call vanguard and recharacterize the 2015 TIRA back to a Roth IRA. This nullifies the original recharacterization. Vanguard does it, no problem.

Thus far I have not received a second 1099R, or any of the other forms you folks have mentioned 5498 or 8606.

This is not a conversion, back door, ladder, or a non-deductible TIRA contribution. Both times it was only a recharacterization. My income is between 118000 and 183000 so I am eligible for Roth IRA but not a deductible TIRA.
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Old 03-03-2016, 04:38 PM   #9
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Sorry, but I would have done the 2nd transfer: tIRA tor Roth should have been a CONVERSION and not a recharacterization. When did this 2nd transfer happen? Did Vanguard treat it as a conversion or a recharacterization?

Also, the IRS does not send you a Form 8606. You fill one out as part of your Form 1040 and send it to the IRS. Did you read the instructions for Form 8606 yet? The Form 8606 instructions tell you how to attach a statement explaining what you did to your tax return.
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Old 03-03-2016, 04:45 PM   #10
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Sorry, but I would have done the 2nd transfer: tIRA tor Roth should have been a CONVERSION and not a recharacterization. When did this 2nd transfer happen? Did Vanguard treat it as a conversion or a recharacterization?

Also, the IRS does not send you a Form 8606. You fill one out as part of your Form 1040 and send it to the IRS. Did you read the instructions for Form 8606 yet? The Form 8606 instructions tell you how to attach a statement explaining what you did to your tax return.


The second recharacterization was a recharacterization. NOT a conversion. The function was to nullify the first recharacterization.


I read the 8606 form instructions and as far as I can tell the form does not apply to me because there was never a nondeductible TIRA contribution made, no conversions done, and no distributions.


Remember, this is for the current year of 2015. On my 2015 return I will not have any deductions for TIRA.
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Old 03-03-2016, 05:02 PM   #11
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5498's are not issued until a month or so after tax returns are due for the year and the time limit to contribute to IRAs for that year has expired.

I don't see anything wrong with what you did, but I am not a recharacterization expert (I did one once and hope to never do one again!). If you would like a higher level of online forum advice check out fairmark.com where you will see the like's of Alan S. and others who seem to know this stuff inside out.

Have you looked at your vanguard.com account to see if the contributions were properly categorized as recharacterizations?

I suspect that everything will work out as long as Vanguard did not get confused.

I mention this in that Vanguard has become confused on several times when I have done 401k --> IRA 60 day rollovers mailed in with a properly completed Vanguard rollover form.

Vanguard would categorize them as something else and I would need to make them fix it, which they have done. If I did not intervene, 5498s would not have shown the rollover contributions and it would look to the IRS that I did not complete the rollover. I now include a cover letter with my 401k --> IRA 60 day rollover applications explicitly clarifying that this is a 60 day rollover and needs to be coded as such. I have not had a problem since starting this practice.

The one thing that you have going for you is that only one financial institution is involved so they will be responsible for correctly processing both sides of the transaction (ie outgoing/1099R/distribution & incoming/5498/recharacterization)

-gauss
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Old 03-03-2016, 05:11 PM   #12
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Originally Posted by Highbeam View Post
The second recharacterization was a recharacterization. NOT a conversion. The function was to nullify the first recharacterization.


I read the 8606 form instructions and as far as I can tell the form does not apply to me because there was never a nondeductible TIRA contribution made, no conversions done, and no distributions.


Remember, this is for the current year of 2015. On my 2015 return I will not have any deductions for TIRA.
OK, then you will need to attach a statement to your return explaining the 1099-R you got. I recall in the Form 8606 instructions it has something like "You do not need to file a Form 8606, but attach a statement to your return ...." for something or other.

In other news, my child received a 5498 today in the mail for a Roth IRA contribution for 2015.
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Old 03-03-2016, 05:15 PM   #13
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OK, then you will need to attach a statement to your return explaining the 1099-R you got. I recall in the Form 8606 instructions it has something like "You do not need to file a Form 8606, but attach a statement to your return ...." for something or other.

In other news, my child received a 5498 today in the mail for a Roth IRA contribution for 2015.


I tend to agree that I need to attach a statement. Is this something I just type up on a sheet of paper and sign?
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Old 03-03-2016, 05:29 PM   #14
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If you paper file you can do it that way. I would probably add a bold header such as "Statement on 2 Recharacterizations in 2015" and then give enough detail so that someone at the IRS could follow what you did in enough detail to answer any of their questions without contacting you.

I would include dates, amounts , account holder, account type etc.

Again I have only done a Re-characterization once and it was simpler than yours.


-gauss
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Old 03-03-2016, 05:44 PM   #15
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If you paper file you can do it that way. I would probably add a bold header such as "Statement on 2 Recharacterizations in 2015" and then give enough detail so that someone at the IRS could follow what you did in enough detail to answer any of their questions without contacting you.

I would include dates, amounts , account holder, account type etc.

Again I have only done a Re-characterization once and it was simpler than yours.


-gauss
I will send in paper this year and will follow your advice on the statement. Thank you Gauss.


Believe me, I was not happy about the way this turned out. I've been a Roth guy for decades. Learned my lesson.


Also thank you LOL!. I'm not very experienced with this and trying to understand.
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Old 03-03-2016, 05:49 PM   #16
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TT should help you attach a statement that can be electronically filed.
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Old 03-04-2016, 02:47 PM   #17
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I just got off the phone with VG again and they assure me that you are allowed to re-recharacterize (roth-tira-roth) and to treat the 2015 contribution as the last type which for me is Roth. It was done properly and notation made in my account.

They did say that recharacterizations are reportable (nomatter how many times) so I need to attach the written statement to my tax forms since the 1099R was sent to the IRS.

Oh and for a bonus, there will be another 1099R issued next year to reflect the last recharacterization of the 2015 contributions since it occurred in 2016. As such, I will need to attach a written statement describing this on my 2016 tax return as well.

I hope somebody learns from my mistake. It's a hassle to recharacterize once. Doing it twice is even worse.
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Old 03-04-2016, 03:01 PM   #18
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They did say that recharacterizations are reportable (nomatter how many times) so I need to attach the written statement to my tax forms since the 1099R was sent to the IRS.

Oh and for a bonus, there will be another 1099R issued next year to reflect the last recharacterization of the 2015 contributions since it occurred in 2016. As such, I will need to attach a written statement describing this on my 2016 tax return as well.

I hope somebody learns from my mistake. It's a hassle to recharacterize once. Doing it twice is even worse.
Yes - that sounds very familiar. It seemed like the tax ramifications trickled out over several years. That is one of the reasons that I now avoid recharacterizations. Who can remember that several years from now with all the other moving parts of a tax return?

-gauss
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Old 03-04-2016, 03:16 PM   #19
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I have a somewhat similar problem with TD Ameritrade. I have a t-ira and a Roth with them that I have been converting piecemeal since 2011. Last year I converted the remaining balance. Then I had a change of mind and decided to recharacterize in December only the amount that I converted in 2015. However TD Ameritrade recharacterized everything in the Roth back to the t-ira including all of the conversions that the taxes were already paid in previous years.
So I filed electronically and will wait for TD Ameritrade to do their thing which will probably be awhile, then file a 1040X with an explanation.
I guess that the only good thing about this is that everything was done in 2015 so I will not owe any additional taxes for 2015 once this is straightened out.
Thanks in advance for listening to my rant.

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