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Recharacterizing a Roth Conversion
Old 04-05-2014, 09:49 AM   #1
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Recharacterizing a Roth Conversion

I'm going to recharacterize a portion of my Roth conversion. Although it doesn't affect the tax we'll owe, it will have a significant effect on our ACA premiums.

The mistake I made in December was to assume that if I converted the same amount as in 2012, our income would be about the same.

It seems that a recharacterization is pretty straightforward, and I can do it over the phone with Vanguard.

Anyone done this?

Anything I need to consider?

Also, even though there are VG reps available on Saturdays, I'd guess that those guys are the B team, and I'll wait and do this on Monday.

Thanks,

Al
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Old 04-05-2014, 10:08 AM   #2
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I did it last year over the phone with Vanguard and it was quite simple. After that, I just followed Turbotax's instructions. No calls from the IRS so far

Next year, you'll see the recharacterization reported in VG's 1099 R. Turbotax took that in stride too.
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Old 04-05-2014, 10:09 AM   #3
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I did it this year with Schwab via on line forms.
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Old 04-05-2014, 10:46 AM   #4
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About 10 years ago. Can't remember details except was easy. No problems going forward either.
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Old 04-05-2014, 01:25 PM   #5
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I did it for 12 accounts with Fidelity this year. They had a bunch of forms to fill out, though they said I could also phone it in. It took a couple of days, plus a few more for the confirmation letters with their official conversion numbers. You'll need the date of the recharacterization and an amount, which go into an explanation box on your return in addition to the total original conversion amount being recharacterized. Turbo Tax barely had enough room in the box for my 12 explanations.

With the multiple accounts and one fund/ETF per account I was able to easily recharacterize shares that had dropped in value and would have cost me more in taxes than Roth converting them in 2014 at a lower price.

Overall it was more trouble than I anticipated, no online recharacterization, but it wasn't too bad. I'll do roughly the same this year, though with fewer accounts if the market doesn't take a dive this year.
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Old 04-05-2014, 03:50 PM   #6
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T-al, aca premiums will only be affected by income in 2014. Re characterizing in 2013 will have no effect on aca. That being said, with fidelity there are forms you can download, fill out and mail back to fidelity. straight forward.
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Old 04-05-2014, 08:21 PM   #7
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T-al, aca premiums will only be affected by income in 2014. Re characterizing in 2013 will have no effect on aca. That being said, with fidelity there are forms you can download, fill out and mail back to fidelity. straight forward.
Wow, glad I brought this up! Thanks!

So it makes no difference at all how much we make in 2013? The won't use that to set our 2015 premiums?
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Old 04-06-2014, 11:10 AM   #8
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I recharacterized in 2012. It was very easy, but do keep detailed records of everything. I got a letter from the IRS last summer telling me I owed all sorts of money, but it was cleared up pretty quickly once I sent all the supporting records. My father had done a recharacterization the previous year, and he told me got a "you owe us" letter from the IRS as well, again easily cleared up with the supporting records.
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Old 04-07-2014, 11:41 AM   #9
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Recharacterization is a simple process via Vanguard. We made an appointment with a rep and he walked us through the process.

However, it was a mistake (and a bad advice from Vanguard) to do the Roth IRA recharacterization (Roth to non-deductible IRA) since IRS treats all non-Roth IRA accounts as one account for tax purpose. The tax free portion will be non-deductible divided by all contributions. If the non-deductible amount is small, a major portion of each withdrawal will be taxable. This is our scenario.

We ended up with excessive Roth IRA contributions for 2013 because of an unexpected increase in income after we had made the contributions. We should have withdrawn the contribution and pay the tax on earnings. Penalty does not apply since we have the Roth IRA for more than 5 years. Earnings can also be tax-exempt if the withdrawal is used for education expense (for DD).

Anyway, we plan to re-convert or reverse (undo) the recharacterization before 4/15/2014.
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Old 04-07-2014, 11:50 AM   #10
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Originally Posted by TromboneAl View Post
Wow, glad I brought this up! Thanks!

So it makes no difference at all how much we make in 2013? The won't use that to set our 2015 premiums?
Yes, what you made in 2013 makes no difference in the end.

Are you currently getting ACA subsidies?

On your 2014 tax return (filed in early 2015) you will compute what subsidies you were entitled to based on your actual 2014 MAGI. Then, if you received more subsidies in 2014 that you should have you'll need to pay the difference and if you were entitled to more subsidies than you actually received then the difference will be added to your refund.

In some cases it can get more complicated, but what I described above is the general idea. So it sort of operates like income taxes where you compute what you owe based on your actual income and get a refund or owe the difference between what was withheld/paid in and the actual tax amount.

Premiums are set by the carriers based on the plan you select. 2015 subsidies are based on 2013 tax return data but if your 2015 income for the year will vary from 2013 you can self-report what your 2015 income will be and that is what they will use. You'll need to support your self-reported income and why it changed.
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Old 04-07-2014, 12:53 PM   #11
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OK, good info.

I did the recharacterization anyway to avoid any potential confusion or extra steps with CoveredCA. Lesser of the two evils: I'd rather have the IRS confused than CoveredCA.

Thanks for the tip, Spanky, I think I did it the right way. The money and earnings were sent back to the IRA from which they came.

I won't get a new 1099, and was told that I should just report the new, reduced conversion, and include a statement.
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Old 04-07-2014, 01:02 PM   #12
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Is the IRS likely to be less confused if I file for an extension, so that they will already have the recharacterization information, or should I go ahead and file it by April 15?
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Old 04-08-2014, 08:13 PM   #13
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Originally Posted by TromboneAl View Post
Is the IRS likely to be less confused if I file for an extension, so that they will already have the recharacterization information, or should I go ahead and file it by April 15?
It might be prudent to file for an extension if Vanguard is unable to forward the info to the IRS before 4/15. I am in the same boat.
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Old 04-11-2014, 07:48 PM   #14
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It might be prudent to file for an extension if Vanguard is unable to forward the info to the IRS before 4/15. I am in the same boat.
Yes, that's what I did.
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