Recharacterizing a ROTH IRA

[MrLoco]

My wife and I made the max Roth Ira contributions in 2019 ( $7,000 each).

It now looks as if we will be over the income limits for filing a joint return.
The phase out for income limit starts at $193,000 up to $203,000 for 2019.
It looks like we will be either above the $203,000 mark or just below it so we will need to do a full or partial recharacterization. I will know more once my CPA does our taxes and runs the numbers.

My questions are:

1) What is the penalty if you do NOT do a required recharacterization?

2) If we do a partial or full recharacterization of the Roth, I understand the amount needs to be the contribution PLUS earnings up to the date of recharacterization? I have seen the formula online (reminds me of 9th grade algebra). Do brokerages do this calculation for you?

Also, MUST you then put the money into a Traditional IRA as part of the recharacterization process OR can you simply put the money back into your bank account? The reasons I ask is because while I have a Trad IRA as well as a Roth....my wife ONLY has a Roth and this would require her to open up a new Trad IRA simply for this one transaction. A pain as she is retiring anyway this year and future IRA contributions will stop ( I am already retired).

And if the IRS DOES require a recharacterization only to a Trad IRA and does not allow you to simply put the money back into your bank account; what happens if the recharacterization is only a partial one of say $400? Most brokerages will have minimum amounts to open a new account of at least $1,000?

Thanks to any that can help.

 

[TheWizard]

Just recharacterize both $7000+ amounts to tIRAs and then convert entire amounts to Roth IRAs a few days later.
This is the Backdoor Roth contribution scheme used by high earners...

 

[The Cosmic Avenger]

This is what Vanguard has to say:

The IRS will charge you a 6% penalty tax on the excess amount for each year in which you don't take action to correct the error.
For example, if you contributed $1,000 more than you were allowed, you'd owe $60 each year until you correct the mistake.
If you remove your excess contribution plus earnings before either the April 15 or October 15 deadline, the earnings are taxed as ordinary income.
And if you're under 59½, you'll be subject to a 10% early withdrawal penalty.

I think the only way to put the excess in the Roth is to convert a tIRA contribution. It doesn't matter where you put the money first, but you won't be able to get it into a Roth IRA without the penalty unless you put it in a tIRA first.

If you don't want to open the tIRA for your wife, then you can just put the money in the bank, but the Roth is a great tool, I'd say do it....unless she was planning on withdrawing at least $7K from her Roth anyway, in which case this money could provide that income instead.

 

[pb4uski]

The brokerage will calculate the total recharacterized... you just need to tell then how much of your contribution that you want recharacterized.

If you think that you'll be able to contribute in 2020, I would ask them to do the recharacterization and then put it back in the Roth as your 2020 contribution.

 

[kaneohe]

..................................

Also, MUST you then put the money into a Traditional IRA as part of the recharacterization process OR can you simply put the money back into your bank account? ..........................

You can simply remove the 2019 contribution (plus earnings)........this is not a recharacterization. You must be crystal clear when you make the request that you are removing the "current" yr contributions (and earnings).........you are not just making a withdrawal.

 

[Perryinva]

I just did exactly what pb4uski said above. All online, with FIDO. Just waiting for the new tax form from Fido to post to add those earnings to my 2019 1040. Easy peasy.