Recharacterization

[mesquite77]

I am confused on the process for calculating the gain from the date of conversion to the date of recharacterization and what the taxable amount of conversion I should report.

Say I had a Roth with a $90k balance and converted another $10k from my IRA to my Roth in December.  Now in February the value of my Roth has grown to $110k and I wish to recharacterize $5k of the $10k conversion back to my IRA.

It appears that my $90k has grown to $99k and the $10k has grown to $11k.  So if I recharacterize $5k, will $6k be the portion taxable on my conversion?

The examples I find are all if the Roth value decreases, I am doing this because $5k of the $10k is costing me alot in tax in 2012.

Thanks!

[mwcpa]

If you recharacterize an IRA conversion to a Roth you need to move the money converted plus any earnings on those funds.

In your case.

You moved 10K from a regular IRA to a Roth IRA.
The value of the Roth was 90K on the day before the moving to the 10K
The account is now 110K

the account "grew" 10%.

Therefore, if you want to move 5K back to the regular IRA you need to move 5.5K.

If you tell the broker to recharacterize this 10K back to the regular they should do the correct math.

No "tax" is due on the "appreciation" at this time.  You will incur a tax when the 5K+the earnings is withdrawn.

[mesquite77]

"No "tax" is due on the "appreciation" at this time."

That is the piece I was missing.  Thanks!

[mesquite77]

Turbo Tax is now asking me to include a "recharacterization explanation" - no examples or guidance is given.  Do you have any idea what to include here?  My definition of a good reason for the recharacterization probably differs than the IRS's.

[mwcpa]

there are 4 examples in IRS publication 590... link www.irs.gov/instructions/i8606/ch01.html#d0e470

"You converted an amount from a traditional, SEP, or SIMPLE IRA to a Roth IRA in 2012 and later recharacterized all or part of the amount back to a traditional, SEP, or SIMPLE IRA"

"You made a contribution to a traditional IRA and later recharacterized part or all of it to a Roth IRA"

"You made a contribution to a Roth IRA and later recharacterized part or all of it to a traditional IRA"

"You rolled over an amount from a qualified retirement plan to a Roth IRA in 2012 and later recharacterized all or part of the amount to a traditional IRA"

go to the publication for more details on the snipets I gave.  (I would think TT, since it is a DIY software, would make this easier for a user)