Recharacterizing Roth IRA contributions made over several dates for 2022

Forum|Forum|3 years ago
April 11, 2023
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Hello,

I have to recharacterize a total of $6000 of Roth IRA contributions made over several dates during the year. Do I need to create a separate Recharacterization for each contribution date *$2500, $3000, $500)? If so, how does one calculate the earnings or loss (I'm sure it's a loss) on those contributions?

I was able to calculate the total loss for the period from the date before the first contribution to the time I recharacterized... should I just apply the same rate to each contribution?

Thank you very much for any guidance.

Best answer by DanaB27

You should be able to submit one recharacterization form to your financial institution and they should be able to calculate the earnings. You only need to know the earnings (or loss) for the explanation statement.

The calculation of the earnings will be more complicated since you had multiple contributions. Please see 26 CFR § 1.408-11 for details.

On your 2022 tax return, you will enter the recharacterization when you enter the contribution to the Roth IRA for 2022:

Login to your TurboTax Account
Click on "Search" on the top right and type “IRA contributions”
Click on “Jump to IRA contributions"
Select “Roth IRA”
Answer ‘Yes” on the “Roth IRA Contribution” screen
Answer “No” to “Is This a Repayment of a Retirement Distribution
Enter the Roth contribution amount
Answer “Yes” to the recharacterized question on the “Switch from a Roth To a Traditional IRA?” screen and enter the contribution amount (no earnings or losses) on the next screen.
TurboTax will ask for an explanation statement where it should be stated that the original $xxx.xx plus $xxx.xx earnings (or loss) were recharacterized.
On the screen "Choose Not to Deduct IRA Contributions" answer "Yes" if you are thinking about doing a backdoor Roth. Otherwise, select "No". (If you have a retirement plan at work and are over the income limit it will be nondeductible automatically and you only get a warning and then a screen saying $0 is deductible).

DanaB27Answer

The calculation of the earnings will be more complicated since you had multiple contributions. Please see 26 CFR § 1.408-11 for details.

On your 2022 tax return, you will enter the recharacterization when you enter the contribution to the Roth IRA for 2022:

Login to your TurboTax Account
Click on "Search" on the top right and type “IRA contributions”
Click on “Jump to IRA contributions"
Select “Roth IRA”
Answer ‘Yes” on the “Roth IRA Contribution” screen
Answer “No” to “Is This a Repayment of a Retirement Distribution
Enter the Roth contribution amount
Answer “Yes” to the recharacterized question on the “Switch from a Roth To a Traditional IRA?” screen and enter the contribution amount (no earnings or losses) on the next screen.
TurboTax will ask for an explanation statement where it should be stated that the original $xxx.xx plus $xxx.xx earnings (or loss) were recharacterized.
On the screen "Choose Not to Deduct IRA Contributions" answer "Yes" if you are thinking about doing a backdoor Roth. Otherwise, select "No". (If you have a retirement plan at work and are over the income limit it will be nondeductible automatically and you only get a warning and then a screen saying $0 is deductible).

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bigben3Author

Thank you Dana. Unfortunately, Merrill Edge's recharacterization form specifically says I am responsible for calculating the earnings or losses on the excess contributions, and to consult a tax advisor. I researched and found some examples from Federalregister.gov and from Fidelity. (Here's the federalregister example) However, Merrill does not provide a value of the portfolio the day prior to my first contribution. Contribution was made on Feb. 18, 2022, and the only portfolio value Merrill could provide is Feb 1, 2022, so I will have to use that value, I think.

In a related question, is there a required time by which I should do the backdoor Roth conversion after contributing or recharacterizing into a traditional IRA? I read this sentence in one of the answers to questions and unsure if it means I should initiate a backdoor conversion within 60 days of contributing to a traditional IRA: "There's almost always a time limit of 60 days to complete a conversion or rollover, with large penalties if the limit isn't met."

I wanted to do a Roth conversion for $1000 that I contributed to a traditional, plus the $6000 Roth contribution I am recharacterizing (with losses, it's $4500). Both are not deductible because I am above the required income level last year. The Merrill form to convert has questions about Withholding taxes. Should I select not to withhold taxes since both contributions were not deductible in the first place?

Thank you very much.

DanaB27

That is unfortunate that they won't calculate the earnings or losses but your plan on how to calculate them sounds reasonable.

The 60-day limit applies to when you take a distribution and return it to a retirement account. You can convert the funds sitting in the traditional IRA anytime but of course, be aware that any earnings will be taxable when you convert it therefore it is usually best to convert as soon as possible to avoid having earnings.

Yes, I would not withhold taxes since any taxes withheld and not replaced count as an early distribution and would be subject to the 10% early withdrawal penalty if you are under 59 1/2.

@bigben3

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