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  1. #1
    LearningDaily is offline Junior Member
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    Question Excess Roth IRA contributions in shares, how to recharacterize to Traditional IRA?

    What is the name of your state (only U.S. law)? NJ

    I need help with the recharacterization of my excess Roth IRA contributions which are sitting in mutual fund shares, and with understanding what would happen if I recharacterize potentially a different amount than I should. Or if there is a better way to do this. Here is the background and situation:

    Background: I contributed $5,000 to my 2012 Roth IRA in January 2012. Last month when I started my tax return for 2012, I realized I had over contributed by $1,730 due to my AGI landing in the phase-out range. Based on everything I read, I know I can recharacterize the excess contribution as a Traditional IRA (non-deductible) along with any net income attributed to the excess contribution before April 15th to correct the excess contribution.

    Problem: I have my Roth IRA in a mutual fund which is valued daily. Based on the latest value, I need to take my excess of $1,730 + net income of $350 (rounded to facilitate this post) for a total of $2,080, and recharacterize this $2,080 to a Traditional IRA. The recharacterization form at my brokerage asks me to list the quantity of shares to recharacterize. However, I'm being told that the recharacterization is processed at the end of the day with that day's ending share price, and I can't guess the day's ending price when I'm filling out the recharacterization form. If I fill out the form at the end of the day, then it would be processed the next day and this whole guessing game recurs. I find this allows room for error.

    Example: The previous day's price is $20 / share, so I calculate I need to recharacterize $2080 / $20 = 104 shares and submit the form. At the end of the day when the form is processed, the ending price is $21 / share. That renders the total amount recharacterized as $21 * 104 = $2184. Now I end up with more recharacterized than I am supposed to based on the IRS formula. This could work the other way too where I am recharacterizing less than I am supposed to if share price goes down.

    Questions:
    1. How will IRS handle this situation? Will they understand the situation with ending prices unknown until the recharacterization form is processed? Do I then still report my excess as $1730 with net income being $454 instead of $350?

    2. Is there another way this should / can be done? I would imagine it might be a somewhat common situation to have an IRA in mutual funds for those with excess contributions that need to be recharacterized. How have others handled this?

    3. Regardless of how much ends up getting recharacterized, which tax forms should I expect from the Roth IRA and the Traditional IRA? 1099-R? 5498?

    4. Which form(s) do I need to fill out for the tax return? 8606 for the resulting non-deductible Traditional IRA?

    Thank you in advance for any advice!

    Thank you,
    LearningDaily
  2. #2
    tranquility is offline Senior Member
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    I'm uncertain as to the problem. Recharacterize. Report the issue when you know the numbers. Yes, the deposit on the non-deductible IRA goes on the 8606. Sorry, but I've got boxes on the tax software where it reports all the things appropriately. If you are making so much to not be able to fully contribute to the Roth, perhaps you should see the guy who has the software?
  3. #3
    LearningDaily is offline Junior Member
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    Quote Originally Posted by tranquility View Post
    I'm uncertain as to the problem. Recharacterize. Report the issue when you know the numbers. Yes, the deposit on the non-deductible IRA goes on the 8606. Sorry, but I've got boxes on the tax software where it reports all the things appropriately. If you are making so much to not be able to fully contribute to the Roth, perhaps you should see the guy who has the software?
    Hi Tranquility,

    I appreciate you taking the time to read and reply to my post. However, I am not sure what my question has to do with software or the guy who has the software? The main problem I have is less about how to report it, but more about recharacterizing more or less net income than IRS' given formula due to my brokerage's setup which seems to requires me to guess at each day's ending price. I am basically wondering if IRS will care if the transferred net income amount is a bit off from what their formula dictates, or if there is a better way to end up with the numbers that the formula requires. And thanks for confirming the last 8606 question.

    LearningDaily
    Last edited by LearningDaily; 03-09-2013 at 09:58 PM.
  4. #4
    ecmst12 is online now Senior Member
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    Tranq's suggestion was to see a tax pro instead of trying to do it yourself and possibly screwing it up.
  5. #5
    davew128 is offline Senior Member
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    Actually thats not what he's saying. Simple solution. Sell the shares first THEN figure out the earnings once the holding is in cash. Don't do an in kind recharacterization. Since its not a taxable sale, theres no downside to not being invested in the fund for a few days.

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