Author Topic: IRA Recharacterization Tax Question  (Read 674 times)

mizzourah2006

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IRA Recharacterization Tax Question
« on: February 27, 2017, 08:14:40 AM »
We typically max out our Roth's throughout the year and then find out how much we can deduct at the end of the year and recharacterize that amount into a traditional IRA. This year we will be able to recharacterize $1,080 per person. The question I have is does it matter if my wife recharacterize's $2,160 in hers or do we actually each need to recharacterize the $1,080? Does anyone happen to know the answer to this?

Thanks in advance!

mizzourah2006

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Re: IRA Recharacterization Tax Question
« Reply #1 on: February 28, 2017, 02:44:20 PM »
So for those wondering it appears you do need to split the re-characterization across two accounts, so I guess we did it wrong last year. Hopefully the IRS doesn't care about doing it wrong once as they still end up getting the exact same amount of money in taxes regardless if we deduct $1k each from 2 accounts or $2k from one account. That's just a pain because now we have to work to recharacterize in one account instead of two.

mizzourah2006

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Re: IRA Recharacterization Tax Question
« Reply #2 on: September 14, 2017, 02:19:36 PM »
So, bumping this again. We just got a note from the IRS saying we owe taxes on the $4,080 we recharacterized in 2015, my understanding was that our brokerage would send them the 1099-R for this. Does this not always happen? I mean I was able to get a copy of the 1099-R and will be writing a return letter with the necessary paperwork this weekend, but has anyone had this happen before?

DavidAnnArbor

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Re: IRA Recharacterization Tax Question
« Reply #3 on: September 14, 2017, 02:26:31 PM »
I think there was another thread on here about someone who recharacterized but the IRS wasn't aware of it. You definitely need to get that 1099-R from the company.

dandarc

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Re: IRA Recharacterization Tax Question
« Reply #4 on: September 14, 2017, 02:34:19 PM »
You said you messed up the 2015 recharacterization - in addition to the possibility of paperwork being amiss, this could be related to that mistake.  So time to dig up the old tax return and figure it out.  Since you did the recharacterization in one account instead of two, seems likely you owe tax (and now penalties and interest) on at least 1/2 of the total recharacterization amount.
Link to my journal, so I can find it quickly - http://forum.mrmoneymustache.com/journals/dandarc's-journal/

mizzourah2006

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Re: IRA Recharacterization Tax Question
« Reply #5 on: September 14, 2017, 03:15:29 PM »
You said you messed up the 2015 recharacterization - in addition to the possibility of paperwork being amiss, this could be related to that mistake.  So time to dig up the old tax return and figure it out.  Since you did the recharacterization in one account instead of two, seems likely you owe tax (and now penalties and interest) on at least 1/2 of the total recharacterization amount.

No, I pulled this thread up, because it was one that I had made earlier about the same subject. That follow up response I made was wrong information. I asked the brokerage and it doesn't matter if you do it all in one individual's IRA or split between the two. So I got that part figured out. I did not mess up the recharacterization. It's fine, but the documentation apparently did not get to the IRS. I'm just wondering if this has happened to others before and how big of a pain it is to deal with. If it's a huge pain I'll pay the tax and the penalty, but then I want all my money put back into a Roth with the growth from the investments as well over that time period. It even says on the recharacterization documentation that a copy will be filed with the IRS, so I'm just wondering what went wrong.

dandarc

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Re: IRA Recharacterization Tax Question
« Reply #6 on: September 14, 2017, 03:24:36 PM »
You said you messed up the 2015 recharacterization - in addition to the possibility of paperwork being amiss, this could be related to that mistake.  So time to dig up the old tax return and figure it out.  Since you did the recharacterization in one account instead of two, seems likely you owe tax (and now penalties and interest) on at least 1/2 of the total recharacterization amount.

No, I pulled this thread up, because it was one that I had made earlier about the same subject. That follow up response I made was wrong information. I asked the brokerage and it doesn't matter if you do it all in one individual's IRA or split between the two. So I got that part figured out. I did not mess up the recharacterization. It's fine, but the documentation apparently did not get to the IRS. I'm just wondering if this has happened to others before and how big of a pain it is to deal with. If it's a huge pain I'll pay the tax and the penalty, but then I want all my money put back into a Roth with the growth from the investments as well over that time period. It even says on the recharacterization documentation that a copy will be filed with the IRS, so I'm just wondering what went wrong.
I think you're wrong about that (ETA: meaning the brokerage told you wrong).  The I in IRA stands for Individual.  When in doubt, check the worksheet.

https://apps.irs.gov/app/vita/content/globalmedia/ira_deduction_worksheet_1040i.pdf

« Last Edit: September 14, 2017, 03:29:00 PM by dandarc »
Link to my journal, so I can find it quickly - http://forum.mrmoneymustache.com/journals/dandarc's-journal/

mizzourah2006

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Re: IRA Recharacterization Tax Question
« Reply #7 on: September 14, 2017, 03:31:47 PM »
You said you messed up the 2015 recharacterization - in addition to the possibility of paperwork being amiss, this could be related to that mistake.  So time to dig up the old tax return and figure it out.  Since you did the recharacterization in one account instead of two, seems likely you owe tax (and now penalties and interest) on at least 1/2 of the total recharacterization amount.

No, I pulled this thread up, because it was one that I had made earlier about the same subject. That follow up response I made was wrong information. I asked the brokerage and it doesn't matter if you do it all in one individual's IRA or split between the two. So I got that part figured out. I did not mess up the recharacterization. It's fine, but the documentation apparently did not get to the IRS. I'm just wondering if this has happened to others before and how big of a pain it is to deal with. If it's a huge pain I'll pay the tax and the penalty, but then I want all my money put back into a Roth with the growth from the investments as well over that time period. It even says on the recharacterization documentation that a copy will be filed with the IRS, so I'm just wondering what went wrong.
I think you're wrong about that (ETA: meaning the brokerage told you wrong).  The I in IRA stands for Individual.  When in doubt, check the worksheet.

https://apps.irs.gov/app/vita/content/globalmedia/ira_deduction_worksheet_1040i.pdf

well then etrade is wrong about it as they said it didn't matter which account we used as long as we just recharacterized what we were eligible for.

Either way that doesn't change the fact that they are saying we didn't report $4,080 in income, which is exactly what we recharacterized. So...wouldn't they say we didn't report half of it if that was the case? And I can always recharacterize half of it back and then recharacterize the other half in my IRA.

DavidAnnArbor

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mizzourah2006

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Re: IRA Recharacterization Tax Question
« Reply #9 on: September 14, 2017, 03:39:59 PM »
https://forum.mrmoneymustache.com/taxes/irs-problems-with-ira-re-characterization/

great...so they apparently don't like to admit they are wrong. Well I'll draft everything up and send it in this weekend. We shall see what happens. Worse case scenario I tell them that I will be happy to pay the taxes and the fine if they allow me to move everything back into the Roth IRA along with gains over that time period.

Thank you very much for this.

dandarc

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Re: IRA Recharacterization Tax Question
« Reply #10 on: September 14, 2017, 03:56:46 PM »
You can't recharacterize contributions whenever you want - you have until your tax filing deadline (with any extensions) to do so.  I don't know if there is an exception for "I made a mistake and the IRS caught it after my deadline" - I would suspect not, but maybe.  Something to ask about.

I'm thinking the IRS saw that you had an unsupported IRA deduction there and just disallowed the whole thing.  I'd probably contact a CPA who is well versed in dealing with the IRS as this isn't a simple "whoops we messed up - we're paying the amount shown on the bill" situation.  More of a "we messed up, but you're asking for more than we actually owe" situation, which as DavidAnnArbor's link will show you will be more difficult.  Anything other than just paying the bill is a big-time pain in the ass to deal with.

Did you use a tax preparer?  If so, get in touch with them - they may cover the penalties and interest if it was their mistake.  H&R Block did this for my now wife when they had signed her up for a tax-credit she most definitely did not deserve.  If I recall, she paid the full bill and H&R Block reimbursed the penalties and interest.  The letter from the IRS was the first piece of mail she received after moving into my condo.  If you used software, who's?  Turbotax has always made it very obvious to me that the recharacterization must come from both accounts when we've done it in the past, but others might not be so clear, or might have had a bug and you can be reimbursed similarly.
Link to my journal, so I can find it quickly - http://forum.mrmoneymustache.com/journals/dandarc's-journal/

mizzourah2006

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Re: IRA Recharacterization Tax Question
« Reply #11 on: September 14, 2017, 05:06:41 PM »
You can't recharacterize contributions whenever you want - you have until your tax filing deadline (with any extensions) to do so.  I don't know if there is an exception for "I made a mistake and the IRS caught it after my deadline" - I would suspect not, but maybe.  Something to ask about.

I'm thinking the IRS saw that you had an unsupported IRA deduction there and just disallowed the whole thing.  I'd probably contact a CPA who is well versed in dealing with the IRS as this isn't a simple "whoops we messed up - we're paying the amount shown on the bill" situation.  More of a "we messed up, but you're asking for more than we actually owe" situation, which as DavidAnnArbor's link will show you will be more difficult.  Anything other than just paying the bill is a big-time pain in the ass to deal with.

Did you use a tax preparer?  If so, get in touch with them - they may cover the penalties and interest if it was their mistake.  H&R Block did this for my now wife when they had signed her up for a tax-credit she most definitely did not deserve.  If I recall, she paid the full bill and H&R Block reimbursed the penalties and interest.  The letter from the IRS was the first piece of mail she received after moving into my condo.  If you used software, who's?  Turbotax has always made it very obvious to me that the recharacterization must come from both accounts when we've done it in the past, but others might not be so clear, or might have had a bug and you can be reimbursed similarly.

But is it a recharacterization if they are saying the reason I owe the taxes on the $4.080 is because they are saying they didn't receive the documentation stating I recharacterized? It should be simply the brokerage moving it back and me paying the taxes. I'm hoping this doesn't happen again in a year. Atleast last year I ignored Etrade and we recharacterized half in both.

tweezers

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Re: IRA Recharacterization Tax Question
« Reply #12 on: September 21, 2017, 11:01:33 AM »
We re-characterized a couple of years ago after converting a traditional IRA to a Roth (and failing at the math...don't ask). Eight months later we received a bill for ~$4K, which I was able to resolve by calling the IRS.  I had the documents demonstrating the re-characterization, but it was resolved without me providing them (perhaps because they had the docs, but they weren't with our return? Not sure). 

In any event, calling and speaking to someone saved me a huge headache (despite being in the call queue for close to 90 minutes).  Might be worth it as a first step in your case.