How do taxes work on a Roth conversion that was recharacterized?
January 29, 2016 5:06 AM Subscribe
If I prepaid taxes on a Roth conversion then recharacterized back to a traditional IRA, how do the taxes I paid work?
I performed a Roth conversion early in 2015 then due to my circumstances changing, a Roth conversion was no longer in my best interest. I requested that Vanguard recharacterize it back to the traditional IRA which they did, however, I must have selected the option to withhold taxes on it already which I couldn't recoup during the recharacterization.
My question, what do I do about the taxes I already on the Roth conversion? I have a 1099-R which is showing the federal taxes withheld.
I performed a Roth conversion early in 2015 then due to my circumstances changing, a Roth conversion was no longer in my best interest. I requested that Vanguard recharacterize it back to the traditional IRA which they did, however, I must have selected the option to withhold taxes on it already which I couldn't recoup during the recharacterization.
My question, what do I do about the taxes I already on the Roth conversion? I have a 1099-R which is showing the federal taxes withheld.
Your 1099-R should show the amount withheld in Box 4. You take this number and add it to the amount withheld on your W-2 Box 2. You enter the sum on form 1040 line 64 "Federal income tax withheld from Forms W-2 and 1099."
You put the amount that was withdrawn from your original IRA in Box 15a on your 1040. In Box 15b you put zero because it is non-taxable because it was recharacterized. You can add a statement to your return indicating the recharacterization or else just write on the line next to 15b "recharacterized."
Note that you should expect your 1099-R to have the letter "N" in Box 7. This indicates the the IRA was withdrawn and recharacterized in the same year.
For future reference, be very careful when doing Roth conversions to uncheck the box for automatic withholding. As you now realize, although you will get the withholding back when you file income taxes, your IRA is now 20% smaller and you can't put the withholding back into it.
posted by JackFlash at 3:16 PM on January 29, 2016
You put the amount that was withdrawn from your original IRA in Box 15a on your 1040. In Box 15b you put zero because it is non-taxable because it was recharacterized. You can add a statement to your return indicating the recharacterization or else just write on the line next to 15b "recharacterized."
Note that you should expect your 1099-R to have the letter "N" in Box 7. This indicates the the IRA was withdrawn and recharacterized in the same year.
For future reference, be very careful when doing Roth conversions to uncheck the box for automatic withholding. As you now realize, although you will get the withholding back when you file income taxes, your IRA is now 20% smaller and you can't put the withholding back into it.
posted by JackFlash at 3:16 PM on January 29, 2016
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According to the IRS, because you recharacterized before filing, that conversion should have no effect on taxes owed.
posted by Mr.Know-it-some at 7:27 AM on January 29, 2016