RECHARACTERAZATION OF A IRA

[maui doug]

How do I recharacterize a Traditional IRA.  My client never took the $6000 Traditional IRA

deduction and wants to put it in a Roth IRA.

[Just-Lisa-Now-]

The non-deductible IRA contribution would appear on the 8606 in the year it was contributed, when its converted to a ROTH the non-deductible basis will offset the taxability created by the conversion 1099R on the return.

[qbteachmt]

"the non-deductible basis will offset the taxability created by the conversion 1099R on the return."

Maybe. If the Trad IRA account already has deducted contributions and earnings, then there still is a pro rata tax in the conversion. Even that $6k basis can have taxable earnings, if it was in the Trad account awhile, which creates a taxable conversion. Of course, recently there has been a lot of loss events, so it's hard to know. Just remember there is no "specificity" with the conversion. Unless they only ever had this $6k in there, it is not literally the same $6k that is converted. It's a value conversion.

[Taxtime3]

Did they do away with the back door conversions.  I think it was on the table anyway.

[qbteachmt]

"Backdoor" conversions still exist. All that means is the nondeductible contribution to a Trad IRA is converted to Roth. It's the exact same thing as you described. However, what people overlook is:

You need to do it right away to avoid that nondeductible contribution having any earnings, which are going to create the pro rata taxable condition.

You need to have only basis in that and any other similar type of Trad account (pretax, such as SEP IRA and SIMPLE IRA), or by definition it is pro rata conversion.

And, any earnings in any of these accounts (anything never taxed or pre-tax) always creates pro rata conversion.

"Backdoor" is a timeliness word. Conversion is conversion.

[qbteachmt]

Maybe this will help: recharacterization would be putting it into Roth, then finding out you didn't qualify, so you put it into Trad IRA as nondeductible.

In the past, you could change your mind and recharacterize a Roth conversion back to a traditional IRA. However, the Tax Cuts and Jobs Act (TCJA) of 2017 banned recharacterizing the account balance of a Roth conversion back to a traditional IRA. Roth IRA conversions are now irrevocable. A conversion from a traditional IRA, SEP or SIMPLE to a Roth IRA cannot be recharacterized. The new law also prohibits recharacterizing amounts rolled over to a Roth IRA from other retirement plans, such as 401(k) or 403(b) plans.