Contributions and Earned Income


“My son, Daniel, opened up a Roth IRA December 2015 and had interest earnings in January 2016 thru April 2016. In the meantime he was working on his 2015 taxes and is using filing status of married filing separately. We found out he is ineligible to contribute to a Roth because he earned over $10,000. However he is eligible to contribute the full amount to a traditional IRA since he has no employer retirement plan.
Can we open up a traditional Ira account and recharacterize his original $5000 contribution? However, how should Daniel handle the interest he earned between January 2016 and April 18, 2016. It will total approximately $259 once he gets his April interest payment posted. When he is doing his taxes using turbotax, it does not allow him to recharacterize more than the original Roth IRA contribution. He could list his original contribution as $5259 instead of $5000 since he is still under the $5500 maximum.
What do you recommend? Christopher won’t file his 2015 taxes until we find out the proper thing to do.
Last but not least, after this is straightened out, we would like to roll the traditional back to the Roth account and pay the taxes due.”

First let me remind you that neither I nor Quest IRA, Inc. can provide you with tax, legal or investment advice, only education which you need to confirm with your own tax advisor.

Your son may certainly open a traditional IRA up and recharacterize his contribution from the Roth IRA to the traditional IRA. When doing a recharacterization, the net income attributable (NIA) must also come over to the traditional IRA. In this case the calculation is easy, if that’s all the money he had in the account (if I understand your fact scenario correctly). I cannot answer why Turbotax will not allow the recharacterization of the full amount, so you will need to address that issue with them. His 5498 will reflect a contribution of $5,000, so that needs to match. He will receive a 1099-R for 2016 reflecting his recharacterization into the traditional IRA for the full amount. Obviously the IRS understands their own rules regarding NIA, so this should not be a problem.

Finally, he should be able to convert the traditional back into the Roth IRA, but he must wait at least thirty days to do so from the date of recharacterization.

If you have any further questions, please do not hesitate to contact us. Have a great day!

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