Recharacterizing IRAs

Technical topics regarding tax preparation.
#1
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My client asked me about recharacterizing their IRA's yesterday so I did some research on it. The CARES Act allows recharacterization during 2020, it appears. They would have to pay tax on the IRA amounts. My question about the tax is, at what rate? The sample says at the 15% rate they would pay $15,000 on a $100,000 exchange. I'm assuming that the rate would be the taxpayer's current rate. The thing is that last year (2019) they had a very good year and were in a high tax bracket, this year thanks to COVID, they will have a loss and likely no tax liability. So it seems this might be a good year to take advantage of recharacterization. Is there a rule that would apply a minimum amount on the exchange?
 

#2
lucyko  
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This is a highly technical topic .You have not provided enough information to fully answer your questions . Is this a recharacterization of a current year contribution or recharacterization of a conversion ? The tax treatment is different.

As a result of tax law changes in 2018 recharacterization of IRA 's to Roth is no longer allowed. Only recharacterization of current year contributions is allowed .

I think what you are driving at is converting a portion of clients IRA to a Roth IRA for tax year 2020 . This is called conversion not recharacterization . That strategy definitely makes sense if they will have a business loss during 2020. You are correct that the tax paid on the conversion is at ordinary tax rates .
 


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