Treatment of contribution rolled into a Roth IRA

[Guest P A Weick]

A client posed an unusual problem. He contributed $2,000 to his $7,700 traditional IRA in January, 1998. In November, 1998 he converted the entire account to a Roth. No election to recharacterize the contribution was made before the transfer. The broker sent him a 1099 showing the entire account balance as a distribution. He thinks he can deduct the original contribution to the traditional IRA and then pick up what the broker showed on the 1099 over 4 years.

I would have thought that he would not take the contribution into income under Section 408A(d)(6)(a) and that the broker's 1099 was wrong, but then there was no election to recharacterize. To get the deduction I would have him elect to recharacterize the contribution as one to his traditional IRA by the time he files his return (I put him on extension).

He (retired lawyer) suggests that 408(d)(6)(B)(2) implies that he could deduct it.

Any thoughts on how this should shake out?

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[Kathy]

I would say you have two choices - assuming he is eligible to deduct a traditional IRA contribution and the contribution was for 1998 and (will be) reported on a 1998 Form 5498 (due in May), he could deduct the full $2,000 and then include 1/4 of the conversion in his taxable income (assuming he also met the requirements to convert). If I'm reading it right, that would cost less than the other option which is: you could go to the broker and ask if the $2,000 plus related earnings could be recharacterized from a traditional IRA contribution to a Roth IRA contribution, rather than converted, since his tax return is on extension. Then there is no deduction but smaller taxable conversion. If you go the first route, I don't think you need any recharacterization. It was a deductible IRA contribution on and then a taxable distribution on conversion, eligible for the 4-year spread.