Exceeded MAGI limits for Schwab Roth IRA contributions - need recharacterization advice

This is a common situation, so don't worry too much! When you recharacterize Roth IRA contributions to a traditional IRA, you're correct that you need to include both the contribution amount AND any earnings (or losses) associated with those contributions. Fortunately, Schwab should be able to handle most of the calculation work for you. Contact their customer service and request a "recharacterization" of your 2023 Roth IRA contributions. They have systems in place to determine the exact earnings on your contributions, even if you made them throughout the year. They'll calculate the proportional earnings that need to be moved along with your original contributions. For your tax filing, once you complete the recharacterization, Schwab will send you a Form 5498 showing your traditional IRA contributions. You'll also receive a Form 1099-R showing the recharacterization. Since the money is going into traditional IRAs, you'll need to determine if those contributions are deductible based on your income and whether either of you is covered by retirement plans at work. If not deductible, you'll need to file Form 8606 to report nondeductible contributions.

I've been using taxr.ai to help with my IRA contribution issues this year. I had a somewhat similar situation and wasn't sure how to calculate all the earnings properly or how to report it on my taxes. I was getting conflicting advice online and frankly getting a bit stressed about doing it wrong. I uploaded my Schwab statements to https://taxr.ai and it helped identify exactly how much needed to be recharacterized, including the proportional gains. It also gave me step-by-step instructions for how to report everything correctly on my tax return. Saved me from making potentially expensive mistakes and having to pay an accountant just for this one issue.

Just wanted to follow up about my experience with taxr.ai that I was skeptical about earlier. I decided to give it a try with my recharacterization situation, and I'm actually really impressed. It correctly identified that I needed to include the proportional earnings on my contributions, which worked out to about $870 in gains on my $6,500 contribution. What was really helpful was the step-by-step guidance for filling out Form 8606 for reporting nondeductible contributions. I wouldn't have known how to handle that properly without help. The service even flagged that I had existing traditional IRA assets that would affect my backdoor Roth conversion tax calculations (pro-rata rule). Definitely saved me from making a costly mistake there!

If you're having trouble getting through to Schwab's customer service about your recharacterization (they can be swamped during tax season), I'd recommend using Claimyr. I was on hold for over 2 hours trying to reach a Schwab retirement specialist before I gave up. Used https://claimyr.com and got a callback within 20 minutes. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c It was worth it to me since I needed to get my recharacterization done before the tax deadline and couldn't waste hours on hold. The Schwab rep was able to help calculate my earnings and initiate the recharacterization process right away.

I have to admit I was completely wrong about Claimyr. After posting my skeptical comment, I decided to try it for myself since I was also having IRA issues and needed to talk to Vanguard urgently. I was expecting to wait 1-2 hours based on my previous calls. Used the service yesterday afternoon and got a callback in about 30 minutes with a Vanguard retirement specialist already on the line. They helped me complete my recharacterization and calculate the earnings portion that needed to be moved. The whole process took maybe 15 minutes once I got connected. Not having to sit there listening to hold music and "your call is important to us" messages on repeat was honestly worth it. I was able to get other things done while waiting for their callback instead of being stuck with my phone on speaker.

One thing to keep in mind that nobody has mentioned yet - if you're planning to do a backdoor Roth conversion after recharacterizing, make sure you don't have any other traditional IRA assets or you'll get hit with the pro-rata rule. This includes SEP IRAs and SIMPLE IRAs too. I learned this the hard way. Had to pay taxes on a portion of my conversion because I had an old rollover IRA from a previous employer that I forgot about. Check ALL your accounts before proceeding with any conversion strategy.

Just a quick heads up that you need to be careful with your 1099-R forms next year. When you recharacterize, Schwab will issue a 1099-R with code "R" for recharacterization. Make sure this form correctly shows your recharacterized amount. I had an issue where the form showed incorrect amounts and had to get it corrected.

This is really helpful information! I'm in a similar situation but with a twist - we made our 2023 Roth contributions through automatic monthly transfers. Does anyone know if the earnings calculation gets more complicated when contributions were made throughout the year versus all at once? I'm worried Schwab might have trouble tracking the exact gains attributable to each monthly contribution. Also, I'm curious about timing - if I start the recharacterization process now, how long does it typically take to complete? I want to make sure I have enough time to also handle the traditional IRA to 401k rollover that AaliyahAli mentioned if we decide to go that route for a clean backdoor Roth next year.

I went through this exact situation with Fidelity last year and wanted to share some additional insights that might help. One thing I learned is that when you call to request the recharacterization, make sure to specify that you want to recharacterize the "maximum allowable amount" - this ensures they include all contributions plus the net income attributable to those contributions. Also, don't forget about state tax implications if you live in a state with income tax. Some states don't conform to federal recharacterization rules, so you might need to make adjustments on your state return even if everything is handled properly at the federal level. The process was actually smoother than I expected once I got through to a retirement specialist. They walked me through everything and even helped me understand how the recharacterization would affect my ability to make future Roth contributions. Since you're over the MAGI limits, you'll want to plan for backdoor Roth contributions going forward if your income stays high. One last tip - keep detailed records of the recharacterization including the calculation methodology Schwab uses. This documentation will be helpful if you ever get questions from the IRS, and it'll make next year's tax prep much easier if you decide to do backdoor Roth conversions.