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Does the IRS let me pretend that I only put $7K into the T-IRA, treating the extra $2,421 as gains on that $7K contribution?

Well, it's not 'pretending'. What was done is called 'recharacterization'. It's like she made a non-deductible contribution of $7,000 to a T-IRA instead of to a Roth IRA. Her IRA now consists of $7k of contributions with basis (i.e. after-tax) and $2,421 of gains that are pre-tax. When she takes distributions (or converts the T-IRA to a Roth), taxes will be assessed based on the percent of the account that is pre-tax.

For simplicity of calculation, let's pretend that you/she decide to convert the account to a Roth when it's exactly equal to $10,000. She has $7,000 (70%) in basis, and $3,000 (30%) in gains, so she will owe taxes on 30% ($3,000) of the conversion.

Or do we need to send in a new 'removal-of-excess' form to pull $2,421 from the T-IRA?


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