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Recharacterization Tax Reporting

OK. So you did your recharacterization from the Roth IRA back to the traditional IRA and now you are wondering how you put this on your tax return so you don’t have to pay tax on the conversion.

You can find some guidance from IRS on the instructions for Form 8606 - which in most cases you don’t have to file when you do a recharacterization. You can find these instructions at www.irs.gov. On the left hand side of the screen click on Forms and Publications.

1099-R (we will assume that the conversion amount is the only IRA distribution)
You will have a 1099-R from the traditional IRA for the distribution you converted and a 1099-R from the Roth IRA for the recharacterization. The distribution amount will go on line 15a of Form 1040. On line 15b you will put a zero and an “R” for rollover.

You must attach a note to the return saying that you have done a recharacterization. You will give the amount and the date of the conversion and the amount and the date of the recharacterization.

Form 5498
You will have a Form 5498 from the Roth IRA conversion and one for the recharacterization. These are informational only and you do not need to attach them to your return.

Form 8606
Generally you only need to file this form if you have any after-tax amounts in any IRA you own.

If you do the conversion and the recharacterization in the same year, you will have all your tax reporting done in the same year and things are easy. If you convert in one year and recharacterize in the next, your tax reporting will also span two years. You will still follow the above instructions for your return (or your amended return).

However, you will not have the 1099-R from the recharacterization to attach to the return. The note that you attach will cover you and on your return for the following year you ignore the 1099-R from the recharacterization.

By IRA Technical Consultant Beverly DeVeny and Jared Trexler
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*Copyright 2010 Ed Slott and Company, LLC


Ok, I get that, but what about the refund of taxes deducted at the time of the original conversion? They will be refunded by the IRS, but what am I required to do with that money? Must it go back into the IRA? Do I keep it? What .. ???

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