In 2024 I established a TIRA and contributed $7,000.00. A few weeks later realized that I actually wanted to establish and contribute to a Roth IRA because a TIRA is non-deductible for me at my income level. I recharacterized the full amount and received a 1099-R from my brokerage firm that has a gross distribution amount in box 1 of $7163.53. Box 2a is marked $0.00 and 2b is marked "Total Distribution". The distribution code in box 7 is "N". The remainder of the form is blank. I believe that I owe taxes on the realized gain amount of $163.53 but turbo tax does not seem to be accounting for this in the distribution. How do I properly compute the tax?
The N removes the income.
Table 1. Guide to Distribution Codes: Use Code N for a recharacterization of an IRA contribution made for 2024 and recharacterized in 2024 to another type of IRA by a trustee-to-trustee transfer or with the same trustee.
I want to urge you to create a financial notebook that is kept separate from your tax return. Keep it safe and each year, add your year-end statements from all your financial accounts plus a copy of your W2’s, your carryover information, and proof of your basis in your various investments. You must keep tax records from the time you purchase until sold/ loss used plus 3 years. It is very easy to lose track of disallowed losses, carryforwards, and basis.
This can be a digital or paper notebook.
[Edited 2/21/2024 | 12:29 PST] @ramen dog
Hi @AmyC,
thank you for this answer. However, in the meantime, I received contrary advice from another tax expert that provided the following justification:
No you don't owe any taxes. When you recharacterize a contribution plus earnings from Traditional to Roth, the earnings are treated as if they had been earned in the Roth account, not in the Traditional account. There is no tax on earnings in a Roth account.
See § 1.408A-5 Q3 & A3
https://www.law.cornell.edu/cfr/text/26/1.408A-5
Q-3. What is the effect of recharacterizing a contribution made to the FIRST IRA as a contribution made to the SECOND IRA?
A-3. The contribution that is being recharacterized as a contribution to the SECOND IRA is treated as having been originally contributed to the SECOND IRA on the same date and (in the case of a regular contribution) for the same taxable year that the contribution was made to the FIRST IRA. Thus, for example, no deduction would be allowed for a contribution to the FIRST IRA, and any net income transferred with the recharacterized contribution is treated as earned in the SECOND IRA, and not the FIRST IRA.
This is different than what would happen in the case of a coversion. In the case of a conversion, the earnings would be taxable. In the case of a recharacterization, they would not be.