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bdb7777
New Member

I converted $300,000 from Trad IRA to Roth. I need to reverse it. I only re-characterize $300,000, but can the gains be left in my Roth IRA? How do I fill out IRS forms?

 
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dmertz
Level 15

I converted $300,000 from Trad IRA to Roth. I need to reverse it. I only re-characterize $300,000, but can the gains be left in my Roth IRA? How do I fill out IRS forms?

Any gains attributable to the $300,000 while in the Roth IRA are required to accompany the recharacterization of the $300,000.  When you ask the custodian to recharacterize $300,000, the custodian will calculate the gains on the $300,000 and transfer the combined amount to the traditional IRA.  For example, if the entire Roth IRA account saw 20% growth between the time the $300,000 was converted to the Roth IRA and the time of the recharacterization, to complete a recharacterization of $300,000 a total of $360,000 must be transferred to the traditional IRA.

When entering the recharacterization into TurboTax, you'll enter the Form 1099-R reporting the original Roth conversion, then in the follow up indicate that you recharacterized the entire $300,000.  Separately, you enter a code N or code R Form 1099-R (depending on whether the recharacterization of the 2017 conversion occurred before or after the end of 2017).  Along with all of this you'll be prompted to enter an explanation statement describing the conversion, recharacterization and the calculation of the gains that accompanied the amount recharacterized.

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6 Replies
dmertz
Level 15

I converted $300,000 from Trad IRA to Roth. I need to reverse it. I only re-characterize $300,000, but can the gains be left in my Roth IRA? How do I fill out IRS forms?

Any gains attributable to the $300,000 while in the Roth IRA are required to accompany the recharacterization of the $300,000.  When you ask the custodian to recharacterize $300,000, the custodian will calculate the gains on the $300,000 and transfer the combined amount to the traditional IRA.  For example, if the entire Roth IRA account saw 20% growth between the time the $300,000 was converted to the Roth IRA and the time of the recharacterization, to complete a recharacterization of $300,000 a total of $360,000 must be transferred to the traditional IRA.

When entering the recharacterization into TurboTax, you'll enter the Form 1099-R reporting the original Roth conversion, then in the follow up indicate that you recharacterized the entire $300,000.  Separately, you enter a code N or code R Form 1099-R (depending on whether the recharacterization of the 2017 conversion occurred before or after the end of 2017).  Along with all of this you'll be prompted to enter an explanation statement describing the conversion, recharacterization and the calculation of the gains that accompanied the amount recharacterized.

bdb7777
New Member

I converted $300,000 from Trad IRA to Roth. I need to reverse it. I only re-characterize $300,000, but can the gains be left in my Roth IRA? How do I fill out IRS forms?

Thank you for your easy to understand answer. My financial planner at a major investment company assured me that any gains made from the $300,000 while in the Roth IRA would remain in the Roth IRA tax free after the re-characterization of the $300,000 back to  the Trad IRA.  I thought his answer was incorrect, which you have confirmed.
dmertz
Level 15

I converted $300,000 from Trad IRA to Roth. I need to reverse it. I only re-characterize $300,000, but can the gains be left in my Roth IRA? How do I fill out IRS forms?

If you want to show the financial planner the statute, it's section 408A(d)(6)(B)(i):
<a rel="nofollow" target="_blank" href="https://www.law.cornell.edu/uscode/text/26/408A#d_6_B">https://www.law.cornell.edu/uscode/text/26/40...>

You can also see CFR 1.408-11 for the details of the calculation of the gains attributable to the amount being recharacterized:  <a rel="nofollow" target="_blank" href="https://www.law.cornell.edu/cfr/text/26/1.408-11">https://www.law.cornell.edu/cfr/text/26/1.408-11</...>
TahoeJeff
Level 3

I converted $300,000 from Trad IRA to Roth. I need to reverse it. I only re-characterize $300,000, but can the gains be left in my Roth IRA? How do I fill out IRS forms?

Hi dmertz - very nice answer and one follow up question. Does the custodian then subsequently report the amount of the 'reversal' (in my case a Roth contribution that I need to reverse) and the amount of the earnings in the following tax year?  I have the 5498 for the Roth contribution, but not sure what forms if any that I need to check and send for the reversal prior to actually sending the full return in. The IRS presumably has the first 5498 with the contribution amount, but how will they be notified of the reversal of the contribution and the additional earnings?  Thanks!

macuser_22
Level 15

I converted $300,000 from Trad IRA to Roth. I need to reverse it. I only re-characterize $300,000, but can the gains be left in my Roth IRA? How do I fill out IRS forms?


@TahoeJeff wrote:

Hi dmertz - very nice answer and one follow up question. Does the custodian then subsequently report the amount of the 'reversal' (in my case a Roth contribution that I need to reverse) and the amount of the earnings in the following tax year?  I have the 5498 for the Roth contribution, but not sure what forms if any that I need to check and send for the reversal prior to actually sending the full return in. The IRS presumably has the first 5498 with the contribution amount, but how will they be notified of the reversal of the contribution and the additional earnings?  Thanks!


@TahoeJeff  This is an OLD post from years ago about reversing a Roth *conversion* that is not longer allowed.

 

Your question about a Roth *contribution* is a totally different question.

 

Rather that continuing a years old thread, I suggest that you start a NEW question  with your situation and provide the details.

 

(Don't be fooled by the posting date, that is the date that the old forum was migrated to this new forum.)

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**
dmertz
Level 15

I converted $300,000 from Trad IRA to Roth. I need to reverse it. I only re-characterize $300,000, but can the gains be left in my Roth IRA? How do I fill out IRS forms?

The IRS receives notification of a recharacterization by your explanation statement required to be included with your tax return or amendment for the year for which the original contribution was made and by a code N or code R Form 1099-R issued by the IRA custodian for the year in which the recharacterization occurs.

 

As macuser_22 indicated, if you have additional questions, please start a new question thread.

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