Recharacterize Roth IRA

[YM23]

On 01/03/2024, my friend contributed $6,500 to Vanguard Roth IRA for 2023. Her AGI is below $60K. Now, she realizes if she contributes to a traditional IRA, her tax will be reduced by $1,633. So, she wants to recharacterize Roth IRA to traditional IRA for 2023. She called Vanguard, they said they can recharacterize Roth IRA contributions to IRA for 2023. But they said the 1099-R won't be issued until Jan. 2025. They said that 1099-R will be for 2024 since the recharacterize in 2024. When she files tax 2023 now, she should select that she contributed to Roth IRA. Is that correct? If the 1099-R shows for 2024, does it mean she won't get an IRA tax deduction for 2023 even though she recharacterized it as a traditional IRA for 2023? That 1099-R affect her tax 2024 and it won't benefit her tax 2023? Am I missing something? If that is the case, then she shouldn't   recharacterize Roth IRA? Thank you. 

[DanaB27]

She can request the recharacterization and then should be able to deduct the traditional IRA contributions on her 2023 tax return if it isn't limited because of her income and work retirement plan. Please see IRA deduction limits for details.

She will enter the recharacterization when she enters the contribution to the Roth IRA:

1. Login to your TurboTax Account 
2. Click on "Search" on the top right and type “IRA contributions” 
3. Click on “Jump to IRA contributions"
4. Select “Roth IRA”
5. Answer ‘Yes” on the “Roth IRA Contribution” screen
6. Answer “No” to “Is This a Repayment of a Retirement Distribution
7. Enter the Roth contribution amount 
8. Answer “Yes” to the recharacterized question on the “Switch from a Roth To a Traditional IRA?” screen and enter the contribution amount (no earnings or losses) on the next screen.
9. TurboTax will ask for an explanation statement where it should be stated that the original $xxx.xx plus $xxx.xx earnings (or loss) were recharacterized.
10. On the screen "Choose Not to Deduct IRA Contributions" answer "Yes" if you are thinking about doing a backdoor Roth. Otherwise select "No". (If you have a retirement plan at work and are over the income limit it will be nondeductible automatically and you only get a warning and then a screen saying $0 is deductible)

She will get a 2024 Form 1099-R  for the recharacterization with code R-Recharacterized IRA contribution made for 2023 and this belongs on the 2023 return. But a Form 1099-R with code R will do nothing to your return. She can only report it as mentioned above. Therefore, she can ignore the Form 1099-R with code R when she gets it in 2025.

[YM23]

Thank you for your response. I help her with her tax. I have a question on step 10. She wants to get tax deduction 2023 that's why she characterizes Roth IRA. She plans to convert back to Roth in 2025 or 2026 if her income drops to $40K. If she selects "No" on "Choose Not to Deduct IRA Contributions", she can get tax deduction for 2023. Does it mean that she can't convert back to Roth IRA in the future? If she selects "Yes" on "Choose Not to Deduct IRA Contributions", then she doesn't get any tax deduction for 2023, but she can convert back to Roth IRA in the future? Is it better to let the contribution stay in Roth IRA if she doesn't get any tax deduction since her income only $60K?

[DanaB27]

Yes, she can convert the funds to Roth IRA no matter what she selects. But keep in mind if she selects to deduct the IRA contribution then any conversion will be taxable since you change it from pre-tax to after-tax. If she selects to not deduct it then she will have a basis tracked on Form 8606 and part allocated to basis will be nontaxable when converted. If pre-tax and after-tax are mixed in the traditional IRA then the pro-rata rule applies. This means that with each distribution/ conversion you will have a taxable and nontaxable part calculated on Form 8606 or the Taxable IRA Distribution Worksheet.

Yes, if she cannot get a deduction for the traditional IRA then it would be more beneficial to leave the funds in the Roth IRA.