Reporting Recharacterization

[Marcuz40]

I contributed $7000 to my Roth IRA last year (2024) and realized this year that I made too much money to contribute therefore I need to recharacterize to a Traditional IRA. When I asked my broker, they said that the whole amount recharacterized would be $8096 ($7000 + $1096 - Gains). 

- Is the contribution only being recharacterized or the contribution + gains?

- If contribution + gains, does that mean the total recharacterization ($8096) is considered a contribution to the Traditional IRA?

- Can I withdraw the $1096 without penalty?

- Do I need to wait for a new 5498 + 1099-R prior to filing my 2024 tax return?

[DanaB27 · Accepted solution]

When you recharacterize a contribution to traditional IRA then the earnings are deemed to have been earned in the traditional IRA.

No, you cannot withdraw the earnings from the traditional IRA without a penalty if you are under 59 1/2.

You will enter the recharacterization when you enter the contribution to the Roth IRA on your 2024 return:

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 $7,000
8. Answer “Yes” to the recharacterized question on the “Switch from a Roth To a Traditional IRA?” screen and enter the contribution amount of $7,000 (no earnings or losses) on the next screen.
9. TurboTax will ask for an explanation statement where it should be stated that the original $7,000 plus $1,096 earnings 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.

You will get a 2025 Form 1099-R  for the recharacterization with code R-Recharacterized IRA contribution made for 2024 and this belongs on the 2024 return. But a Form 1099-R with code R will do nothing to your return. You can only report it as mentioned above. Therefore, you can ignore the Form 1099-R with code R when you get it in 2026. The box 1 on the 1099-R will report the total recharacterized amount (contribution plus earnings) but it does not separately report the earnings and box 2a must be zero.

[Marcuz40]

Thank you @DanaB27 ! 

If I am planning on doing a backdoor Roth, how do I need to report that on my 2024 taxes?

[fanfare]

recharacterization: the original amount to the first IRA you report as contribution to the second IRA, earnings move but that is ignored.

Upon reporting a Trad IRA contribution (non-deductible) on your tax return, you can then also report a Roth conversion of the contributed amount for net tax of zero, unless your IRA already had a basis.

In that case, it can't be done tax free.

@Marcuz40 

[fanfare]

report this on your tax return for the year during which the contribution was made.
Treat the contribution as having been made to the second IRA on the date that it was actually made to the first IRA.

[fanfare]

having a basis of 7,000 in an IRA worth $8,096 (last known value) means you cannot avoid paying some tax on a Roth conversion.

The only way to use up the basis is to convert 100%.

@Marcuz40 

[Marcuz40]

On my 2024 taxes, I am currently reporting a recharacterization (checking the Roth IRA contribution box). Do I need to go back in and check the Traditional IRA instead since I am planning to backdoor the recharacterized contribution to my Roth IRA? Otherwise if I check both the Traditonal IRA box and Roth IRA box it says that I have excess contributions.

[fanfare]

Having recharacterized, you no longer have a contribution to the first IRA.

You have a contribution to the second IRA.

@Marcuz40 

[DanaB27 · Accepted solution]

No, you check the Roth IRA box and follow the steps mentioned in my instructions above to report the recharacterization. When you select to make the contribution nondeductible then TurboTax will create a 2024 Form 8606 with a basis on line 14 and this will be carried over to your 2025 return. 

The conversion to Roth IRA will be reported next year on your 2025 return since it will happen in 2025:

1. Click on "Search" on the top right and type “1099-R”  
2. Click on “Jump to 1099-R”
3. Click "Continue" and enter the information from your 2025 Form 1099-R with code 2
4. Answer questions until you get to “Tell us if you moved the money through a rollover or conversion” and choose “I converted some or all of it to a Roth IRA”
5. On the "Review your 1099-R info" screen click "Continue"
6. Answer "Yes" to "Any nondeductible Contributions to your IRA?" if you had any nondeductible contributions in prior years.
7. Answer the questions about the basis from line 14 of your 2024 Form 8606 and the value of all traditional, SEP, and SIMPLE IRAs

@Marcuz40 

[Marcuz40]

@DanaB27  Thank you! You’ve been very helpful!