Full recharacterization Roth to Traditional? Any impacts? What forms do I need?

[Mike8]

I opened a Roth IRA in 2016 and funded it with $3,600.

I did not make any additional deposit afterward.

I did not fill my taxes yet.

Can I recharacterize it to a Traditional IRA? What are the impacts? Any fees/penalties? How do I handle that in my tax return? Should I just declare the contribution of $3,600 to a Traditional IRA and not even mention that it was first a Roth IRA contribution?

What forms should I request from my IRA custodian to make sure everything is in order?

Thanks

[JaimeG]

If you re-characterize your return this year you will not have any penalties. The restrictions are placed on (re)re-characterizing it to a Roth IRA from a Traditional IRA. If you re-characterize now, you will not receive any paperwork relative to the move until next year.

Roth IRA contributions are not reported on your Tax Return. You do not report any activity from your Roth until you withdraw funds. This is the case whether or not it is a planned distribution or an early distribution.

For more information regarding Roth IRA Rollovers please click on the link below:

https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras-recharacterization-of-roth...

[Mike8]

Thank you for your response. I am confused, though. I found Forms 8606, 5498 and 1099-R in my search about recharacterization and IRAs. Do I need to deal with any of these forms in my case? I would like to convert the $3600 funded to a Roth IRA into a Traditional IRA. Since I did not file my 2016 return yet and the contribution was made in 2016, I thought this would be a simple process. After I ask my IRA custodian to do it, what do I have to do for my 2016 tax return? Will there be anything to do next year for my tax return 2017?

[macuser_22]

See my answer below that answers all of your questions.

[macuser_22]

To report the recharactorization:

Enter the Roth contribution into the IRA contribution section and say that you changed your mind and moved it to a Traditional IRA (recharactorized) and if asked that you want it all to be non-deductible. The amount recharacterized would be the amount of the Roth contribution - not any earnings. Enter an explanation statement of the amount recharactorized and earnings if any. That will create a 8606 form that will track the non-deductible basis of the non-deductible contribution.

You should receive a 1099-R next year with a code "R" in box 7. That only reports the recharacterization to the IRS and is ignored if entered into TurboTax.


Enter IRA contributions here:
Federal Taxes,
Deductions & Credits,
I’ll choose what I work on (if that screen comes up),
Retirement & Investments,
Traditional & Roth IRA contribution.

OR Use the "Tools" menu (if online version under My Account) and then "Search Topics" for "ira contributions" which will take you to the same place.

[Mike8]

Thank you for your response. I am confused, though. Hopefully you can help me clarify the situation.
a) Since I did not file my 2016 return yet and the contribution was made in 2016, I thought this would be a simple process and that I could treat the contribution as having been originally made to the Traditional IRA instead of to the Roth IRA. Is that correct?
I am confused because you talked about entering the Roth IRA contribution in TurboTax.
b) As for Form 8606: the amount is $3,600 and all of it is deductible (already checked my limit) so I do not need this form correct?
Also, this is not a form from my IRA custodian correct?
c) As for Form 1099-R, if I receive it next year, will I have to enter it in my 2017 return?
Thanks a lot.

[macuser_22]

Actually it is simple.

a) In order to report the recharacterization, you must first enter it as a Roth contribution which is what you actually did. On the Roth IRA contribution screen right after you enter the amount of the Roth contribution, it will ask if you "Switched from a Roth to a Traditional IRA" - answer YES - that is telling TurboTax that it is a recharacterization.  Then enter the amount recharactorized (I assume the same amount as the contribution).   Then enter an explanation for the  recharacterization.

b) The 8606 is only if the recharactorized Traditional IRA contribution either cannot be deducted because your MAGI is too high for a deduction or you choose in the contribution interview not to deduct it.     If it is deductible then  there will be no 8606 form and the deduction will go on line 32 on the 1040 form or line 17 on a 1040A.

c) The 1099-R that you will receive in 2017 will have a code "R" in box 7 that can be entered into TurboTax but will do absolutely nothing except to tell you to amend 2016 to report the recharacterization.  Unfortunately the 1099-R interview only says to amend 2016 but does not tell you what to amend.  Most people would think that they would just enter the 1099-R with the code R into 2016 - not so.  If the code R 1099-R is entered into the 2016 TurboTax it will be ignored because the IRA contribution interview is the only way to report the  recharacterization - which you will have already done with the explanation statement.   The only purpose of the 1099-R is to inform the IRS of the recharacterization and it is information to you.

[Mike8]

Ok thanks, I think I got it. Let me try to summarize.

If I well understand, entering first the Roth contribution is a necessary step in TurboTax to let the software detect the recharacterization and offer to add a statement for the explanation.

In reality, in the final forms that are being filled for the 2016 tax return, there will be no mention of the Roth Contribution and it would be like I had manually entered 2 things:
1) $3,600 on Form 1040 Line 32 as a traditional IRA deduction as if I originally made the contribution to the traditional IRA
+
2) a Statement explaining there was a recharacterization

In my case, there will be no Form 8606 on my 2016 tax return because the entire contribution was deductible.

Correct?

As for next year, I will receive a 1099-R from my IRA custodian because I performed the recharacterization in 2017.
I can enter it when filling my 2017 tax return but it won't have any impact because it will have the code "R" in box 7.
Also, I won't have to amend the 2016 tax return at that point because I already reported the recharacterization thanks to the statement explaining it when filling my 2016 tax return this year.

Correct?

Hopefully I got this right this time. Let me know. Thanks a lot.

[macuser_22]

You got it.

[Mike8]

I received a 2016 Form 5498 from my broker, is that normal? I recharacterized all my 2016 Roth IRA contribution to a Traditional IRA in March 2017.

[macuser_22]

Yes.   5498 are for your information and the recharactorization should be reported in box 4.

[Mike8]

There is nothing in box 4 though. Only box 5, 7 and 10 are filled. My broker says that the 2017 tax forms, (not 2016 forms) will reflect the recharacterization transaction that occurred in 2017 even though the contribution was for 2016.

[dmertz]

That is correct.  The recharacterization will appear in box 4 of the *2017* Form 5498 from the traditional IRA.  Your 2016 Form 5498 from the Roth IRA properly shows a regular contribution in box 10.  You'll also receive code R 2017 Form 1099-R from the Roth IRA.  Since the recharacterization should already have been reported on your 2016 tax return with explanation, you won't need to do anything with the code R Form 1099-R.

[Mike8]

Ok it's all good then. Thanks for your quick response 🙂