Roth IRA recharacterization

[AnhVA]

I contributed to Roth IRA for 2023 a week ago then found that I'd have a big tax due (>$700) then I started working on my 2023 tax filing; that leads to a possibility of recharacterizing the contributed 2023 Roth IRA to traditional IRA in order to take the income deduction to bring my possible tax refund (>$600). My numbers are not huge but my income is low and they are meaningful to my financial situation.  I was told once I submit the request to "recharacterize" I cannot undo it. I have never encountered "recharacterization" and very nervous about how difficult and complicate it may be for filing tax.  Could someone advise what are the process, risk, etc. anything I need to know before I request to recharacterize?

Thank you very much!

[SusanY1]

Recharacterizing your contribution from Roth to Traditional is just a way of correcting the type of contribution that you made.  The effect, in the end, will be the same as if instead of making a Roth contribution you had made a Traditional one for tax year 2023.  The only difference relates to any earnings or gains on the original contribution to the Roth.  

Depending on the amount of your recharacterized contribution and earnings, you could see some taxable income as a result, but that will be income that is reported next year (if it applies) and your IRS custodian will provide you with the necessary information on a Form 1099-R to properly report the transaction. 

It won't complicate your tax filing much— the TurboTax interview will walk you through it both this year and next year.  

It sounds like you will benefit from making the switch over to a deductible traditional IRA and this is a fairly routine transaction that TurboTax handles well.  If you have any questions as you go through the process, you can return here for help with the entries into the program.  

 

[AnhVA]

thank you very much for your help

[AnhVA]

I'm sorry, a question, Will I or will I NOT receive a 1099-R for 2023? and maybe a 1099-R for 2024 IF there's a gain or loss to the original Roth contribution? Thank you!

[DanaB27]

If you request a recharacterization of your 2023 contribution in 2024 then you will get a 2024 Form 1099-R with code R in 2025. But a Form 1099-R with code R will do nothing to your return. You can only report it as mentioned below. Therefore, you can ignore the Form 1099-R with code R when you get it in 2025.

You will enter the recharacterization when you enter the contribution to the Roth IRA on the 2023 tax 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 
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)

[AnhVA]

thank you for your answer, but I'm confused about step 9 in your reply.

I contributed to the Roth IRA last week so it's March 2024 and would request the recharacterization soon in March 2024.  If I will not receive a 1099-R for 2023, what should I do when filing for 2023 in your step 9, i.e. what amount to put in for "plus $xxx.xx earnings (or loss) were recharacterized"?  

[DanaB27]

You will need to check with you financial institution or check the account once they moved the funds from the Roth IRA to traditional IRA what the gains or losses were. If more than your contribution got transferred then you have a gain, if less then you have loss. 

For example, if you contributed $6,500 but transferred $6,700 then you would enter on the explanation statement that the original $6,500 plus $200 earnings were recharacterized.

[AnhVA]

Thank you. I think I understand but still nervous about it because I don't know how long it generally takes for Fidelity (which is where I have my IRA) to do the transfer so I can find out the amount gain/loss so I have the information for filing tax 2023 in TurboTax. By any chance, do you know the timeline in general? If not, I understand.

Thank you for your help DanaB27 and SusanY1

[DanaB27]

It would be best to check with Fidelity about the timeline.

[karifiles]

Hi,

This conversation has been really helpful, thank you!

I too did a recharacterization of a Roth IRA contribution to a traditional IRA contribution for tax year 2023. I'm wondering if I need to request and keep 5498's from Schwab (the brokerage company where I have my IRA's) for the 2023 contributions as well as the 1099-R. If so, can you please explain why? Also, does Turbotax take care of filing the 8606 if one is needed with the tax return for a recharacterization?

Really appreciate the help!

Kari

[DanaB27]

Yes, if you select to make the contribution nondeductible or it is nondeductible because you had a retirement plan at work and are over the limit then TurboTax will fill out Form 8606.

Yes, you will receive Form 5498 and 1099-R and should keep them for your records. Please see How Long Do Federal and State Tax Returns Need to Be Kept? for additional information. 

@karifiles 

[karifiles]

Thank you! I appreciate the help.