Treatment of gains on recharacterized IRA contributions

[anonymouse1]

I contributed $7500 to a traditional IRA in January 2023 and made 3 recharacterizations totaling $4800 to a Roth in July.   My custodian sent me a 1099-R with distribution code N showing $5300 which included $500 of earnings, none of it taxable.  Is my deductible IRA contribution $2700 (7500-4800) or $2200 (7500-5300)?

[dmertz · Accepted solution]

When TurboTax asks you how much of your traditional IRA contribution you switched (recharacterized), enter $4,800.  The result of recharacterizing $4,800 of your $7,500 traditional IRA contribution is that you have a $2,700 traditional IRA contribution and a $4,800 Roth IRA contribution.  The $500 of earnings simply become $500 of earnings in the Roth IRA.

[anonymouse1]

Thank you.  That is what I put when I was filling out the interview-style TT but my husband was reviewing the 1040 and other forms and asked why the number on my 1099 was different than what I had claimed - the untaxed numbers weren't adding up.  So I did a live chat with my broker/custodian and they verified that they put the correct amount (including earnings) on the 1099-R, but would not tell me what they are going to put on the 5498 in May.  They suggested I call their Retirement Services department on Monday, or talk to my tax advisor.

[dmertz]

The 2023 Form 5498 from the traditional IRA will show $7,500 in box 1.  The 2023 Form 5498 from the Roth IRA will show $5,300 in box 4.  However, these forms only tell part of the story.  It's your 2023 tax return that will report what actually happened.  When you tell TurboTax that you "switched" $4,800 to be a Roth IRA contribution, TurboTax will prompt you to prepare an explanation statement describing the recharacterization which is what the IRS will use to confirm that everything has been reported properly on your tax return.

[anonymouse1]

Thank you, I did the explanation (I also had $2000 for a 2022 contribution I'd recharacterized in early 2023 but before I filed that I explained was already on my 2022 tax return) when I did the return.  My husband was just checking everything before I e-filed.  This was just one thing I wasn't quite sure of the rules about, and I'd tried searching online and didn't find a clear answer, though I was sure that was the whole purpose of recharacterization vs conversion.  His employer also for some reason withheld $10 extra for Medicare and a new form popped up in TT, the 8959, that credited the $10 back toward income tax, so I had to dig that out of the forms tab to show him.