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10365: IRA - Recharacterization

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What is a "recharacterization" with respect to IRAs?

Taxpayers may be able to treat a contribution made to one IRA account as having been made to a different type of IRA. These are referred to as “recharacterized” contributions. For example, a contribution to a traditional deductible IRA is later changed to a contribution to a Roth IRA. The recharacterization is treated as a correction if consistent with IRS requirements.

Note: Effective January 1, 2018, pursuant to the Tax Cuts and Jobs Act, a conversion from a traditional IRA, SEP or SIMPLE to a Roth IRA cannot be recharacterized. The new law also prohibits recharacterizing amounts rolled over to a Roth IRA from other retirement plans.

From the instructions to Form 8606:

"Generally, you can recharacterize (correct) an IRA contribution, Roth IRA conversion, or a Roth IRA rollover from a qualified retirement plan by making a trustee-to-trustee transfer from one IRA to another type of IRA. Trustee-to-trustee transfers are made directly between financial institutions or within the same financial institution. You generally must make the transfer by the due date of your return (including extensions) and reflect it on your return. However, if you timely filed your return without making the transfer, you can make the transfer within 6 months of the due date of your return, excluding extensions. If necessary, file an amended return reflecting the transfer (see Amending Form 8606, later [in the instructions]). Write “Filed pursuant to section 301.9100-2” on the amended return.

Treat any recharacterized IRA contribution, Roth IRA conversion, or Roth IRA rollover from a qualified retirement plan as though the amount of the contribution, conversion, or rollover was originally contributed to the second IRA, not the first IRA. For the recharacterization, you must transfer the amount of the original contribution, conversion, or rollover plus any related earnings or less any related loss..."

Beside IRAs, the term "recharacterization" also can refer to a change in the character of income for tax purposes under various other provisions of the U.S. Tax Code.

Common Examples:

1099-R Distribution Fully Re-characterized

When a distribution is fully recharacterized, the contribution is not reported on form 8606, however, a statement should be attached to the return explaining the recharacterization. If the recharacterization occurred during the current year, you should include the amount transferred on Form 1040, line 4a (Form 1040, line15a, or Form 1040A, line 11a in 2017 and prior); or Form 1040NR, line 16a, as applicable. 

To report a recharacterization from a Traditional IRA to a ROTH IRA,

  • Complete the 99R screen.
  • Enter a zero (0) in the Taxable amount box 2a.
  • Attach a statement to the return that explains the recharacterization by using the SCH screen. 
  • Record the basis of the IRA on ROTH screen in Part II (optional; for tracking purposes). 

To report a recharacterization from a ROTH IRA to a Traditional IRA, 

  • Complete the 99R screen.
  • Leave the Taxable amount box 2a blank. 
  • Enter the Total IRA contributions chosen to be non-deductible on the 8606 screen, line 1
    • The software will track the IRA basis based on these entries. 
  • Attach a statement to the return that explains the recharacterization by using the SCH screen. 

1099-R Distribution Partially Re-characterized

Typically, the taxpayer would receive multiple 1099-Rs recording the distributions for this situation. Complete a separate 99R screen to record each 1099-R received. Generally, partial recharacterizations, do carry to the 8606 to determine the taxable amounts. Additional entries may need to be made on the 8606 in either part 1 or part 3 depending on how the recharacterization occurred. 

For more detailed information, and IRS scenarios, see IRS Publications 590-A and 590-B or the Form 8606 Instructions

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