Drake Tax - IRA: Recharacterization
Article #: 10365
Last Updated: October 18, 2024
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.
See the Form 8606 Instructions for details.
Caution Effective January 1, 2018, pursuant to the Tax Cuts and Jobs Act, the conversion of a traditional IRA to a Roth IRA, or the rollover from another type of retirement plan to a Roth IRA, cannot be recharacterized as having been made to a traditional IRA.
Note 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.
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 or Form 1040NR, line 16a, as applicable.
To report a recharacterization from a Traditional IRA to a ROTH IRA,
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Complete the 1099 screen.
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Enter a zero (0) in the Taxable amount box 2a.
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Attach a statement to the return that explains the recharacterization by using the SCH screen.
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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,
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Complete the 1099 screen.
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Leavethe Taxable amount box 2a blank.
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Enter the Total IRA contributions chosen to be non-deductible on the 8606 screen, line 1.
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The software will track the IRA basis based on these entries.
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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 Forms 1099-R recording the distributions for this situation. Complete a separate 1099 screen to record each Form 1099-R received. Generally, partial recharacterizations, do carry to Form 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 Publication 590-A, Publication 590-B, or the Form 8606 Instructions.