Recharacterization of IRA contribution

Submitted by Tom H. on Tue, 2019-03-12 16:48

Hi,
I am thinking of recharacterizing my full, maximum amount IRA contribution for 2018 from a traditional to a Roth. Not the whole IRA but the whole contribution for just that year. It’s 2019 now and before the deadline for tax return so I’m thinking of doing it now. I’ve read up on the tax rules and understand that when reported on my tax return it is supposed to be reported as if it had gone straight to the Roth and not the traditional.
But rules also say that I have to calculate the gain or loss on the contribution and there’s a worksheet to calculate it (if the custodian doesn’t, which in my case it doesn’t). Some questions I have:
1) IRS form 590 has a worksheet to calculate the amount to transfer (including gains or losses) – It wants me to calculate the fair value of the traditional before the contribution… OK I can do that, but then it wants me to calculate the fair value of the traditional on the date prior to recharacterizing.
Question 1 is – Since I am recharacterizing the IRA in 2019, I made a 2019 contribution already to that
same account – am I supposed to include that in the value of the account? The account didn’t grow that
much by itself since I made that contribuiton – and I know what you’re thinking, why did I make a traditional
contribution if I’m changing 2018’s to a Roth. Well I didn’t think about it until after I did this. But do I
include 2019’s contribution when calculating the current (immediately prior to recharacterization) fair value
of the IRA?
2) Since I’m doing this worksheet to calculate how much I must recharacterize, if there’s a gain how does
it get reported to the IRS? It says on the IRS website (https://www.irs.gov/instructions/i8606) to treat it as if I made the contribution straight to the Roth. It also says that “If the recharacterization occurred in 2019, report the amount transferred only in the attached statement, and not on your 2018 or 2019 tax return.”
It also says “Don’t report the Roth IRA contribution (whether or not you recharacterized all or part of it) on Form 8606.” The attached statement is just a written statement it appears, kind of like the worksheet showing how much you transferred and explains how you came up with that amount.
BUT, all this looks like it doesn’t get reported anywhere on your tax return so it doesn’t have any effect on
the tax you pay (regardless of the gain or loss you are transferring) other than the Roth doesn’t get any tax
deduction where the Traditional would have. Is this correct?
Also in terms of what does show on the tax return is I would report that I made a full contribution to my Roth
IRA account, even if the amount I transferred was more than the full amount due to gains, is that correct? And it appears from everything I’ve found online on the IRS website and their publications, that those are the only references to the IRA contribution/recharacterization – the place where I report that I made a full contribution on the tax return and the attached statement where I explain the amount recharacterized. Is all this correct? Any help with the 2 questions is appreciated.



Submitted by David Mertz on Tue, 2019-03-12 17:21

  1. When you have made other additions to the account between the time of the contribution being recharacterized and the time of the recharacterization, the calculation is a bit more involved than it would otherwise be.  CFR 1.408-11 describes the calculation.  The adjusted opening balance used in the calculation will include both your contribution for 2018 and your contribution for 2019: https://www.law.cornell.edu/cfr/text/26/1.408-11
  2. In general, that’s correct.  No traditional IRA contribution for 2018 will be reported and the Roth IRA contribution does not get reported.  Your tax return will need to include the explanation statement describing the amount of the original traditional IRA contribution, say, $5,500, the amount of that contribution recharacterized, $5,500, and the adjusted amount (calculated per CFR 1.408-11) transferred from the traditional IRA to the Roth IRA.  The end result in this example is a $5,500 Roth IRA contribution.  (Since a eligibility to make a Roth IRA contribution is subject to AGI limits, a recharacterization could turn a permitted traditional IRA contribution into an excess Roth IRA contribution, but presumably you’ve already taken that into consideration.  Also, changing a deductible traditional IRA contribution into a Roth IRA contribution will change your AGI which could have side effects that depend on AGI.) 


Submitted by Tom H. on Tue, 2019-03-12 18:42

DMx said:”In general, that’s correct.  No traditional IRA contribution for 2018 will be reported and the Roth IRA contribution does not get reported.”    So are you saying that in the section where I report IRA contributions I don’t show it as a Roth contribution there?  I only make any reference to the contribution on the attached statment? Thank you                 (edited to add 1 follow up question)



Submitted by Alan - IRA critic on Tue, 2019-03-12 19:15

Regular Roth IRA contributions are not reported on your tax return. Conversions are reported, and for a TIRA contribution you either report a deduction  or a non deductible contribution on Form 8606. Since you are recharacterizing as a Roth contribution, your only reporting for 2018 will be the explanatory statement. 



Submitted by Tom H. on Tue, 2019-03-12 19:18

Thanks to you both for the help.  Very much appreciated.



Submitted by David Mertz on Tue, 2019-03-12 19:37

Tax return software will generally have you enter Roth IRA contributions (or, in this case, the original traditional IRA contribution and subsequent recharacterization, resulting in a Roth IRA contribution) so that it can track Roth IRA basis, to determine if the contribution is an excess contribution that needs to be reported on Form 5329 and to determine on Form 8880 if you are eligible for a Retirement Savings Contributions Credit based on the Roth IRA contribution.  But the contribution itself doesn’t get reported on the filed tax return outside of Forms 5329 and 8880.



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