Roth IRA Recharacterization
I jhave a client who converted some dollars to a Roth IRA from a traditional IRA and then found out that his income was to high. He recharacterized it back to his traditional IRA. He has not filed his income tax for 2007 yet – he had an extension. Does he have to report this in any way on his return. I was under the assumption that if he recharacterizes it – it is as if it never happened. So if that is true he should not have to account for the conversion/recharacterization at all on his return – is that true?
Permalink Submitted by Alan Spross on Thu, 2008-08-07 20:17
David,
The IRS requests an “explanatory statement” advising the flow of related events. This assists them in understanding the return because the 1099R and 5498 forms for the recharacterization will not be issued until next January. The amount of the conversion is shown on line 15a of Form 1040, but nothing on 15b, the taxable line.
Here is an example of what they want per Inst for Form 8606, p 3 (the 8606 is not required for the return):
“On xx/xx/2007 I converted y$ to my Roth IRA. However, because my modified AGI exceeded 100,000, on xx/xx/2008 I recharacterized the entire conversion amount, which was then worth $z, back to my traditional IRA.”
As a result of this explanation, there will be no need to consider the recharacterization at all on the 2008 return, even though the recharacterization was completed in 2008 and the 1099 forms will come out next January.
Permalink Submitted by David J Chapman, CFP on Thu, 2008-08-07 20:47
Thanks Alan – but wouldn’t he get a 1099 earlier this year to file for 2007 taxes in 2008 – he did the conversion in 2007.
Permalink Submitted by Alan Spross on Thu, 2008-08-07 20:58
Yes, he should already have the 2007 1099R for the conversion. However, he will not get the 1099R (nor will the IRS) for the recharacterization until January, 2009 since the recharacterization is being done in 2008.
Since the IRS only has the 1099R for the original conversion, they will wonder why he did not report it since they will not know till next January that he recharacterized (reversed) it. They will think he omitted reporting the conversion, so this is why he should attach the explanatory statement.