Reporting rollover, conversion, recharacterization

Submitted by Bruce Steiner on Mon, 2016-07-04 20:06

An IRA owner had already taken a distribution from her traditional IRA in 2015 and rolled it over within 60 days. She then took another distribution at the end of 2015, and within 60 days put the money back into a Roth IRA. Since it’s a Roth conversion it’s exempt from the one rollover within 12 months rule.

She recharacterizes it back to a traditional IRA in 2016.

How does she report the second distribution/rollover/conversion/recharacterization on her tax return(s)?



Submitted by Alan - IRA critic on Mon, 2016-07-04 22:14

Bruce, she would not report the conversion on the return, other than on an explanatory statement indicating the date and amount of the conversion and the date and amount of the recharacterization transfer. This statement should go on the 2015 return. The following example is from the Form 8606 Inst:

Example. You are married filing jointly and converted $20,000 from your traditional IRA to a new Roth IRA on May 20, 2015. On April 7, 2016, you decide to recharacterize the conversion. The value of the Roth IRA on that date is $19,000. You recharacterize the conversion by transferring that entire amount to a traditional IRA in a trustee-to-trustee transfer. You report $20,000 on Form 1040, line 15a. You do not include the $19,000 on line 15a because it did not occur in 2015 (you also do not report that amount on your 2016 return because it does not apply to the 2016 tax year). You attach a statement to Form 1040 explaining that (a) you made a conversion of $20,000 from a traditional IRA on May 20, 2015, and (b) you recharacterized the entire amount, which was then valued at $19,000, back to a traditional IRA on April 7, 2016. 4. You rolled over an amount from a qualified retirement plan to a Roth IRA in 2015 and later recharacterized all or part of the amount in a trustee-to-trustee transfer to a traditional IRA. Do not report the rollover (whether or not you recharacterized all or part of it) or the recharacterization on Form 8606. Attach a statement to your return explaining the recharacterization and include the amount of the original rollover on Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a. If the recharacterization occurred in 2015, also include the amount transferred from the Roth IRA on Form 1040, line 15a; Form 1040A, line 11a; or Form 1040NR, line 16a. If the recharacterization occurred in 2016, report the amount transferred from the Roth IRA only in the attached statement, and not on your 2015 or 2016 tax return (a 2015 Form 1099-R should be sent to you by January 31, 2017, stating that you made a recharacterization of an amount in the prior year).  

If 2015 has been filed, she could file a 1040X just to include the statement, or if she was not concerned with receiving an IRS inquiry before the 1099R was issued in January reporting the recharacterization, she could wait and just respond to the IRS if they contact her. In most cases, since the IRS knows about the extended due date to recharacterize, they delay sending out an inquiry until Feb of the following year ((2017) after the recharacterization 1099R forms have been issued.

Submitted by Bruce Steiner on Sun, 2016-07-17 16:41

  • I’m still not sure I understand.
  • Early in 2015 an IRA owner took a distribution of 6x from her traditional IRA.
  • In November 2015 she took another distribution of 2x from her traditional IRA.  She rolled it back into the same IRA in early 2016 within 60 days.
  • In December 2015 she took another 2x distribution from her traditional IRA.  To avoid the 1 rollover in 12 months limitation, she put the money back into a newly created Roth IRA in early 2016 within 60 days.  She subsequently recharacterized her Roth IRA back to a traditional IRA.
  • I assume line 15a of her 2015 return should show a distribution of 10x and line 15b should show a taxable amount of 6x.  But I’m still not sure what she should show as the explanation on her 2015 return, and whether she needs to include any additional explanation on her 2016 return.

 

Submitted by Ben Meyer on Sun, 2016-07-17 22:56

  • The potential difficulty here is to be completely clear that the two 2x distributions were each put back within 60 days into the intended accounts.  It appears from the posting that the amounts were the same.  A similar situation was described in Bobrow where the IRS took a different view from Mr. Bobrow regarding which re-deposit matched up with each distribution.  Under the IRS interpretation they swapped the re-deposit dates, since the amounts were the same, resulting in the 60 day limit being exceeded to the detriment of Mr. Bobrow.  That was not the main issue but it shows what reasoning the IRS might use if the amounts of two distributions are the same.
  • Therefore the explanation should be carefully worded to be clear that a correct 60-day rollover was performed and that the Roth conversion contribution was made within 60 days.  Alternatively the explanation could address only the conversion contribution deposit and recharcterization as concisely as possible.  Full details with dates, accounts, and amounts could then be furnished later in case of an IRS query.

Submitted by Bruce Steiner on Sun, 2016-07-17 23:33

The IRA owner wasn’t recycling the same money.  She took all of the distributions before doing either the rollover or the conversion.

Submitted by Ben Meyer on Mon, 2016-07-18 00:00

That’s the same as in Bobrow.  It’s important to be sure to match up each deposit with the applicable withdrawal.  Matching it up one way will have both within 60 days.  Matching up the other way might have the Roth conversion contribution out of time.  It could be ambiguous if the amounts are the same.

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