Roth IRA Recharacterization and Form 8606
On 3/7/08 using TurboTax online, I submitted my 2007 income tax return (Form 1040) which included a Form 8606 reporting my Dec. 2007 Roth conversion of part of a Vanguard traditional IRA to my preexisting Roth IRA. On 10/6/2008 I recharacterized all of that conversion back to my traditional IRA.
I am now about to file Form 1040X to report the decreases in my 2007 AGI, taxable income and income tax because of my 10/6/08 recharacterization.
I expect Vanguard next May will issue a Form 5498 for the traditional IRA that will show a recharacterization addition in 2008 and a Form 5498 for the Roth IRA that will show a recharacterization withdrawal in 2008. I further suppose neither entry will clarify that the recharacterization is of a 2007 Roth conversion, so how do I correct the IRS’ Form 8606 record of my Roth conversions?
E.g., when I submit my 1040X should I include a copy of my original 2007 Form 8606 with a line drawn through all of the amounts? Or?
Finally, if anyone knows, how do I correct the TurboTax history of my Roth IRA conversions?
Thanks very much for your help.
Permalink Submitted by fairira on Wed, 2008-10-22 01:17
I failed to say in my first post that I completed my RMD before my 2007 conversion and that before my 2008 recharacterization, I recalculated and took my 2008 RMD (increased to account for the effective increase in my 12/31/07 Traditional IRA FMV because of the recharacterization).
Thanks again for any help with my first post’s questions.
Permalink Submitted by Alan Spross on Wed, 2008-10-22 04:03
Your second post certainly shows that you are on top of the RMD situation. Very few would have thought about the increased 2008 RMD requirement.
With respect to the first post, the IRA custodian will code the recharacterization 1099R with a distribution code of “R” which indicates that it applies to 2007 even though the 1099R will not be issued until next January. There will also be a 5498 that matches the amount on the 1099R. The rest come from you in the form of an explanatory statement you can include on the 1040X. Example:
“On xx/xx/2007 I converted $X to my Roth IRA, and on 10/6/2008 I recharacterized the entire conversion, which was then valued at $y back to my traditional IRA. Therefore, Form 8606 is deleted from the original tax return.”
This helps the IRS match up the info forms, since the $y will equal the amounts shown on the 1099R and 5498.
If you get stuck, there is an example on p. 3 of the 8606 Instructions. It does not matter whether you recharacterize because you had to due to income limits or you wanted to simply for tax reasons and/or diminished values.
Am not familiar with the Ttax fix, but it seems if you go back into the file and simply eliminate the conversion, it should feed correctly into future years. This will restore your balance of regular contributions, conversions, and earnings in case your Roth is not already fully qualified. It would be fully qualified if you opened your first Roth in 2003 or earlier.