Multiple IRA recharacterizations and Form 8606
I am trying to assist a family member who completed 3 IRA recharacterizations (Roth-to-trad, trad-to-Roth, Roth-to-trad), a Roth conversion of 2020’s nondeductible trad IRA contribution, and a Roth conversion of a rollover IRA complete Form 8606. I am running into issues as the final Roth-to-trad rechar was not made until 2/25/22 and Form 8606 asks for 2021 EOY value of all trad IRAs, at which time there was a trad IRA balance. Do I complete Form 8606 as if the contribution was made at the time of the first Roth-to-trad rechar or at the second Roth-to-trad rechar and omit the EOY trad IRA value? Will going the later route present issues with 2022’s 1099-R? Thank you for your assistance.
$6000.00 Trad IRA basis from 2020
1/5/21: $6000.00 Roth IRA 2021 contribution
2/10/21: $6000.13 Roth conversion (2020’s contribution, ending account balance $0)
5/18/21: $3459.09 Trad 401k rollover and then Roth conversion (endling account balance $0)
10/1/21: $6678.69 Roth-to-trad recharacterization (#1) – ($6k + gains)
12/31/21: $7290.36 EOY value of all trad IRAs (strictly 2021 trad contribution/rechar)
1/6/22: $7320.75 Trad-to-Roth recharacterization (#2) – ($6k + gains)
2/25/22: $4715.32 Roth-to-trad recharacterization (#3) – ($4729 Roth limit based on MAGI – losses)
Permalink Submitted by Alan - IRA critic on Mon, 2022-02-28 15:12
It appears that the 2021 contribution was re characterized 3 times, when only one is allowed for the same contribution. Since the first recharacterization was for the entire 6000 contribution, the next two were not allowable. Did the same custodian process these?
To address your direct question, when a contribution is legally recharacterized in a later year, the line 6 Form 8606 year end value should reflect the recharacterization rather than the actual year end value.
Permalink Submitted by Samantha Tsuchiya on Mon, 2022-02-28 20:21
Thank you for your assistance.The recharacterizations were all completed by the same custodian without issue. I have received mixed answers on whether or not funds can be recharacterized multiple times and have been unsuccessful in locating the answer in the tax code. This family member recharacterized twice in 2020 using a different custodian than the current one, but the same custodian for both recharacterizations, also without pushback.
Permalink Submitted by Alan - IRA critic on Mon, 2022-02-28 23:55
Well, the rule isn’t obvious. In Pub 590 A, p 29 regarding recharacterized contributions, it is stated “Election cannot be changed. After the transfer has taken place, you can’t change your election to recharacterize”.
There is no clear template to correct this situation, but it may well go right over the head of the IRS. While recharacterizations require an explanatory statement with the 2021 return, I think it would be best to make the explanation as if recharacterizations 1 and 2 were never done (ignore those 1099R forms) and explain the final recharacterization which conforms to where the funds actually landed. Apparently, there is a partial Roth contribution, and the rest is likely a non deductible TIRA contribution for 2021. Since the final recharacterization was done this year, the 1099R for it will not be issued till next January, but it should be reported on the 2021 return to reflect the final 2021 contribution types, so there will be a year end balance on Form 8606, but it will probably all be IRA basis.