IRS Question regarding IRA recharacterization

[AK143]

In Feb 2017, I deposited 5,500 in Traditional IRA for tax year 2016.
On the same day, I called Investment bank and told them that i made a mistake and i should have put the amount of 5,500 in Roth IRA.
They asked me to open Roth IRA account and they said they will do recharacterization.
While doing recharacterization, I ganed 35.75.
They told me that the Roth IRA contribution will also be for Year 2016.
So, my roth IRA has 5,535.75.
Since the earnings were incurred in Year 2017, they told me that they will send 1099-R in Jan 2018 and i need to report the earnings of
35.75 when i file 2017 Taxes.

I am trying to file 2016 taxes, Do i need to report this recharacterization to IRS?.. Since all this was done before i filed
2016 taxes and there is no effect on taxes.. Do i still need to report it?..
If i have to report, which form i should use?
Please suggest..

[Epsilon Delta]

It is not clear what happened here. The above is inconsistent, probably not your fault. My guess is that this is actually a recharacterization and the first paragraph below is correct, but you need to look at the paper work and decide. The key word on the statements should be recharacterization or conversion. Ignore anything said over the phone by under trained customer service reps.

if this was an traditional IRA contribution followed by a recharacterization the $36 in earnings will not be reported and will never be taxed, not in 2016, not in 2017 and not when the funds are withdrawn later in life. The details on how to report this are in the instructions for form 8606. All you do is attach a statement to your 2016 tax return saying what you did. (If you're income is low enough for the savers credit the Roth contribution would also be reported there).

If this was a traditional IRA contribution followed by a conversion, then your 2016 return should either show an IRA deduction on 1040 line 32 or a non-deductible contribution on an attached form 8606, or both if it's partially deducted. The conversion will be reported on form 8606 in 2017. Something between $36 and $5536 will be taxed in 2017, depending on whether you deduct the 2016 contribution and any other IRAs you own.

[AK143]

Thanks for your response.

I got a letter stating that it's a recharacterization.
I called them and they told me that it's recharacterization and Not a Conversion.

I am trying to fill form 8606(Form 8606 - Nondeductible IRAs) for 2016 and i am using online software.

It has the below fields :

Nondeductible contributions to Traditional IRAs
---------------------------------------------------------

Total basis in traditional IRAs = 0

Contributions made from January 1 through 4/18/2017 = 5500 ( as i contributed in Feb 2017 for Tax year 2016)

Total value of all your traditional, SEP, and SIMPLE IRAs as of December 31, 2016 = <Amount based on 5498 for 2016>

Outstanding rollovers = 0

Enter Traditional IRA distributions (reported to you on form 1099-R) received during 2016.
DO NOT include rollovers, qualified charitable distributions, a one-time distribution to fund an HSA, conversions to a Roth IRA, certain returned contributions, or recharacterizations of traditional IRA contributions.
= 0 -- Didn't receive 1099-R and not applicable for me..

Net amount converted from traditional, SEP, and SIMPLE IRAs to Roth IRAs in 2016
= 5336 -- Is this correct?

When i am doing this, software is telling me taxable amount as 5336 and it should not be taxable amount.
May be it's assuming that i am withdrawing 5336 from Tradiitional IRA account???..

Should i make "Net amount converted from traditional, SEP, and SIMPLE IRAs to Roth IRAs in 2016" the value as zero?
Can you please guide me.

[Epsilon Delta]

Thanks for your response.

I got a letter stating that it's a recharacterization.
I called them and they told me that it's recharacterization and Not a Conversion.

I am trying to fill form 8606(Form 8606 - Nondeductible IRAs) for 2016 and i am using online software.

It has the below fields :

Nondeductible contributions to Traditional IRAs
---------------------------------------------------------

Total basis in traditional IRAs = 0

Contributions made from January 1 through 4/18/2017 = 5500 ( as i contributed in Feb 2017 for Tax year 2016)

Total value of all your traditional, SEP, and SIMPLE IRAs as of December 31, 2016 = <Amount based on 5498 for 2016>

Outstanding rollovers = 0

Enter Traditional IRA distributions (reported to you on form 1099-R) received during 2016.
DO NOT include rollovers, qualified charitable distributions, a one-time distribution to fund an HSA, conversions to a Roth IRA, certain returned contributions, or recharacterizations of traditional IRA contributions.
= 0 -- Didn't receive 1099-R and not applicable for me..

Net amount converted from traditional, SEP, and SIMPLE IRAs to Roth IRAs in 2016
= 5336 -- Is this correct?

When i am doing this, software is telling me taxable amount as 5336 and it should not be taxable amount.
May be it's assuming that i am withdrawing 5336 from Tradiitional IRA account???..

Should i make "Net amount converted from traditional, SEP, and SIMPLE IRAs to Roth IRAs in 2016" the value as zero?
Can you please guide me.

No it is not correct. If the only IRA transactions for 2016 where the contribution and recharacterization there should not be any 8606.

This is treated exactly as if you contributed $5,500 directly to a Roth IRA*, except there should be a statement attached to your tax return saying. "On xx/xx/201x i made a $5,500 contribution to my tIRA for 2016. On xx/xx/201x I recharacterized that contribution and $36 of earnings to a Roth".

*Roth contributions are not normally reported anywhere on your tax return.

If you are doing this by hand you need to read the 8606 instructions. Most of page 4 covers "reporting recharacterizations" one of the examples covers your situation. If you are using tax software you need to answer no when it asks if you did a conversion (you didn't do a conversion you did a recharacterization)

[Alan S.]

Form 8606 does not apply here.
You did not make a TIRA contribution because it was recharacterized as a Roth contribution. All you have to do for your 2016 return is the explanatory statement as indicated by Epsilon. This was not a conversion.

If the program asks you if you made an IRA contribution for 2016, enter that you made a Roth IRA contribution of 5500. The software will then capture your Roth IRA basis for future years if you use the same program, but this has no bearing on your actual 2016 return.

You will get the 1099R for the recharacterization next January, but it will be coded to apply to a 2016 contribution. Because it applies to 2016 you will not report it on your 2017 return.

[AK143]

Thanks Epsilon and Alan for your responses.

I seem to get it..Since i did recharacterization , it treats as if the amount of $5500 is contributed to Roth IRA from beginning for year 2016.

I am using online software and there is section in 8606 which talks about "Distributions from Roth IRAs" and i don't think this is applicable here.
As you mentioned, there is no place for me to mention Roth IRA amount..

Any implications if i don't even report this to IRS while filing 2016 taxes.
Next year, 1099-R will be reported by the bank to IRS.

[AK143]

This is treated exactly as if you contributed $5,500 directly to a Roth IRA*, except there should be a statement attached to your tax return saying. "On xx/xx/201x i made a $5,500 contribution to my tIRA for 2016. On xx/xx/201x I recharacterized that contribution and $36 of earnings to a Roth".

Since i am using online software, I am unable to attach a statement with the Tax Form..
Just wondering if it is mandatory to report it..

[Duckie]

Since i am using online software, I am unable to attach a statement with the Tax Form.

Which software? In TurboTax if you tell the software you made a TIRA contribution and recharacterized it to a Roth IRA an explanation statement box will pop up that you can fill in.

[AK143]

I use Taxslayer..In Turbotax..which form...8606?..
I thought it's not applicable here..

[AK143]

Please tell me the form that you use in Turbotax..i will try to search for the same

[Duckie]

I use Taxslayer..In Turbotax..which form...8606?..
I thought it's not applicable here..

In TT in EasyStep mode when you add the recharacterization statement under Federal Taxes >> Deductions & Credits it ends up on the 1040 form. You can see it in Forms mode right below Line 15a. There is a grey "Explain" box you can click to read the statement. I don't know how it works in TaxSlayer.

[AK143]

Thanks Duckie...I don't see it in Taxslayer..
Any idea what will happen if i don't attach the statement(about recharacterization) while filing 2016 taxes.
Is it mandatory?

[Duckie]

I don't see it in Taxslayer..

In TaxSlayer, if you tell it you made a $5,500.00 contribution to a TIRA for 2016 and recharacterized it to a Roth IRA, what happens? Do you not get an option to provide an explanation?

Any idea what will happen if i don't attach the statement(about recharacterization) while filing 2016 taxes.
Is it mandatory?

I don't know what will happen. The instructions say to: "Report the recharacterization on your tax return for the year during which the contribution was made." So the IRS wants a statement.

Edited for incorrect year.

[Alan S.]

Thanks Duckie...I don't see it in Taxslayer..
Any idea what will happen if i don't attach the statement(about recharacterization) while filing 2016 taxes.
Is it mandatory?

The purpose of the statement is to explain your change of contributions to the IRS because the 1099R will not be issued till Jan, 2018. Meanwhile, the IRA custodian will report on Form 5498 in May that you made a TIRA contribution (they do NOT change the 5498 to reflect recharacterization) and the IRS will not see either an 8606 or a deduction on your return. That might trigger an inquiry from the IRS that you might wish to avoid.

That said, the IRS seems to have lengthened their IRA inquiry period until they also have all the 1099R/5498 forms to know what you ultimately did with your contribution or conversion as people have been getting fewer inquiries in the first year after filing. So the downside of not completing the statement could well be nothing. You should still try to figure it out if you can, but I would not do a paper return if you can't.

[AK143]

In TaxSlayer, if you tell it you made a $5,500.00 contribution to a TIRA for 2017 and recharacterized it to a
Roth IRA, what happens? Do you not get an option to provide an explanation?

I contributed TIRA 5,500 for 2016 in Feb 2017 and then recharacterized to Roth in Feb 2017(same date) for 2016.
I will look into the software to see if it gives me an option for providing me an explanation.

Thank you

[AK143]

Thanks Duckie...I don't see it in Taxslayer..
Any idea what will happen if i don't attach the statement(about recharacterization) while filing 2016 taxes.
Is it mandatory?

The purpose of the statement is to explain your change of contributions to the IRS because the 1099R will not be issued till Jan, 2018. Meanwhile, the IRA custodian will report on Form 5498 in May that you made a TIRA contribution (they do NOT change the 5498 to reflect recharacterization) and the IRS will not see either an 8606 or a deduction on your return. That might trigger an inquiry from the IRS that you might wish to avoid.

That said, the IRS seems to have lengthened their IRA inquiry period until they also have all the 1099R/5498 forms to know what you ultimately did with your contribution or conversion as people have been getting fewer inquiries in the first year after filing. So the downside of not completing the statement could well be nothing. You should still try to figure it out if you can, but I would not do a paper return if you can't.

Thanks Alan for the explanation.
I will call Taxslayer customer service and take their help on monday..

[Epsilon Delta]

Thanks Duckie...I don't see it in Taxslayer..
Any idea what will happen if i don't attach the statement(about recharacterization) while filing 2016 taxes.
Is it mandatory?

To add what Alan and Duckie said.

According to 26 CFR 1.408A-5 the election to recharacterize is made when you instruct the custodian and they follow your instructions in a timely manner, not when you file the return. So not attaching a statement is a case of not reporting the recharacterization correctly rather than failing to recharacterize. The failure to include the statement does not affect the tax owed so there should be no penalties for accuracy or failure to pay. So probably the worst that could happen is you get a letter from the IRS and have to provide the statement in response. But the letters from the IRS seem to begin "You owe us $x,000, mail it to ... tout de suite. ... If you disagree contact ... " so it's something most people want to avoid.

[AK143]

Thanks Duckie...I don't see it in Taxslayer..
Any idea what will happen if i don't attach the statement(about recharacterization) while filing 2016 taxes.
Is it mandatory?

To add what Alan and Duckie said.

According to 26 CFR 1.408A-5 the election to recharacterize is made when you instruct the custodian and they follow your instructions in a timely manner, not when you file the return. So not attaching a statement is a case of not reporting the recharacterization correctly rather than failing to recharacterize. The failure to include the statement does not affect the tax owed so there should be no penalties for accuracy or failure to pay. So probably the worst that could happen is you get a letter from the IRS and have to provide the statement in response. But the letters from the IRS seem to begin "You owe us $x,000, mail it to ... tout de suite. ... If you disagree contact ... " so it's something most people want to avoid.

Thank you..As i said, I will call Taxslayer support and tell them about attaching a statement while submitting the return..Hopefully, they will have provision for that.

[Duckie]

As i said, I will call Taxslayer support and tell them about attaching a statement while submitting the return..Hopefully, they will have provision for that.

Does TaxSlayer get your information via question/answer? Does it ask you if you have contributed to a TIRA or Roth IRA? Does it ask those types of questions? If so, why can't you just answer them, and keep going. In TT it asks those questions and your answers prompt more questions. For example:

1. Did you contribute to a TIRA for 2016? YES
2. How much? $5,500
3. Was any part of the contribution non-deductible? NO
4. Did you recharacterize any part of the contribution to a Roth IRA? YES
5. How much of the contribution did you recharacterize? $5,500 (any earnings don't count for this question)
6. Did you convert any TIRA assets to a Roth IRA? NO

And so on. Play with the software. Changes are fixable.

[AK143]

As i said, I will call Taxslayer support and tell them about attaching a statement while submitting the return..Hopefully, they will have provision for that.

Does TaxSlayer get your information via question/answer? Does it ask you if you have contributed to a TIRA or Roth IRA? Does it ask those types of questions? If so, why can't you just answer them, and keep going. In TT it asks those questions and your answers prompt more questions. For example:

1. Did you contribute to a TIRA for 2016? YES
2. How much? $5,500
3. Was any part of the contribution non-deductible? NO
4. Did you recharacterize any part of the contribution to a Roth IRA? YES
5. How much of the contribution did you recharacterize? $5,500 (any earnings don't count for this question)
6. Did you convert any TIRA assets to a Roth IRA? NO

And so on. Play with the software. Changes are fixable.

Nope..Taxslayer doesn't ask these questions..We have to fill forms...one form is IRA Deduction and other is 8606..
Both are not applicable here..I will ask these questions when i spoke to Customer service..

Thanks Again..it looks like most of you use TurboTax..

[jimcrawford01]

Taxslayer sounds similar to the free FreeTaxUSA program that I use and can recommend.

I partially recharacterized in FEB 2017, a 2016 Roth Conversion (Tira to ROTH).

When I hit a roadblock (my lack of understanding and knowledge), FreeTaxUSA Customer Support stated that they did not support written statements to accompany an EFiling (explaining the Rechar). Nor did they support Rechars.

Actually, all that is required is the NET Conversion amount (Conversion amt less Rechar amt) when filling out the Form 1040 and Form 8606.

So, I had to Paper File in order to get my statement in there. I'll know better next time.

RE: TurboTax - TT will NEVER hear from me again. 'Nuff said.

I must add that Vanguard has room for improvement as to how it handles these things. FIRST negative statement I have ever made in 40 years with Vanguard!! Long Live Mr Bogle.

Jim

[AK143]

Thanks Jim..

I called Customer Service and they told me that their software doesn't allow statements to be sent..

2 options..it seems i have

1) Print out Tax Return , attach the statement and send it to IRS

OR

2) E-file through Taxslayer and send the statement alone seperately..

Regardign 2nd option..Can i do that???..Please suggest..

[livesoft]

3) Use HRBlock Deluxe desktop. Buy today for $20 (or $10). See if you can get the 10% of refund rebate.

But your time costs money, so maybe this is more an investment in the future.

[AK143]

3) Use HRBlock Deluxe desktop. Buy today for $20 (or $10). See if you can get the 10% of refund rebate.

But your time costs money, so maybe this is more an investment in the future.

Can i do option 2?...E-file and then send statement..

[livesoft]

Can i do option 2?...E-file and then send statement..

Sure, but I personally would not send a statement until the IRS asks for it. That way, you won't have a random statement sent to IRS unassociated with a tax return.

[cherijoh]

Thanks Epsilon and Alan for your responses.

I seem to get it..Since i did recharacterization , it treats as if the amount of $5500 is contributed to Roth IRA from beginning for year 2016.

I am using online software and there is section in 8606 which talks about "Distributions from Roth IRAs" and i don't think this is applicable here.
As you mentioned, there is no place for me to mention Roth IRA amount..

Any implications if i don't even report this to IRS while filing 2016 taxes.
Next year, 1099-R will be reported by the bank to IRS.

One reason it can get confusing is that you can recharacterize either a contribution OR a conversion. But the rules are different for a recharacterization of a conversion. Be sure and read your online tax software very carefully to see which type of recharacterization the question is about!

[AK143]

3) Use HRBlock Deluxe desktop. Buy today for $20 (or $10). See if you can get the 10% of refund rebate.

But your time costs money, so maybe this is more an investment in the future.

Well..I used HR block software and it allowed me to put a statement..But when i print the return, that statement which i typed is not printing.
I will call Tax consultant tomorrow..If it doesn't print, then i am planning to mail the return along with the statement..

[AK143]

Should have read this topic before paying for HR Block..

viewtopic.php?t=114642

It looks like they expect me to use 8606 form for the statement to print..
In my case..it's not needed..

I will call them tomorrow any way..

[jfave33]

Just read the instructions for form 8606 . It has a section on recharcterizations and it is pretty clear what you need to do. That all you need is a statement and what info it should contain is all spelled out in the instructions. You don't make any numerical entries on your 1040 in relation to this.

I have no idea if tax software does this for you. It should if it is any good.

[AK143]

Ok..finally i am able to attach the statement using HR Block..

It's just that i am checking both Traditional and Roth IRA when i am checking Contributions for 2016.
It seems that i need to check Traditional IRA and then on the next page..I need to mention recharacterization.

Want to update as it might be helpful in future..

[livesoft]

You are The Expert now! Congratulations! But as The Expert you now have the great responsibility of responding to all threads on this matter. Thanks!

[AK143]

You are The Expert now! Congratulations! But as The Expert you now have the great responsibility of responding to all threads on this matter. Thanks!

Sure...