A recharacterization is the movement of a contribution from a traditional IRA to a Roth IRA or vice versa requested no later than the tax-return due date (plus extension) for the year the amount is contributed. This process treats the contribution as if it was originally made to the other type of IRA account.
A contribution plus any associated earnings may be recharacterized for any reason, including if the account owner was ineligible to make or deduct the original contribution due to modified adjusted gross income (MAGI) limits.
What contributions cannot be recharacterized?
It's important to note that the following transactions cannot be recharacterized:
Roth conversions: Moving funds from a traditional, SEP, or SIMPLE IRA to a Roth IRA.
IRA transfers and rollovers: Transferring or rolling over funds from one IRA to another of the same type, or rollovers from an employer-sponsored retirement plan to a Roth IRA.
How Guideline recharacterizes contributions
The IRS deadline to recharacterize all or a portion of a current-year IRA contribution is the your tax return due date plus extensions for the year for which the contribution was made (generally, October 15). If you are looking to recharacterize contributions, you must submit an IRA recharacterization request by contacting us at IRA@guideline.com or (888) 810-3801 by September 30 of the year following the year for which the contributions were made.
A recharacterization is accomplished by a direct trustee-to-trustee transfer from within your Guideline IRA accounts, rather than a distribution and subsequent rollover.
Tax reporting and important considerations for your recharacterization
Recharacterizations will be reported to the IRS via Form 1099-R and Form 5498. When necessary, Guideline will issue these forms and publish them within your dashboard for tax purposes.
Once the recharacterization is complete, it is irreversible, per IRS guidelines.
The tax forms you can expect to receive if you elect to recharacterize IRA contributions are:
Form 1099-R: This form reports the recharacterization itself.
For contributions recharacterized in the same year, it will show a code “N” in Box 7.
Example: A contribution was made on March 31. On November 30 of the same year it was recharacterized. The 1099-R issued in the following January will have a code “N”.
For contributions recharacterized in the next year but before the deadline, it will show a code “R” in Box 7.
Example: A contribution was made on March 31. On April 1 of the following year it was recharacterized. The 1099-R issued in the following January will have a code “R”.
You will be sent a Form 1099-R in January of the year following the recharacterization. This form will report your total distribution, including both the recharacterized contributions plus any net income attributable (related gains).
Form 5498: This form reports the contribution.
Box 4 (Recharacterized contributions) on Form 5498 will report the “contribution” the recharacterization creates for the year that the recharacterization occurs.
The original contribution to your traditional or Roth IRA will be reflected on your Form 5498 for the contribution year. The recharacterization will not change this initial reporting.
The recharacterization itself will be reflected on a Form 5498 issued by June 1 of the year following the recharacterization.
If you are filing Form 1040, Individual Income Tax Return, you must attach a statement to the return explaining the IRA recharacterization. Please refer to the Form 8606 instructions, specifically the section titled “Recharacterizations,” for details on if the recharacterization needs to be reported, and if it does, how to report these transactions.
We strongly encourage you to discuss your tax filings with a qualified financial or tax professional for assistance with the necessary actions you should take regarding IRA recharacterizations and your tax forms.
This content is for informational purposes only and is not intended to be taken as tax advice. Please contact a tax professional for further information.