How to Report an IRA Recharacterization on a Tax Return

An Individual Retirement Arrangement (IRA) recharacterization redesignates a contribution from one type of IRA to another, such as changing a Roth IRA contribution into a traditional one. This action is often taken to correct an ineligible contribution, like contributing to a Roth IRA when your income exceeds the allowable limit. When performed and reported correctly, a recharacterization is a non-taxable event.

The process effectively undoes the original contribution, treating it as if it were made to the correct IRA from the start. This must be a trustee-to-trustee transfer, where financial institutions handle the funds directly. To be recognized as non-taxable by the IRS, the transaction must be reported on your annual income tax return. This requires using specific tax forms and attaching a detailed explanatory statement.

Required Forms and Information for Reporting

You will need Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, etc., from the institution that held the original IRA. Box 1 shows the gross distribution amount, and Box 7 contains a distribution code. A code ‘N’ indicates a recharacterization in the same year as the contribution, while code ‘R’ signifies one that occurred in the following year.

You will also receive a Form 5498, IRA Contribution Information, from the financial institution that now holds the recharacterized funds. This form confirms the details of contributions made to your IRA for the year. For a recharacterization, Box 4 is relevant as it reports the specific amount of the recharacterized contribution.

A key piece of information is the Net Income Attributable (NIA) to the contribution. The NIA is the amount of earnings or losses your original contribution generated while it was in the first account. Your financial institution is responsible for calculating the NIA and must include this amount in the total funds transferred to the new IRA.

Finally, you must prepare an explanatory statement to attach to your tax return. This statement needs to clearly detail the transaction for the IRS. It must include the type and amount of the original contribution, the date it was made, the amount of any NIA transferred, and the total amount moved to the new IRA.

Completing Form 8606

When you recharacterize a contribution, you must report the transaction based on its final destination. Form 8606, Nondeductible IRAs, is used for this purpose, particularly when the recharacterization involves a traditional IRA that includes nondeductible contributions. The key is to treat the contribution as if it were made directly to the second IRA from the start. The recharacterization itself is not listed on a specific line; instead, the form reflects the end result of the transaction.

For example, assume you contributed $7,000 to a Roth IRA in 2024 but later discovered your income was too high. In early 2025, before the tax filing deadline, you recharacterize the entire contribution, which has earned $200 in NIA, as a nondeductible traditional IRA contribution. The financial institution moves a total of $7,200 to the traditional IRA. On your 2024 Form 8606, you would report the $7,000 contribution on Line 1 as a contribution to a traditional IRA.

You would not report the Roth IRA contribution anywhere on Form 8606. The form is concerned with the final state of your contributions for the tax year. If the recharacterization resulted in a nondeductible traditional IRA contribution, you would proceed to complete the relevant lines in Part I of Form 8606, including entering your total basis from prior years on Line 2.

The distribution of $7,200 from the Roth IRA, which is reported on Form 1099-R, is accounted for in the explanatory statement you attach to your return. If you recharacterize only a portion of a contribution, you would report the nondeductible part of the remaining contribution on Form 8606. If the entire contribution is recharacterized and the resulting traditional IRA contribution is fully deductible, you may not need to file Form 8606, but the explanatory statement is still required.

Assembling and Filing Your Tax Return

If your recharacterization resulted in a deductible traditional IRA contribution, you will report this deduction on Schedule 1 (Form 1040). The total amount of the deductible contribution is entered on Line 20 of Schedule 1. This amount then flows to your Form 1040, reducing your adjusted gross income.

The explanatory statement you prepared is a part of your filing. For those filing a paper return, you should physically attach the statement to your completed tax return. If you are e-filing, most tax software provides a specific section for attachments or disclosures where you can upload a PDF of your statement.

The gross distribution shown on Form 1099-R must be correctly handled on your tax return. The total distribution amount from the initial IRA is often reported on Line 4a of Form 1040. However, the taxable amount, reported on Line 4b, should be zero for a properly executed recharacterization. The attached explanatory statement provides the justification for why this distribution is not taxable income.