The Tax Forms to Fill Out to Recharacterize a Traditional IRA to a Roth IRA

by Cindy Quarters

Recharacterizing a traditional IRA as a Roth IRA is a relatively simple process. There are some tax considerations when making such a change, but as long as everything is done according to the regulations set forth by the IRS there should not be any problems making the conversion. It is important to understand the tax ramifications before making the switch from one type of IRA to another, to be sure that recharacterization is the best choice.

Traditional IRA

A traditional individual retirement account (IRA) allows a person to place untaxed money into the account. Typically, the money in a traditional IRA, including any money earned by the account, is not taxed until it is withdrawn. Ideally, the account owner will be in a lower tax bracket after retirement, and the taxes paid at that time will be less than they would have been if paid when the money was first put into the account.

Roth IRA

A Roth IRA is similar in many respects to a traditional IRA, but there is a significant difference when it comes to how the account is taxed. Money placed in a Roth IRA is taxed at the time it is placed into the account. This means that all money contributed to a Roth IRA has already been taxed, and no taxes are due at the time the money is withdrawn. This includes not only the amount of the contributions, but also extends to any funds earned during the life of the account.

Recharacterization

When the funds in an IRA are recharacterized, it means that they are treated as though they had never been deposited in the first IRA, but had gone directly into the second one instead. The trustees for both the first and second IRAs must be notified of the type of the recharacterization, the amount of money involved, the date the affected contributions were made, and complete information including such things as account numbers and the names and contact information for the trustees.

Required Forms

When traditional IRA funds are recharacterized, the traditional IRA is no longer a consideration. This means that it is not necessary to use Form 8606 in order to report the change. Instead, the money from the traditional IRA is treated as income for the year in which it was recharacterized as a Roth IRA and is reported on the account owner’s regular tax return. Form 1040 is used to report the income and taxes will be due on the amount that was recharacterized.